I’ve written previously about my distaste for Rocket Internet here. I don’t believe in their philosophy towards entrepreneurship, and I think they represent what I’ve called “the corporatization of entrepreneurship.” Furthermore, I would caution those considering joining the company to carefully evaluate Rocket’s historical treatment of founders and employees before accepting an offer. My sources indicate that it can be a very unpleasant place to work, and while the learning experience may be valuable, there are plenty of other options out there for those looking to build an entrepreneurial skillset.
Nonetheless, I recognize that opinions based on personal values (such as those I enumerate above) can differ dramatically from conclusions drawn from dispassionate analysis (such as those I elaborate below).
Recently, I conducted an investigation into how the practice of business model replication (i.e. cloning) impacts emerging markets. The idea was to avoid moral, ethical, or pride-based judgements, and evaluate business model replication – particularly the variety practiced by Rocket Internet – purely on the basis of whether it is good or bad for the emerging markets of the world. In other words, if economic development is the ultimate objective, are Rocket’s activities beneficial or destructive?
The results of my analysis may surprise those who have read some of my previous posts. After speaking with dozens of emerging market entrepreneurs, venture capitalists, and former Rocket employees – and after examining some of the relevant scholarly literature on the subject of emerging markets venture formation – I conclude that the practice of business model replication is almost overwhelmingly positive, as it leads to several measurable economic and technological benefits for emerging market inhabitants. In other words, as much as we may love to hate Rocket Internet, the reality is that the company is having a positive impact on the emerging markets in which it operates. At least from an economic development perspective.
This study was conducted for one of my Wharton classes, so the writing style is decidedly academic. Nonetheless, I thought my readership would find it relevant, so I’ve posted it here in its entirety. Footnotes / references are at the bottom of the essay. Please note that the section which describes Rocket Internet and its business model contains some material recycled from a prior blog post, but the bulk of the analysis is brand new. If you’d like a PDF copy of the report, complete with bibliography, feel free to contact me at baldwint@wharton.upenn.edu. I also plan to post this to scribd at a later point in time. In the meantime, enjoy, and as always, I encourage feedback and commentary.
The Impact of Business Model Replication in Emerging Markets
By Thomas Baldwin, 4/1/2013
Introduction
Business model replication – the practice of copying an existing business model and developing it in another market – has been in existence since the development of modern day capitalist society. More recently, however, the practice of cloning has been institutionalized, driven by the rise of several organizations whose explicit strategy is to identify promising business models from developed world markets and deploy them simultaneously across several emerging market geographies. This phenomenon – dubbed the “Attack of the Clones” by the Economist Magazine – has been the subject of considerable debate in recent months, eliciting heated opinions from several prominent members of the startup and venture capital communities.[1] While proponents argue that business model replication is a natural feature of competitive startup environments, detractors condemn these “clone factories” as unethical imitators whose focus on execution as opposed to innovation casts an unflattering pall over startup ecosystems across the globe.
Questions of morality and pride aside, few market observers have tackled the more important question of whether the practice of business model replication in its more modern manifestation – which primarily involves porting ideas from developed economies to developing economies – is an overall positive or negative for emerging market societies at large. In the author’s view, this is the key issue to address, for it touches upon themes that are of fundamental importance to hundreds of millions of emerging market inhabitants worldwide. For these individuals, accelerated rates of internet penetration, heightened inbound flows of foreign capital, and greater levels of inter-market knowledge transfer can yield meaningful changes in the longevity and quality of life.
In this study, I examine the impact of business model replication in emerging markets. I deliberately avoid forming moral judgments regarding the acceptability of cloning practices, choosing instead to perform a holistic investigation of the effects – both good and bad – of modern day copycatting. I argue that, from an economic development perspective, the practice of business model replication is almost overwhelmingly positive, as it leads to several measurable economic and technological benefits for emerging market inhabitants.
A Note on Methodology
The research process used to form the insights contained in this analysis leveraged two main sources of information: (1) Primary sources consisting of in-person and telephonic interviews with several emerging market entrepreneurs, venture capitalists, and former Rocket employees; and (2) secondary sources comprised of academic works on a variety of topics related to entrepreneurship and venture formation in emerging markets. Given the lack of scholarly literature on the subject of Rocket Internet, the section of the paper which deals with the company is based primarily upon interviews with individuals familiar with its business model and practices. In many instances, interviewees requested anonymity, so direct attribution of particular statements or assertions was not often possible. However, exhibit 1 in the appendix contains a complete list of all the individuals who were consulted for the purposes of the research contained in this paper. It is important to highlight that the conclusions contained in this analysis were formed by the author himself, and do not necessarily represent the views of those interviewed for this report.
