Rocket Internet is finding Asia a hard market to crack

Rocket Internet SE, Europe’s largest startup factory, has found that its one-strategy-fits-all approach might not be working in less-organised, high-growth Asian markets.

This year, its portfolio has barely changed at $6.7 billion in the first nine months. While its biggest startups more than doubled their sales, several of them — like e-commerce site Lazada and meal-kit startup HelloFresh — have suffered widening losses.

Rocket’s chief executive office Oliver Samwer has pushed for investments in Southeast Asia, and the firm is perhaps strongest in that region. Companies like Lazada and Zalora, the online seller of niche fashion apparel, have collectively raised more than a billion dollars in investment capital, although neither of them is profitable.

Problems all around

Food delivery app Foodpanda is lurching from one problem to the other in Asia. It is laying off 15 per cent of its staff in India, a key market where food delivery startups have mushroomed. It has been trying to manage troubles with its operations, after realizing that many restaurants billing it did not exist or had closed down. Its management has been a revolving door. One co-founder left in November 2013. His successor Rohit Chadda stepped down in August, while another co-founder Akhilesh Bali joined LimeTray.

‘Co-founder’ is a designation in Rocket startups. They are business executives selected to run the business in certain markets and their departure is more akin to a CEO leaving than a founder’s departure.

In Vietnam, Foodpanda shut shop after struggling for months, and was sold to Vietnammm. Cab-hailng app and Uber competitor EasyTaxi, also ceased operations in the country, despite having first mover advantage over Uber and regional rival GrabTaxi. Speculation is rife that it might also pull the plug on Zalora, which posted a EBITDA of negative $87 million in 2014, widening its loss by a quarter per cent compared with the previous year.

It had earlier failed to do beauty e-commerce in Asia. Glossybox, which was similar to New York, US-based Birchbox‘s business model, failed to grow operations in Asia and parts of the business was sold to rivals in 2013.

India is a bigger worry, because it’s a big market, second only to China. At a time when others are growing, companies like Jabong are struggling to stay relevant in the fashion e-commerce market. Competition has intensified in the past year, with local competitors like Flipkart and Snapdeal raising large amount of funding and focussing on growing apparel sales, and Amazon India expanding aggressively into fashion wear, powered by $2 billion in investment from its parent.

Rocket Internet-backed FabFurnish, an online furniture marketplace in India, lost out in competition with Pepperfry, which raised $116 million in venture funding last year and became the largest player in that space. At the same time, the higher end of the market was cornered by Urban Ladder, which raised $50 million in disclosed funding, and became known for superior design and quality of furniture. Caught between the two, FabFurnish was not able to differentiate itself. Reports said that Rocket is looking for buyers for its India businesses. The company said such speculation was not accurate.

Rocket Internet has also adopted a new strategy in Asia with online beauty service Vaniday, where customers can book treatments such as massages, hair appointments and manicures. It began in Latin America, followed by Australia and southeast Asia. Under this strategy, the business will not be targeted at more mature markets like China, but will be launched only in emerging markets. Investments in the region will be driven by Asia Pacific Internet Group (APACIG), a joint venture between Rocket and Qatari telecommunications provider Ooredoo. APACIG will function as a startup incubator focussed on e-commerce and plans to launch one new venture every quarter.

What might work

The Rocket Internet portfolio might recover in Asia if they change what investors think is wrong with the model. To think that startups that succeeded in Europe will do so in more chaotic places like India — based on more investment and spreadsheet analysis — is a mistake because of differences in work cultures and laws of the land.

Another drawback is their way of hiring leaders. “One mistake was the way they hired people, by giving them fairly decent salaries and miniscule equity. It was a funny structure then and remains so now. If I own 60 per cent of the company versus 4 per cent, I am just making sure that I get to a place where I own 60 per cent of a company. So it was just a stepping stone for talented people,” said Ashish Taneja, founder of Delhi-based growx ventures, an angel/seed investor in 18 startups.

If Rocket can rescue Foodpanda in India, and manages to keep its new ventures solvent in Asia, things might look up for the group in 2016. Its nascent businesses in Myanmar have a chance to perform, with much less competition than in other nations. However the market is still very small, and unpredictable. It might well be an expensive ride downhill for Rocket in Asia.

Also Read:

Rocket Internet-backed Foodpanda to exit Vietnamese market

Rocket’s Vietnam exodus: Will fashion portal Zalora go the Foodpanda & EasyTaxi way?

Rocket Internet launches aggressive growth strategy for APAC; to roll out a new venture every quarter