The Rocket Effect: How Rocket Internet has Impacted the Brazilian Startup Landscape

Hello everyone! In true Brazilian fashion, I went to the beach for the holidays. Needed some time to “desencanar” (unplug). Traveled to Rio and hung out on Ipanema Beach for 5 consecutive days. Check out the pic below – if you’ve never been to the Cidade Maravilhosa, it’s an absolute must. More on that in another post. Right now, I’m in the middle of a 7-hour bus ride back to São Paulo, so I thought I’d use the time to bang out a post on Rocket Internet. Enjoy, and please comment!

ipanema

Defining Rocket

Rocket Internet. The king of cloning. The bane of many an emerging market startup founder’s existence. Training ground for aspiring entrepreneurs who want a more structured startup experience before moving on to do something on their own. Home to lots of former consultants and bankers who want to try their hand at building something on someone else’s dime.

Rocket Internet is many different things to many different people, and we could spend hours debating the true nature of this mysterious, seemingly ubiquitous organization. But one fact is beyond argument: Rocket Internet is a highly controversial entity that has disrupted the emerging market startup landscape in a big way. In the paragraphs that follow, I attempt to break down – as objectively and dispassionately as possible – the impact of Rocket Internet and its worldwide arsenal of startup clones. My analysis will focus on Brazil, as this is the internet battleground that I understand best. I conclude this post with my own personal view on Rocket and its business model.

The Rocket Way

Rocket Internet is led by Oliver Samwer, a German known for his distinctly un-PC approach to communication. The company can best be described as a clone factory: they identify promising business models that have been successfully executed upon in market A, and replicate them in markets A, B, C, D, and E. They do this rapidly and efficiently by tapping a pool of in-house developer / designer talent that provides programming support across the portfolio. They leverage cross-portfolio synergies in a massive way: because their core competency is cloning across multiple markets, they re-use much of the same coding / UI design to quickly set-up startup websites in different geographies. On the logistics / operations front, they resemble a factory 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 no qualms about poaching bankers and consultants from top firms to become “Founders” of Rocket-backed startups. They also recruit heavily at top-tier MBA programs. They like smart, process-driven professionals who operate well under conditions of extreme pressure. They give these individuals a multimillion dollar initial budget, a very small sliver of equity (based on my straw-poll, generally in the neighborhood of 0.5% to 3.0%), a large salary (in Brazil, as much as 20 – 30K reais per month), and the “Founder” title. Then they tell them to perform or go home. Oh, and don’t forget about that pesky vesting period….

Rocket is Ruthless

You’ve got to admire the ruthless efficiency and hawk-like agility of these guys. They move extremely quickly, they are incredibly data-driven, and they are relentlessly performance-focused. They hire fast and fire faster. Over the past few years – and particularly over the course of the past 18 months – they’ve spread across the globe like an advancing army (sorry, I guess Oli’s penchant for invoking warlike language to describe his pursuit of world domination has rubbed off on me :-) ).

Rocket’s rapid growth has come through an almost obsessive focus on the top-line. They like to pour marketing dollars into a new venture, growing it as quickly as possible until they drown out the competition and own the local market.  Then they look to get bought out by the company the cloned. At times, profitability seems almost like an afterthought to them, and they have the funds to operate on a cash flow-negative basis for very long periods of time (probably longer than would be acceptable for VC-backed startups). This is why traditional emerging market startup founders, who rely on finite sources of venture capital to fund growth, find these guys so scary.

rocket deals

Source: The Economist Magazine

You can’t deny that Rocket has made money. You also can’t deny that some pretty sophisticated investors believe in this model, and have poured lots of capital into it. But many question the underlying ethical foundation of the Rocket approach. For obvious reasons.

The Rocket Effect

Okay, so now let’s talk about Rocket in Brazil. The Rocket Effect can be broken down into multiple themes, some positive, some negative, depending on your perspective. Here I highlight the more salient among them.