A Brief History of Business Model Replication
It is instructive to begin the present analysis with a brief overview of the history of business model replication. The idea of copying someone else’s business idea has existed since the dawn of capitalism; indeed, it harkens back to the writings of Adam Smith, and lies at the very core of what it means to operate in a competitive economic environment. Business ideas and business models cannot be patented, and what cannot be patented, can be copied.[2] As such, business model replication has functioned as a legally viable competitive tactic for centuries. However, only recently has this approach taken on an institutional form, with several entities explicitly leveraging business model replication as their principal approach towards doing value creation, and applying this approach on a massive, global scale. As I will argue in my research, this shift holds significant implications for startup ecosystems, venture capital firms, and populations across the world’s emerging markets. In the section that follows, we examine one of the primary actors in this brave new world of geographic business model arbitrage.
Rocket Internet
The most prominent propagator of startup clones is Rocket Internet, a firm operated by the Samwer brothers from their headquarters in Berlin, Germany. At the helm of the company is Oliver Samwer, a German known for his distinctly un-PC approach to communication.[3] The firm can best be described as a clone factory: it identifies promising business models that have been successfully executed upon in developed market A, and replicates them in emerging markets A, B, C, D, and E. It does this rapidly and efficiently by tapping a pool of in-house developer / designer talent that provides programming support across the portfolio. It leverages cross-portfolio synergies in a massive way: because its core competency is cloning across multiple markets, it re-uses much of the same coding / UI design to quickly set-up startup websites in different geographies.
With regard to logistics and operations, Rocket Internet resembles a manufacturing production line of sorts. Managers receive thick process manuals that describe exactly how things should be done from start to finish to establish a new operation in a new country. As for talent, Rocket has traditionally poached bankers and consultants from top firms to become “Founders” of Rocket-backed startups. It also recruits heavily at top-tier MBA programs (see exhibit 2 in the appendix for a recruiting email sent to the author from a Rocket Managing Director)[4]. Rocket seeks smart, process-driven professionals who operate well under conditions of extreme pressure. It gives these individuals a multimillion dollar initial budget, a very small sliver of equity (generally in the range of 0.5% to 3.0%), a large salary (as much as 10 – 15 thousand dollars per month), and the “Founder” title.[5]
Rocket Internet has developed a reputation for ruthless efficiency and hawk-like agility. Conversations with the author’s interlocutors paint the picture of a firm that moves extremely quickly, is incredibly data-driven, and is relentlessly performance-focused. The author’s interviewees also indicate that Rocket hires fast and fires faster, an ode to the performance-based culture of the top-tier investment banks and consulting firms from which it draws many of its hires. Over the past few years – and particularly over the course of the past 18 months – startups incubated by Rocket have popped up across the globe at a highly accelerated rate. Rocket currently operates 53 startup clones across 60 geographies, the majority of which are found in the emerging markets of Central and South America, East Asia, Southeast Asia, and Africa. See exhibit 1 below for a snapshot of Rocket’s portfolio.
Exhibit 1: Current Rocket Internet Portfolio[6]
The author’s primary research suggests that Rocket’s rapid growth has come through an almost obsessive focus on the top-line. The company is widely known to pour marketing dollars into its new ventures, growing them as quickly as possible in an effort to drown out local competition and own the respective market. Rocket monetizes its investments by seeking buyers for its startups, and some of its most successful exits have come by selling to the originators of the concepts they have cloned. See exhibit 2 below for a snapshot of Rocket’s history of exits.
Exhibit 2: Rocket Internet Exits[7]
In the wake of Rocket internet’s successful sale of Ebay clone Alando to Ebay, and it’s sale of Groupon clone Citydeals to Groupon, the company amassed a significant “war chest” of capital for use in the establishment of ecommerce startups across the emerging markets of the globe.[8] Additionally, the company raised additional holding and portfolio company-level capital from sources including AB Kinnevik, Quadrant Capital Advisors, Summit Partners, Holtzbrinck Ventures, JP Morgan Asset Management, Access Industries, New Enterprise Associates, and Millicom.[9] In total, these various capital providers have poured over USD $1B into Rocket internet and its portfolio of clones.
