Category: Uncategorized

I’m telling you, G, it’s all about the CLV

Oi! Tudo bem? I’m back again with a post on CLV / CAC. Enjoy!!!

The Times article that I referenced in yesterday’s post mentions the recent closure of a Brazilian startup called Shoes4You. Shoes4You had a solid pedigree. It was founded by young Frenchman Olivier Grinda, the younger brother of entrepreneurial wunderkind Fabrice Grinda (founder of OLX). The company, which essentially replicated Shoedazzle’s subscription shoes business model in Brazil, was backed by a premier roster of investors, including Accel, Redpoint, and Flybridge. Based on the company’s highly optimistic Series A press release, you’d think these guys were well positioned for success. Unfortunately, as so often occurs in the startup world, things didn’t go exactly as planned. So what happened?

Bye bye Shoes4You

Bye bye Shoes4You

The Times article states that “costs like legal and tax matters along with underdeveloped e-commerce logistics made operations difficult” for Shoes4You, ultimately contributing to the startup’s untimely demise. But every eCommerce startup in Brazil faces these costs, and many are thriving, so there must have been other factors at play. In my view, the failure of Shoes4You can be traced back to the relationship between the company’s cost of customer acquisition (CAC) and its customer lifetime value (CLV).

Startup 101 tells us that in order to operate your startup on a sustainable basis over the long-term, you need to reach a point where each of your new customers contributes more to the company’s bottom line over his / her expected lifetime (CLV) than it costs your company to acquire that customer (CAC). My guess is that Shoes4Your never quite reached this critical threshold.

An example for the layman

Here is a very simple example to better illustrate the fundamental CLV / CAC equation. Let’s say I’m running a new eCommerce startup that sells widgets. I run a model using data gathered from cohort analysis. My model tells me that each of my customers, once activated, is purchasing on average 4 widgets per year over an expected lifetime of three years. I sell each widget for $40, and each sale costs me $35 in variable costs (COGS, payment gateway fees, cost to provide free shipping, taxes, etc), thereby generating $5 of contribution margin. If I get $5 from each sale, and each customer is buying 4 widgets per year for 3 years, each new customer will generate a customer lifetime value of $60. Nice!

But wait. How much am I paying to acquire each of these customers? Let’s go back to our hypothetical widget example. Suppose I’m flush with cash, fresh off a Series A investment. I’m using the money to acquire customers through several channels: I’m running an in-house Google adwords campaign, doing paid advertising on Facebook, working with an online ad agency that runs remessaging display campaigns on my behalf, and working with another agency that is doing display advertising via several Brazil-specific digital ad networks. Each week, my total online ad spend across all these channels is $2,000, and on average I’m gaining about 30 new paying customers per week. This means that my CAC – the amount I’m paying to generate a new paying customer – is $67.

Uh oh. My CLV analysis is telling me that each new customer generates $60 in contribution margin over his lifetime. But it’s costing me $67 to acquire each new customer. This means that for each new customer I bring on board, I’m losing $7!! Not good. When CAC > CLV, you know your startup is in trouble.

CAC > CLV. Uh oh. Tough times lie ahead.

CAC > CLV. Uh oh. Tough times lie ahead. (image courtesy of David Skok, click image to link to post)

So what do I do now? Step 1: I need to dramatically reduce my online marketing spend, potentially even bring it to a halt. At this stage, every customer I bring on board is a money loser, so I need to take a step back and reassess a few things before I keep throwing money out the window. Step 2: I need to think about why my CLV / CAC relationship is out of wack, and come up with a plan of attack to right the ship. A couple things merit consideration here. Let’s look at each in turn:

Customer Acquisition Cost

  • Track repeat purchase behavior. On the CAC side, there are things you can do to reduce customer acquisition cost. Run experiments using cohort analysis to determine the ROI on each of your customer acquisition channels. Group all the new buyers who came onto your platform in a given week via a specific channel into a cohort, and track the purchase behavior of that specific cohort over time. You may see that those who came onto your platform via Facebook have a repurchase frequency of 5x a year, versus only 2x a year for those who became first time buyers via your remessaging campaign. This would suggest you should allocate more dollars to facebook ads and reduce your remessaging spend.
  • Track channel-specific CAC. Similarly, run experiments to determine channel-specific CAC for each of your customer acquisition channels. You may notice that for every $2000 spent on ad networks, you’re gaining 40 new paying customer, versus only 20 customers for every $2000 spent on google adwords. This would suggest reallocating dollars from adwords to ad networks.
  • Optimize the customer purchase funnel. Another idea is to run A/B tests to optimize your customer purchase funnel. Is your website designed such that customers who enter the homepage have an easy, effective, and streamlined means of going from first contact with a product page through to the payment page and onto the actual purchase? Run tests to reduce bounce rate and make sure the highest possible percentage of website visitors make it all the way to the end of the purchase funnel. This will help you get the most bang for your online marketing buck and thereby reduce your CAC.
  • The power of experiments. The reality is things are a bit more nuanced than this, but the basic idea is that you can run experiments to determine the relative effectiveness of each of your customer acquisition channels, and optimize accordingly. You can also optimize your customer purchase funnel to reduce bounce rate and enhance purchase probability (and thereby the acquisition of a new customer). All of these things should help reduce your overall CAC, thereby helping come closer to the desired relationship between CLV and CAC.

Customer Lifetime Value

  • Improve margins. On the CLV side, there are a couple things we can do. First things first, let’s try to improve margins (in other words, there are multiple ways we can increase the profit contribution resulting from each individual sale we make, which thus increases CLV). First, we can try to reduce COGS by finding new, lower-cost suppliers, or by purchasing in bulk from our existing suppliers. To a certain extent, this will happen naturally as we scale, but it’s definitely something we should be focused on. Second, we can experiment with changes to our shipping policy, potentially moving from a full free shipping model to a partial or subsidized shipping model based on the size of customer orders and their geographic location (be careful to gauge the impact on sales to ensure changes to shipping policies are not completely offset by reductions in customer orders). Finally, (but not exhaustively) have you been offering too many customer discounts, thereby reducing gross margins? Perhaps we can reduce our average customer discount without generating a corresponding decrease in sales… You get the idea right? There are various things we can do to improve margins. Test them all. Remember, better margins —> higher CLV
  • Increase basket size. You can also work to increase basket size. Going back to our example, our customers are buying one widget per purchase, four times a year. Can we get them to buy two widgets each time they make a purchase, such that they are buying 8 widgets a year instead of four? The impact on CLV resulting from a greater basket size should be pretty self-explanatory. But how can we get there? Run experiments! Try giving customers free shipping only if they purchase more than one widget at a time, and see what happens. You might be pleasantly surprised!
  • Enhance repeat purchase rate. Another way to improve CLV is to improve your customer repeat purchase rate. Remember, CLV is in large part a function of how many times per year your customers purchase your product. How can we improve this? In a nutshell, step into the shoes of the consumer and do everything possible to improve the quality of the customer experience and the quality of your end product. This is a bit of an intangible, and will vary depending on your business model, but the bottom line is that we need to be customer-centric so that our customers buy more frequently.
  • Get rid of crappy customers. Whoaaaa wait a second, don’t we love all our customer equally? NO. We do not. Some of our customers have high basket sizes, buy high margin widgets (real world example: designer t-shirts), and have high repeat purchase rates. We LOVE these customers. Other customers rarely buy, and when they do, they buy only one widget, and it’s a low margin widget (real world example: generic underwear). Let’s get rid of the crappy customers! How can we do this? It’s called customer segmentation, my man! Label the email addresses of all crappy customers as “crappy” and the email addresses of all rock star customers as “rock stars”. When one of our crappy customers logs on to make a purchase, make their lives difficult by forcing them to pay for shipping, lengthening the customer purchase funnel, etc… Over time we end up with a much higher quality customer population, thereby increasing our overall CLV.

Back to business

Okay, so let’s assume I’ve slowly made the changes above, and as I’ve done so, I’ve been using cohort analysis and A/B testing to gauge the effectiveness of my strategic tweaks. Over time, I should begin to see my CAC go down, and my projected CLV go up (eventually I’ll have enough longitudinal data to retrospectively calculate my actual CLV). Before long, you’ll get to a point where you feel confident that your CLV > CAC. When you reach this point, guess what? Time to put the pedal to the metal!!