(1)    Acceleration of emerging market eCommerce penetration. My close friend Toby Clarence-Smith gets credit for pointing this out to me. As mentioned earlier in this post, Rocket spends tons of money on paid online marketing (POM) in order to acquire customers in emerging markets. It’s a very difficult and costly proposition to try and build a Zappos clone in an emerging market. But Rocket is up for the challenge. And in the process, they bring lots of formerly offline shoppers online. Put simply, through the sheer enormity of their POM cash burn, they raise awareness of eCommerce as a new means for consumers to obtain products, they build consumer confidence in online shopping, and they accelerate the overall penetration rate of digital commerce. I believe this happened to a certain degree with Dafiti in Brazil. And it is happening with Linio in Mexico.

(2)    Increased distrust in the marketplace. Rocket is in the business of cloning. They may prefer to call it something else, but that’s what they do. In Brazil, the arrival of Rocket precipitated a palpable change in the local startup scene – people within the community became more secretive and less trusting, especially after hearing stories of Rocket employees disingenuously scheduling meetings for the sole purpose of extracting information from competing startups.

(3)    Stifled Innovation. This is a problem that would likely exist regardless of Rocket’s presence in the market, but I believe Rocket has aggravated it. The success of Rocket in Brazil seems to have accentuated Brazilians’ focus on cloning (or “tropicalização, as the Brazilians refer to it) as opposed to genuine innovation. There are some signs that this is changing, but tropicalização remains the dominant form of entrepreneurship in Brazil, and Rocket certainly hasn’t helped the situation.

(4)    Heightened competitiveness in B2C. If you’re an eCommerce startup targeting a big, fast-growing consumer vertical in an emerging market, prepare for war. It doesn’t matter if you’re backed by some of the finest investors in Silicon Valley. Nor does it matter if you’ve got a several month head-start. Rocket will come after you, deploying enormous amounts of marketing dollars to try to outgrow you. The story of baby.com.br (backed by Brazilian and Silicon Valley-based VCs) and Tricae (Rocket clone) is a case in point. VCs are conscious of this and will bring up the “Rocket threat” in meetings.

(5)    Talent development. Rocket does a great job of converting bankers and consultants into startup professionals (i.e. online marketing, operations, logistics). These folks may go on to work at other startups, or launch their own companies. In this respect, Rocket has done good things for the startup talent pool in Brazil.

Good Rocket, Bad Rocket

So is the Rocket Effect good or bad? If you’re a startup founder focused on B2C, you probably don’t like Rocket. They make it less fun to build a business in an emerging market. They make members of the community trust each other less, they have a seemingly endless supply of cash that they use to steal your customers, they are known to use shady tactics to gain inside information about your business, they may even try to poach some of your employees by offering lucrative salaries. Not nice.

Rocket also sets a negative example for aspiring Brazilian entrepreneurs, showing that it may be better to look north for clonable business models as opposed to studying the home front for opportunities for genuine innovation. This is not good either.

On the other hand, as I’ve pointed out above, Rocket can be positive in some respects. They create functional startup talent. They accelerate the development of eCommerce infrastructure and penetration in emerging markets. They generate increased competition. Viewed from an objective lens, these can all be positive things for an entrepreneurship ecosystem.

My Take on Rocket

I want to conclude with my personal view on Rocket and its model. I’ll be honest: I personally don’t like the Rocket philosophy towards entrepreneurship and venture development. To me, Rocket represents the corporatization of entrepreneurship. If you’re a Rocket “Founder”, you’re not an entrepreneur in the traditional sense, you’re an employee reporting to Germany. You were hired because you worked at McKinsey / Goldman or went to Wharton / HBS, and you’re good at execution. You were given a business model, a geography, and a budget, and told to execute according to script. Oliver Samwer pretty much admits this himself, stating that “We are builders of companies, we are not innovators. Someone else is the architect and we are the builders.” I’m not saying there’s anything wrong with working for Rocket – in fact I think for some it’s a fantastic learning opportunity – I’m just saying let’s not confuse apples for oranges.