This enormous capital position has enabled Rocket Internet’s portfolio companies to act in ways that traditional VC-backed startups cannot, in markets that traditional VC-backed startups have avoided. More specifically, Rocket Internet seeks to gain first mover advantage in underpenetrated but fast growing markets across the globe, and does so despite the substantial capital runway that the development of successful ecommerce ventures in low internet penetration-economies requires. Rocket’s strategy is to enter into challenging emerging markets, establishing market dominance through the deployment of massive amounts of capital to overcome logistical constraints and consumer awareness challenges.
Following in Rocket’s Footsteps
In the wake of Rocket Internet’s success, several organizations that operate under a similar business framework have come into existence. These include Springstar, based in Berlin, Germany, and Project-A, also based in Berlin, Germany.[10][11] Each of these entities engages in geographic business model arbitrage, although they may also incubate original business ideas as well. Regardless, their existence, and the ongoing emergence of similar clone-focused incubators, suggests the consolidation of an entire industry based around the transportation of existing developed world business models to emerging market geographies. As mentioned earlier in this study, this trend shows no signs of abating; to the contrary, it is gaining significant momentum, and it bears important implications for emerging market economies. It is to this important area of study that we now turn our attention.
Business Model Replication in Practice: Impact and Implications
In evaluating whether business model replication is ultimately good or bad for the denizens of emerging market economies, we must perform a holistic analysis which incorporates the positive as well as negative externalities associated with this practice. My review of the effects of business model replication in emerging economies conclusively demonstrates that – while perhaps unsavory from a moral or ethical perspective – the strategy of copying first world business models and implementing them across large numbers of emerging markets is overwhelmingly positive for those residing in emerging geographies.
Positive effects of business model replication
Development of localized ecosystems of startup service providers
Recall from our discussion of Rocket Internet above that the firm is notorious for its ability to spend enormous sums of capital in an effort to “crack” underdeveloped emerging market economies. A case in point is Nigeria, which until recently had an extremely inchoate ecommerce ecosystem. Most VC-backed startups would view the Nigerian market as unsuitable for market penetration, due to its decrepit shipping and logistics infrastructure, relatively low level of internet penetration, and lack of consumer familiarity with online purchasing. Rocket, however, views Nigeria as the ideal market in which to launch startup clones, and given its Croesus-like cash position, the firm is completely comfortable operating on a cash flow negative basis for several years until achieving the scale necessary to reach profitability.[12] From a long-term perspective, this approach makes sense: while extremely costly in the short term (hence the need for a capital war chest to support significant capital burn), the “winner” in the race to own Nigeria’s ecommerce economy stands to reap handsome gains in the future.
What is the effect of this cash guzzling strategy? One observable impact is the almost single-handed creation of ecosystems, or clusters, of startup service providers. Because Rocket enters geographies where few traditional startups dare ply their trade, and because their portfolio companies are prepared to spend massive amounts of capital on the services that fuel their growth, Rocket catalyzes the development of “ecommerce economies” – clusters of online marketing agencies, graphic design firms, consumer research shops, and printing companies. As Michael Porter points out, such specialized industry-specific clusters foster high levels of productivity and innovation, thereby exerting a positive influence on the emerging market economies in which they are located.[13]
Accelerated development of supply chain / logistics infrastructure
Just as Rocket fosters the development of localized startup ecosystems in emerging market economies across the globe, so too does the company accelerate the improvement and build-out of local supply chain and logistics networks. Again, this relates to Rocket’s seemingly limitless capacity to deploy capital to support the growth and maturation of its startup portfolio, and its propensity to enter underdeveloped economies where the infrastructure necessary to fulfill ecommerce orders is lacking or unsatisfactory. When Rocket enters markets like Indonesia, Nigeria, or Mexico – where ecommerce penetration is limited and firms specialized in order fulfillment are limited in number and sophistication – it forces the local market to more quickly develop the infrastructure and supply chain requirements more typical of advanced ecommerce ecosystems.