CLV > CAC. Time to go full throttle on the marketing spend! Image courtesy of David Skok (link at end of post).

CLV > CAC. Time to go full throttle on the marketing spend! (image courtesy of David Skok, click image to link to post)

When CLV comfortably exceeds CAC (ideally, it should exceed CAC by 2.5x according to Jeremey Liew of Lightspeed), you are making money off each new customer you bring on board. If you already have cash in the bank, or your business model throws off high amounts of organic cash, go ahead and crank the online ad spend using those funds. If you were in lean startup mode, it may now be time to shift into high gear. Go back to your VCs (or find new ones), show them your new numbers, explicitly tell them your CLV is way higher than your CAC, and raise some friggin’ dough (you should be able to do so at an attractive valuation with your new numbers). When the money is in the bank, go full throttle on the online marketing spend… It’s time to grow grow grow, baby!

Further Reading

I’m definitely not an expert on CLV, but hopefully the insights outlined above serve as a helpful starting point. To learn more about this fascinating and important topic, I suggest checking out the following supplement resources:

Phewww. Just pumped out this post in two hours, record time! Going to take a little break now. Don’t forget, I’ve got an awesome post coming out soon on the differences between the São Paulo and Mexico City ecosystems. You don’t want to miss it, it’s going to be very solid… So check back mañana! Oh, and if you missed yesterday’s post where I talk about my Wharton journey, check it out! It’s been very well received.

Click on the image to check out yesterday's post on my Wharton experience.

Click on the image to check out yesterday’s post on my Wharton experience.

Breaking Down the Brazilian Zeitgeist (plus memoirs of an MBA grad)

Annnndddd I’m back. Sorry for the long delay everyone – the last few weeks of school were extremely busy (and extremely fun). I’m now a freshly minted Wharton MBA graduate, ready to take on the world! My 24 months at Wharton / Lauder were truly outstanding, and I wouldn’t trade the experience for the world (or the six figure debt load I took on in order to finance it ;-)). I’m now an even stronger believer in the value of a top-tier MBA. While it’s not for everyone, it made a lot of sense for me, and I can say with complete candor that the experience was truly transformative.

That's me on the left. With my roommates Jordan (middle) and Brett (right).

That’s me on the left. With my roommates Jordan (middle) and Brett (right).

I gained a lot from Wharton. A new group of amazing friends who would go to hell and back to help me out and see me succeed? Check. Unforgettable international adventures alongside super sharp, super fun-loving people? Check. A robust network of powerful professional relationships that I can leverage to turbo-charge my career and come closer to realizing my long-term aspirations? Check.  New insights and new knowledge that have changed the way I interface and interact with the world around me? Check. A job whose central focus is exactly what I’m passionate about, that I’ll actually be excited about waking up for, that puts me in touch with Latin American entrepreneurs and creators every day? Check, check, check. You get the point… For me, Wharton was a wild, crazy, and life-changing ride, and I feel so privileged to have had the experience.

Okay, let’s get down to business. The goal of today’s post is to provide a quick update on my personal story / future plans, and weigh in on a recent NYT article on current trends in the Brazilian startup ecosystem. Tomorrow I’m publishing a post on the importance of CLV, and in a few days I’ll post an extensive comparative analysis which examines the differences between the São Paulo and Mexico City ecosystems. Stay tuned!

My new gig, and how I got it

I generally seek to avoid writing about myself on this blog (apart from a few personal anecdotes / stories here and there). But today I’m going to break from tradition and share a bit about my personal journey over the past two years. Hopefully some of you out there find it interesting, relevant, or useful.

I didn’t know much when I arrived at Wharton two years ago. What I did know, however, was the following: (1) I didn’t want to do anything “corporate” (2) I wanted to do something deeply entrepreneurial, whether launching a startup, working at a startup, or investing in startups; and (3) I wanted to do something that channeled my passion for Brazil.