More reading: Inside the Clone Factory (Wired Magazine)

That’s it for today. As always, I would love your comments or feedback on this or any of my posts. Have a great one and look out for another post in the very near future!

15 comments

  1. Toby Clarence-Smith

    This is a fantastic post. I agree with everything you say. I think Rocket is at an interesting point in its development. 12-18 months ago, Rocket was launching clones left and right. Now, I get the impression they are scaling back on the number of ventures (many have been shut down) and focusing on those that are proving successful and just launching them in as many geographies as possible. And the interesting thing is that the ones that have failed have largely been ventures where branding and the connection with customers is key (e.g. their Fab clone, their AirBnb clone). I think this provides some important spirals of hope for budding entrepreneurs. You can be the best at executing fast and efficiently, you can spend the most money on paid marketing, but some businesses require more than that for success – you need to create a strong company culture that in turn creates a strong connection with your customers. Rocket has so far not shown itself particularly successful at doing this. I don’t believe Rocket could ever build a successful Warby Parker clone for instance. Or a successful Diapers.com (which is why I think Baby.com.br is going to win in Brazil). Because these are businesses where building a brand is key and Rocket is not geared to doing that.

  2. Raj

    Awesome article, very informative and some great insights that are not obvious.

    One line that I just wanted to play devil’s advocate with was ‘if you’re a Rocket “Founder”, you’re not an entrepreneur in the traditional sense, you’re an employee reporting to Germany’.

    1. A lot of well respected ‘entrepreneurs’ have built companies by buying/copying technology/business practices and/or applying them to new markets e.g. Microsoft buying DOS, SpaceX using a lot of NASA technology and talent but in the private market, Starbuck taking Italian cafe concept to the US. We often hear that entrepreneurship is not about the idea (which 50 people have already had) but the execution. So the indignation when rocket take existing business solutions and applies them to new geographic markets, seems a little unfair.

    2. In terms of drowning out ‘local innovation’, there seem to be very few innovations where if they originate in one country we wait for people in other countries to ‘come up with their own model’. In fact we praise when companies like Apple/P&G/Coke push their new products into other countries even if it kills a local alternative and causes everyone to try and clone their dominant design. If there is a smart value added new product/service surely we should support anyone that help as many people in the world have access to it as quickly as possible. If that means hiring in bankers and consultants to do it quickly, so be it, I’m sure Mexican consumers don’t care who founded their online diapers company as long as they have access to one as soon as possible.

    3. This idea of an entrepreneur as a lone innovator working on idea with little help which then succeeds, seems slightly romanticized. A lot of entrepreneurs get funding from external investors who they have to ‘report to’. Often if funding is from VCs they will receive detailed advice on how develop their product, got to market, hire/poach talent from other tech companies etc. Rocket does this at a larger scale and at a faster pace, why is it ok for a valley based VC to do this locally (e.g. the many number of VC backed Uber and zillow imitators who plan on exiting to their larger originals) but not for Rocket to do internationally?

    I don’t know enough about rocket to comment on whether they are good or bad and think your article did a brilliant job of being balanced. I just want to poke a little at some of the criticism I hear which sounds more like protectionist wining than unfair competitive practices.

    • Brad

      I think the difference here is when he entire enterprise is geared towards, and is funded by, purely copying in order to be bought out as opposed to getting inspiration and building on top of that, contributing towards something better. Its partly about the intention. Obviously hes doing nothing legally wrong, but just leaves a bad taste.

  3. daniel azoulai

    Great article, Thomas. This seems to be a complex phenomenon that has strong positives and negatives.
    I am applying to Wharton round 2 this year. Interestingly, I talked to you about the Lauder program, and couchsurfed with Gabriel Gaspar when I visited Wharton. He lived with Toby. Then, I went to Burning Man with Bernardo and Gabriel, and I saw your Facebook post on Bernardo’s Facebook. Wharton really does have a great community!

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