Take, for example, the case of Mexico, where Rocket-backed Linio has raised over $45M of third-party capital in an effort to become the country’s Amazon.com. Toby Clarence-Smith, a Wharton MBA and former Linio summer intern, states that:
“Linio is definitely having a profound impact on the logistics landscape in Mexico. For instance, none of Linio’s logistics providers had dedicated ecommerce teams or offerings by the time I started my internship. But by the time I left, all of them had created teams or procedures dedicated to ecommerce. Also, whilst Cash on Delivery was something already offered, Credit Card on Delivery was not, and so Linio worked hand in hand with the logistics companies to create a CCOD offering. Moreover, these logistics providers have started to understand the nature of ecommerce clients, for instance learning to adapt to situations when the client is not at home to receive the order. This phenomenon could also be seen in other important infrastructure providers, such as payment gateways. Paypal for instance created a dedicated team to work with Linio in order to improve the checkout process. It’s a win-win for everyone, including those like us who want to enter the market as well.”[14]
Inter-market knowledge transfer
Several of the author’s interlocutors highlighted knowledge transfer across geographies as a significant positive externality of emerging markets business model replication. As former Rocket Internet employees, these interviewees had been afforded direct exposure to Rocket’s globally interconnected network of satellite offices. Linked together in a hub-and-spokes arrangement, with the Berlin headquarters office serving as the central core of the network, these satellite locations serve not only as operating platforms for local clones, but also as intelligence gathering outposts.[15] Each location accumulates significant amounts of data about areas as diverse as the effectiveness of online vs. offline advertising, the suitability of different business models across geographies with divergent levels of socioeconomic development, tactics regarding how to overcome emerging markets scalability challenges, best practices around local hiring, and many others. This information, in turn, is shared horizontally – from one satellite office to another – and vertically, from the satellite offices to the headquarters office.[16]
The impact of this inter-market knowledge transfer is positive for emerging market economies. It heightens the likelihood of successful venture replication, leading to the creation of successful entities that hire local employees, produce and sell into local markets, and contribute to local GDP growth.[17] Additionally, the knowledge accrued through inter-market transfer is passed on to local employees, who leverage this business intelligence to become higher caliber workers, or to successfully launch local ventures of their own. Viewed from a holistic perspective, the movement of knowledge between and across emerging markets – a process greatly facilitated and accelerated by entities like Rocket Internet – is thus a force for positive change in developing economies.
Acceleration of ecommerce habituation
Industry literature has identified lack of familiarity with online purchasing as a key impediment to ecommerce penetration in emerging markets. For example, Japhet Lawrence and Usman Tar state that:
“Most cultures in developing countries do not support ecommerce and the conditions are not “ripe” because of lack of confidence in technology and online culture (Efendioglu et al, 2004). The social and cultural characteristics of most developing countries and the concepts associated with online transaction pose a much greater challenge and act as a major barrier to adoption and diffusion of ecommerce.” [18]
In light of this innate cultural resistance to online purchasing, one can argue that the transition of a given consumer population from a consumption framework centered around offline purchasing to one based in part on electronic commerce is subject to a gradual process of habituation. More specifically, it is only after repeated exposure to the messaging, advertising, and consumer engagement associated with sophisticated ecommerce operators that a given consumer group will begin to engage more meaningfully in online purchasing.[19] This explains why it has historically taken so long for ecommerce to become a significant driver of overall retail consumption in emerging market economies.
Mexico offers an example of this phenomenon. In a special report on the state of ecommerce in Mexico, the consulting firm Boston Consulting Group identified several key factors delaying Mexico from achieving the rates of ecommerce penetration seen in more advanced emerging market economies. The firm highlighted the dearth of sophisticated ecommerce offerings – and consumers’ resulting lack of familiarity with online purchasing processes – as a key cause of Mexico’s underdeveloped ecommerce ecosystem. The report stated that“Mexico needs a greater number of [ecommerce] firms offering large selections of online products and services, positive online purchasing experiences, and strong levels of online engagement via social media.”[20]
According to Toby Clarence-Smith, Rocket’s Latin American Amazon clone, Linio, is having a dramatic effect on the state of ecommerce in Mexico. Having raised over $45M in capital from investors including AB Kinnevik, JP Morgan Asset Management, Summit Partners, and the Tengelmann Group, the company is investing heavily in a concerted online marketing campaign designed to rapidly break down Mexicans’ natural reluctance to purchase online versus in person.[21] While quantitative data is hard to obtain, anecdotal evidence suggests that the company is accelerating ecommerce habituation in the country of 110 million people.[22] Importantly, the Rocket strategy of pouring enormous sums of capital into online marketing in order to familiarize emerging market consumers with the world of online retail is being repeated across the developing economies of the world.