During my time at Wharton, I maintained a laser-like focus on activities that I felt would help create opportunities consistent with the goals outlined above. I took my Lauder Portuguese classes very seriously, using every opportunity to ramp my Portuguese language abilities. I read startup / VC blogs voraciously. I began tweeting about Latin American startups and the Latin American tech scene. I cold called startup founders, interviewed them, and published the interviews in the Wharton Journal. I became an evangelist for my entrepreneurially inclined friends and colleagues, promoting their projects via facebook, twitter, foursquare, and linkedin. I spoke and wrote and tweeted so much about startups that it actually began to annoy people! I soon became known across campus as the “Brazil startup guy.” Sweet. This is what I was going for.

There’s more. During Wharton’s “DIP Week” (dedicated interview period), when the bulk of my Wharton peers were consumed by interviews with bulge bracket banks and consulting firms, I skipped town, traveling to Brazil to begin building local relationships throughout the ecosystem. I networked aggressively with the Brazilian startup community, leveraging Brazil-based Wharton / Lauder contacts like Davis Smith, Jake Rosenbloom, and Nick Reise in order to establish a local beachhead and grow my Brazilian rolodex. These connections helped me land an awesome summer internship at a São Paulo-based, venture-backed fashion eCommerce startup called olook (coincidentally cofounded by another Whartonite, Peter Ostroske). At olook, I ran a cohort analysis and built out a comprehensive customer lifetime value model, leading the company to embark on an important strategic pivot.

After my summer in SP, instead of returning to Philadelphia, I flew to San Francisco, where I participated in the pilot program for the new Wharton Semester in San Francisco program (Wharton is the only MBA program that offers the opportunity to spend a semester “abroad” in San Francisco). While in San Francisco, I took courses like Venture Capital and the Finance of Innovation, Technology Strategy, The Development of Web-based Products & Services, and Digital Commerce. I also soaked up the insights and advice of those who visited us as part of the Wharton in San Francisco speaker series, including Josh Kopelman of First Round, Andrew Chung of Khosla, Amy Errett of Maveron, Kevin Hartz of Eventbrite, Michael Baum of Splunk, and Davis Smith of, among others. Finally, following the advice of my friends Toby and Pablo, I used my 5-week winter break to travel back down to São Paulo to launch a blog focused on the Brazilian tech scene. Every day while in SP, I met with different entrepreneurs and investors, seeking to develop unique and actionable insights that I could share on my blog. And the result was, which you’re reading right now.

Wharton brand new campus in San Francisco. I encourage all entpreneurially-minded Whartonites to participate in SSF!

Wharton’s brand new campus in San Francisco. I encourage all entrepreneurially-minded Whartonites to participate in SSF!

Long story short, I used my time at Wharton to focus on the stuff I love (startups, Brazil, the Portuguese language, entrepreneurship) and stay away from the stuff I don’t (corporate America). At times, it was extremely nerve wracking, and I struggled to deal with the inherent uncertainty of my chosen path.  Especially considering my debt load. But in the end, things worked out.

In early June, I’m joining Valor Capital Group, an NYC-based Venture Capital firm focused on opportunities in Brazil. Valor was launched in 2011 by Clifford Sobel, and has invested in, olook, and descomplica, among others. It’s a small shop, but growing quickly. I love the team, love the focus on Brazil, and love the learning opportunity. Additionally, it’ll allow me to keep one foot in NYC (where I’ll be close to fam and friends) and one foot in SP (where I’ll be actively engaged with the ecosystem I’m so passionate about). I’m so stoked. Can’t wait to get started!

Breaking down the Brazilian Zeitgest

The New York Times recently published a solid article detailing recent trends in the Brazilian startup space. It does a great job capturing the current zeitgeist of the Brazilian ecosystem, and I generally agree with their assessment of the state of the industry. But let’s dig a bit deeper. Below I pull out a few of the key themes / quotes and offer some supporting analysis and context:

  • “The consensus among investors and entrepreneurs in Brazil is that the short term will be difficult, but that long-term prospects remain highly favorable.”  Wholeheartedly agree with this. As I’ve written about previously, beginning in mid-2012, the funding environment in Brazil began to trend towards conservatism, with some of the more active investors retrenching to focus more on portfolio management than ongoing capital deployment. The ebullience of 2011 rapidly dissipated as investors began to recognize the challenges of scaling in a hyper-competitive marketplace, particularly for companies focused on eCommerce. The shutdown of Shoes4You (more on this in tomorrow’s post) is a case in point. Regarding longer-term prospects, however, I believe positive sentiment is completely justified. Brazil’s nearly 200M citizens are highly digitally predisposed, the country’s middle class continues to expand at a rapid clip, and the local ecosystem is the most advanced in the Latin America. I’m confident we’ll see some big exits in the next 3 – 5 years, thereby validating international and domestic investors’ bets on the South American juggernaut.
  • “Initially, most investments made here by foreign venture capital firms were in a narrow range of Brazilian Internet or technology companies, sometimes called copycats because they replicate existing consumer Web business models in the United States or Europe.” Correct. Putting money to work in Brazilian startups involves an element of risk not present in domestic venture investing: country risk. When compared to investing in the US and Europe, investing in Brazil involves new forms of risk that emerge from backing a company in a foreign market with different consumer behaviors, cultural dynamics, legal frameworks, and bureaucratic practices. To compensate for the country risk associated with investing in Brazil, foreign VCs deploying capital in the country sought to mitigate a separate and distinct type of risk: business model risk. As the NYT points out, the mitigation of business model risk by foreign VCs was achieved by investing in proven business models that have worked in other markets, such as the US or Europe. The result is an investment dynamic focused on copycat models as opposed to genuine innovation. But I believe this is changing…
  • “Investors assumed Brazil’s market was large enough to support multiple successful companies in each e-commerce vertical: for example pet supplies, fashion or taxi services.” Yep. Take a look at the baby space. Yes, it’s a big and fast-growing vertical, but does it really make sense to have three venture-backed companies battling for market dominance in Brazil? was the first player to receive venture backing in the space, and they are funded by a group of all-star investors, including Accel, Tiger, Monashees, Felicis, Thrive, and Menlo Ventures (full disclosure: Valor Capital Group, my new employer, is also an investor). Yet, despite the presence of a well-capitalized player backed by tier-A VCs, other investors felt comfortable putting money into competing firms. Atomico backed Bebestore with a $10.7M investment, and Rocket Internet put 20M Reais into Tricae. This is the hypercompetitive dynamic that has lately given investors pause and prompted them to approach the Brazilian eCommerce space in a more circumspect manner.
  • “Silicon Valley’s expectations were higher than they should have been in terms of the reality of the opportunity down there” Maybe. But can you really tell whether expectations were overblown only two to three years after you put money in the space? Most international investors only began deploying capital in Brazil in 2011. It’s now 2013. In the world of eCommerce, investors don’t generally see a liquidity event for 5 – 10 years after the initial investment. Given most international investors have exposure to Brazil via eCommerce investments, I would argue that it’s a bit early to make a call on whether Brazil has met expectations. Let’s give it a few more years, yeah?
  • “I expect a lot of shut-downs, and that a lot of companies will be firing people” Probably. I’ve commented before on how Peixe Urbano sold off some of its foreign entities, and laid off a bunch of people. We just saw Shoes4You close its doors. Word on the street has it that a bunch of startups with seed stage capital are struggling to scale and / or raise follow-on funding. So I wouldn’t be surprised if we saw further announcements of shutdowns. But remember, this is the world of venture, where shutdowns are natural and expected! So I wouldn’t be very alarmed. Failure is a natural part of any ecosystem.
  • “Companies will have a tough time raising money and do so more by begging and groveling with current investors” Totally. In fact, I think it’s fair to say I called this a few months ago when I wrote about how the investment environment in Brazil has become significantly more challenging. Seed stage funding is still fairly plentiful – you can get it from the German angel mafia (Kai, Florian, Felix, etc), from 500 Startups, or from Redpoint e.Ventures seed program, among others – but Series A / B has become really challenging, and will remain so for some time. Lots of folks with seed or Series A capital have had to turn to existing investors for follow-on funding. An increasingly popular alternative source of follow-on funding is strategic investors. These are larger Brazilian corporates who offer capital and other sources of strategic support in exchange for an equity stake and access to a startup’s unique expertise in a particular area, such as eCommerce operations and customer acquisition. I encourage these sorts of partnerships, especially when access to traditional VC capital dries up.
  • “People realize that Mexico is less developed in the Internet space and that raising follow-on capital is even harder” Keep your eyes peeled for my upcoming comparative analysis of the São Paulo and Mexico City ecosystems, which should be out in the next few days. In that post, I will discuss at length the current state of the Mexican startup / VC landscape, with a particular focus on what it takes to raise $$ for tech startups in Mexico at present.
Touchdown in Mexico. Stay tuned for an upcoming post on the Mexico City ecosystem.