Skills development for future emerging markets entrepreneurs
As described in the preceding section of this analysis, Rocket Internet operates almost like a factory assembly line, with established venture formation practices passed down from headquarters to startup management teams across the globe in order to speed the development of new companies. This process has the beneficial effect of operating as an “education” of sorts for Rocket employees, who receive a fast-paced, immersive knowledge development experience in areas such as online marketing, inventory management, delivery optimization, customer segmentation, and others. Indeed, Rocket has frequently been described as a “training grounds” for aspiring entrepreneurs, providing a low-risk means of obtaining an entrepreneurial toolkit that can later be leveraged by former employees to build non-Rocket startups.[23] Given the extremely high turnover rate at Rocket portfolio companies – it is generally accepted that most employees will not spend more than a year at a given entity before departing for greener pastures – it could be argued that Rocket acts a rotating door that provides skills development to large numbers of aspiring entrepreneurs.
In the author’s view, the educational impact of Rocket is an important positive externality that must be considered when examining the question of the overall impact of business model replication in emerging markets. The development of large numbers of highly-trained former Rocket employees, many of whom go on to build new ventures of their own, is a decidedly positive phenomenon for emerging market economies.
Negative effects of business model replication
Reduces inter-firm collaboration, incentivizes secrecy
Several of the author’s interlocutors identified heightened levels of secrecy and reduced collaboration within and across emerging market startup ecosystems as a negative effect of Rocket’s activities across the globe. These individuals offered anecdotes which portrayed Rocket as a ruthless competitor, hungry for inside information that could be used to undercut its rivals and gain a competitive advantage. One Brazilian entrepreneur described being asked by a local Rocket representative to attend a meeting to discuss a potential opportunity, only to realize during the meeting that the Rocket employee was simply probing for information, and had no intention to work towards any kind of mutually beneficial agreement. Weeks later, this entrepreneur witnessed the launch of a Rocket-backed clone of his startup.[24]
Stories like this, it is argued, spread rapidly throughout entrepreneurial circles in emerging markets, creating an atmosphere of secrecy and insularity. According to proponents of this view, the resulting reduction in inter-firm collaboration is damaging to startup ecosystems, because transparency and sharing help firms gain access to the strategies and best practices that lead to successful venture development.
In the author’s view, the preceding argument – that Rocket’s presence in a given market creates an environment of secrecy – is tenuous at best. While Rocket’s information gathering tactics may indeed be somewhat more nefarious than those of other firms, it is difficult to directly tie Rocket to reduced inter-firm collaboration. Indeed, one could plausibly argue that – given publically available information that denotes specific firms as Rocket-backed – collaboration continues to occur, just among non-Rocket startups as opposed to the entire startup community.
Stifled innovation, culture of copycatting
The author’s interviewees consistently mentioned that Rocket Internet, and its adoption of business model replication as the core component of its value creation strategy, sets a “negative example” for aspiring emerging market entrepreneurs. These individuals argued that Rocket is promoting a distinct form of entrepreneurship, one in which stealing others’ ideas is viewed not only as acceptable, but as desirable. Rather than emphasize the traditional entrepreneurial values of creativity, ingenuity, innovation, and resourcefulness, Rocket instead embraces geographic arbitrage and “shock and awe” execution as the twin pillars of its venture formation strategy. This, in turn, may lead young emerging market entrepreneurs to interpret entrepreneurship as a clone-driven road to riches, as opposed to an organic process underpinned by creativity and a desire to solve big societal problems. According to my interviewees, this is “bad” in the sense that it stunts the development of truly disruptive ventures that dramatically improve the lives of emerging market citizens.
There is little empirical evidence to support the assertion that Rocket causes aspiring entrepreneurs to pursue copycat entrepreneurship instead of innovation-driven entrepreneurship. Furthermore, even if it could be conclusively shown that Rocket promotes a brand of entrepreneurship geared towards business model replication, it would be difficult to argue that this is actually a bad thing. It is possible, for example, that if Rocket were not present in a market, there would be fewer entrepreneurs in general. From an economic development perspective, given the choice between an ecosystem rich in entrepreneurs pursuing business model replication, and one characterized by a general paucity of qualified entrepreneurs, most would identify the former as preferable.