Touchdown in Mexico. Stay tuned for an upcoming post on the Mexico City ecosystem.

  •  “We’re seeing less flooding by M.B.A.’s and consultants from all over the world” Haha! I loved this line. Yes, it’s true, fewer and fewer of we dreaded “MBAs and Consultants” are coming to Brazil… instead, many of us are heading to Mexico! My friends Toby and Pablo, for example, decided Mexico was the place to launch a new vertical-specific eCommerce startup,… check out their new company’s awesome site. And again, watch out for my next post, where I’ll go into greater detail on why so many aspiring MBA entrepreneurs are heading to Mexico these days.
The team at Pesty working late into the night. Startup lifestyle baby! More on these guys on my post on the Mexico ecosystem.

The team at Petsy working late into the night. Startup lifestyle baby! More on these guys in my upcoming post on the Mexico ecosystem.

That’s it for today folks! As mentioned, I’m back into the swing of things, and I’ve got some great material coming up. Tomorrow a look at the importance of CLV, and in a couple days, a kick-ass analysis on the Mexico ecosystem. See you soon!

clone wayrs

Why Rocket Internet is Good for Emerging Markets

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 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


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]

rocket portfolio_edited

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]

 rocket deals

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 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

[5] Author interviews

[6] “Rocket Internet ventures,” Rocket Internet website, accessed 3/18/2013,

[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.

[10] Springstar website, accessed 4/1/2013,

[11] Project A website, accessed 4/1/2013,

[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

[15] Author interviews

[16] Ibid.

[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.

[20] Ibid.

[21] Steve O’hear, “Rocket Internet’s Linio, The Amazon Of Latin America, Raises $26.5M From Summit Partners” TechCrunch, February 25, 2013.

[22] Author interviews

[23] Ibid.

[24] Author interviews

Towards a Stronger Brazilian Startup Ecosystem: Exits, Strategics, and The Halo Effect

It’s nearly 3pm on a rather cloudy Thursday afternoon here in Philadelphia. I’m in John Huntsman hall, the imposing brick and glass edifice which forms the physical and spiritual core of the Wharton community, and it feels eerily deserted. Why? In keeping with tradition, the vast majority of my MBA peers have taken a few days off, swapping the dreary, snowless streets of Philly for the powdery slopes of Breckenridge, Colorado. While my friends tear up the pow pow over in ski country, I’m lying low here on the east coast… great way to save some dinero and escape the MBA masses for a bit. Also, the perfect opportunity to reinvigorate my blog with a brand new post! Today, I’ll be discussing what I believe to be some of the key impediments to the growth of the venture capital / startup ecosystem in Brazil.

The MBA Cafe in Huntsman Hall on a Quiet Thursday afternoon

The MBA Cafe in Huntsman Hall on a Quiet Thursday afternoon

The Global Proliferation of Startup Ecosystems

Before diving into the meat of my analysis, it’s worth taking a look at the global ranking of startup ecosystems conducted by The Startup Genome Project. They’ve done an excellent job of breaking down what defines an ecosystem, the factors that condition their strength or weakness, and the variables that mediate their growth prospects. The report also describes the rapid emergence of dynamic new ecosystems across the world, stating that:

While nearly all high growth technology startups have historically emerged from no more than 3-4 startup ecosystems, namely
Silicon Valley and Boston, this trend appears to have reached its end. Simultaneous with a global explosion of entrepreneurship
has been an explosion in the rise of new startup ecosystems around the world, and a new found maturity in others.

I love this quote because I believe it captures the essence of a fundamental shift in how we conceptualize venture formation and venture investing globally. Silicon Valley will always remain a juggernaut in the world of startups / venture, but truly prescient entrepreneurs and investors are beginning to look outside the Palo Alto bubble for unique and compelling opportunities that present the possibility of truly outstanding returns. I believe São Paulo (which is currently 13th in the global ranking) is on its way towards becoming a powerhouse ecosystem. But in order to genuinely achieve a world-leading position as a catalyst for innovation and company creation, a few things need to happen. And that is what this post is about.

The Startup Genome Project's Ranking of Ecosystems. Note São Paulo is currently ranked 13th.

The Startup Genome Project’s Ranking of Ecosystems. Note São Paulo is currently ranked 13th.

Exits, or “Can I get an Instagram Please”

We haven’t seen too many big exits in Brazil. Exits – whether through IPO, financial sponsor purchase, or strategic acquisition – are the lifeblood of an ecosystem; they are the combustible that fuels the fire of the industry. Exits generate the financial returns that LPs and GPs seek, and (in most cases) they represent the ultimate realization a founder’s entrepreneurial dream.  Perhaps most importantly, exits provide the economic justification for the existence of venture capital and the startups capitalized by it.

While a few prominent exits mark the history of the Brazilian VC / startup world – such as the 2009 purchase of Buscapé by Naspers for USD $342M – such success stories are few and far between. Brazil needs more and larger exits to demonstrate to the global VC community that it can deliver VC-like returns, and to prove to domestically-inclined funds that venturing beyond US borders can yield positive, black swan-style outcomes.

Imagine the impact of an Instragram-esque exit in Brazil? There’s something about a 312x return that gets people fired up… An exit of that magnitude would attract additional capital and talent, inspire new generations of young people to build companies, and generally grow and enhance the ecosystem. Can Brazil deliver a mega-exit? While I don’t see anything on the horizon, I’m long-term optimistic (for reasons that I’ll go into in another post).

More acquisitive Strategics

We need Brazilian companies to become more acquisitive. This point is closely linked to my commentary above regarding the importance of exits. One of the great things about the San Francisco ecosystem is its abundance of big, cash-rich tech companies who buy startups as a means of catalyzing innovation, obtaining top talent, and acquiring new technologies. Intel, Google, Apple, Cisco, IBM, Oracle, Microsoft, Amazon…. The list goes on and on.

While it’s unlikely that Brazil will ever come to possess such a powerful panoply of acquisitive tech titans, I do believe that some of Brazil’s existing tech / media companies will become more positively disposed towards startups in the future. Ecommerce companies like Nova Pontocom and B2W could snap up smaller, vertical-specific ecommerce startups in an effort to gain a strong foothold in a particular product segment. Media conglomerates like Abril already recognize the importance of digital media, and may use startup acquisitions as a means of accelerating their transition to a digital world. Finally, it’s quite possible (in fact, likely) that cross-border startup acquisitions will pave the way for established US companies to enter foreign markets. Could Zappos (Amazon) buy Dafiti? It’s not beyond the realm of possibility…

The Halo Effect

Check out my snazzy powerpoint graphic below. Can you see the positive feedback loop, the self-reinforcing cycle? I like to call this “The Halo Effect,” a not-so-subtle reference to the fact that – in Silicon Valley –successful entrepreneurs become highly active angels, seeding future ventures and thereby creating a virtuous circle forged of capital and mentorship. This is another reason why Silicon Valley really is the “fertile crescent” of the startup world, why it’s given birth to so many outstanding, world-changing companies. Accomplished entrepreneurs in Silicon Valley give back in the form of money and expertise, and this tradition of “closing the loop” has helped create an explosion of ongoing innovation and company creation that shows no signs of abating. It’s a cycle that feeds on itself and grows stronger over time. Awesome!

halo effect

We need this in Brazil. We need more successful entrepreneurs to redeploy the proceeds of their exits into new ventures and new entrepreneurs. You see some examples of this – Hernan Kazeh and Nicolas Szekasy (Mercado Libre), Romero Rodrigues (Buscapé), Florian Otto and Felix Scheuffelen (Groupon Brazil), Kai Schoppen (BrandsClub) – but not nearly enough (and too few of these guys are actually Brazilian!). My hope is that the positive feedback loop that has helped created such a rich entrepreneurial ecosystem in Silicon Valley will begin to take hold in Brazil. I think it will – it’s just a matter of time (and more exits!!!).