Concluding Thoughts
In the preceding analysis, I reviewed both the positive and negative aspects of business model replication in emerging markets. The aim of this review was to examine the fundamental question of whether the practice of “geographic arbitrage” – the porting of business models from advanced industrial economies to emerging market geographies – is a positive or negative phenomenon. More specifically, if economic development is the ultimate goal, are the activities of firms like Rocket Internet beneficial or destructive?
My examination into the practice of business model replication has conclusively demonstrated that it is indeed a force for positive change in emerging markets. While geographic arbitrage may have some negative externalities, they are difficult to quantify and measure. Moreover, even if these negative effects are real, they do not outweigh the many positive ways in which business model replication acts on emerging market economies.
The mechanism through which Rocket Internet and its peers drive economic growth operates on several levels:
- The creation of localized ecosystems of startup service providers. Rocket Internet’s demand for startup-related products and services catalyzes the development of startup ecosystems which enable and empower the development new businesses
- The accelerated development of supply chain / logistics infrastructure. Rocket Internet forces logistics providers to modernize, thereby speeding the development of the infrastructure that underpins ecommerce economies
- Inter-market knowledge transfer. Rocket Internet facilitates the flow of business knowledge across and between emerging markets, leading to improved prospects for the development of new emerging market ventures
- Acceleration of ecommerce habituation. By introducing new consumers to the world of online retail, Rocket Internet and its peers set the stage for the development of online economies across the emerging markets of the world
- Talent development. Rocket Internet provides training for emerging market entrepreneurs, offering a skill set which can later be used to pursue other value-added entrepreneurial projects
Each of the above bullets represents a driver of economic growth, either directly or indirectly. Startup ecosystems, for example, serve as the foundation for the development of new ventures which can create jobs, provide skills development, and introduce groundbreaking new products and services. A stronger logistics landscape benefits not only Rocket Internet portfolio companies, but all those who seek to transport goods within and across national boundaries. Inter-market knowledge transfer brings new knowledge into emerging markets, which in turn supports innovation and value creation across a range of industries. Ecommerce habituation creates the psychographic conditions under which online business can grow and flourish, creating a new avenue for economic growth. Talent development strengthens a nation’s human capital, empowering new generations of entrepreneurs to tackle important problems and create tangible social value. Thus, in each of these ways, the practice of business model replication is positive phenomenon that drives economic growth in emerging markets.
[1] Unspecified author, “Attack of the Clones,” The Economist, August 6, 2011.
[2] Andrea Ovans, “Can you Patent your Business Model?,” Harvard Business Review, July, 2000.
[3] Mike Butcher, “In confidential email Samwer describes online furniture strategy as a ‘Blitzkrieg’,” TechCrunch, December 22, 2011.
[4] Email received by author on 1/20/2013
[7] Unspecified author, “Attack of the Clones,” The Economist, August 6, 2011.
[8] Unspecified author, “Breaking: Groupon acquires German clone CityDeal” TechCrunch, May 16, 2010.
[9] Hendrik Laubscher, “Rocket Internet to IPO?” Electric Thoughts in a Digital Era, January 6, 2013.
[12] Conversation with anonymous Rocket Nigeria intern
[13] Michael Porter, “Clusters and the New Economics of Competition,” Harvard Business Review, November-December, 1998.
[14] Author interview with Toby Clarence-Smith, Wharton MBA ’13 and former Rocket Internet Mexico intern
[17] Martinkenaite, Ieva “Antecedents and consequences of inter-organizational knowledge transfer: emerging themes and openings for further research.” Baltic Journal of Management, 6(2011)1: 53-70
[18] Lawrence, Japhet and Tar, Usman “Barriers to ecommerce in developing countries.” Information, Society and Justice, Volume 3 No. 1, January 2010: pp 23-35
[19] Boston Consulting Group, “El comercio electrónico en México,” BCG Special Report, July, 2012.
[21] Steve O’hear, “Rocket Internet’s Linio, The Amazon Of Latin America, Raises $26.5M From Summit Partners” TechCrunch, February 25, 2013.