That’s it from me for now. As always, I welcome your comments and feedback, and I encourage you to check back often. Até mais!!

B2B modified

Four Brazilian B2B Startups I Would Invest in

In my last post, I outlined how the world of B2B startups has evolved in Brazil over the past few years from a more theoretical perspective. In this post, I will provide a more tangible view of what “dark pool” markets in Brazil look like, and identify some of the top B2B startups that are disrupting them.

The companies listed below represent the “creme de la creme” of the Brazilian B2B  startup world. I have met and engaged with the founders of each of these companies, and I would personally bet money on all of them. Why? Because the Founders have (1) Vision (they have charted a path to the creation of something massive); (2) Magnetism (they have the charisma, poise, and presence to attract top talent and intelligent capital); (3) and Drive (they possess an unrelenting, irrepressible determination to achieve success no matter what). The icing on the cake when it comes to each of these companies is that they’ve made the wise choice of focusing on dark pool markets that are large, ripe for tech-driven disruption, and unlikely to attract the attention of predators like Rocket Internet.

Without further ado, the four Brazilian B2B startups that I would personally invest in (in no particular order):

Printi: Florian Hagenbuch and Mate Pencz are inarguably two of the smartest guys in the Brazilian startup scene. They did a masterful job lining up a $1.2M seed round amidst an increasingly challenging capital raising environment. What I really love about this business, however, is the market it targets: the sleepy, old-school backwater that is the Brazilian printing industry. This is a textbook dark pool market, so unsexy and complex that few have ventured to disrupt it over the years. These market attributes – which might scare off your typical entrepreneur – are exactly what attracted Florian and Mate to the idea. They saw in the unsexiness of the market an opportunity to operate relatively competition-free, leveraging technology to slowly but surely take a bigger and bigger share of this massive market. I interviewed Florian and Mate for the Wharton Journal – check it out to learn more about their highly compelling business model.

Emprego Ligado: This is a 500 Startups-backed B2B startup focused on leveraging SMS technology to connect blue collar job seekers with prospective employers. I know cofounders Jake Rosenbloom and Derek Fears quite well, and they are rock stars (don’t know the third co-founder, Nathan Dee, but if Jake and Derek are any indication, he’s a machine as well). They have vision, they have execution, they have scrappiness and resolve. They were one of the first teams to understand that designing solutions for home-grown dark pool markets – as opposed to simply tropicalizing foreign business models – is a great way to achieve the kind of outcomes VCs look for. In the words of Jake, “the companies that will become truly sustainable in Brazil will be those that are designed specifically (not just localized) for the Brazilian marketplace.”

4Vets: I freaking love this business model. Classic case of targeting a dark pool market that’s gone unnoticed by everyone else. Bernardo Arrospide and Benjamin Lewis came to Brazil and discovered that the way in which pet stores, veterinary hospitals, and animal clinics procure products is antiquated and obsolete. It’s all done offline, which involves lots of phone calls, time-consuming trips to regional distributors, costly delays, time and money wasted. Why not offer a one-stop online shop for these businesses to obtain what they need to run their day-to-day operations from the comfort of their offices? This is what these razor-sharp Wharton entrepreneurs are doing. They’ve already signed exclusive distribution contracts with a few US companies to bring never-before-seen pet products to Brazil, and they just won first place out of more than 500 applicants in the LatAm startup challenge. This one is a no-brainer, I’d definitely invest if I had spare funds!

Itaro: These guys get it. They’ve gone after a super-unsexy, super-large market, built an impressive team with a deep bench of entrepreneurial talent, and lined-up a strong roster of investors anchored by Brazil’s vaunted angel investing duo, Kai Schoppen and Florian Otto. Itaro sells “tudo para seu carro” (everything for your car). At the moment, tires comprise the bulk of sales, but the longer term vision is to become the dominant provider of car products & parts to the massive number of mechanics and car repair shops across the country. I met with the founding team recently (led by Jan Riehle) and was blown away by their execution capability and the depth of their market knowledge. Another company I’d love to put money into.

That’s it for now. Haven’t decided what my next post will address, but I promise you it will be interesting and relevant… so stay tuned.

dark pools

The Rise of the Unsexy: B2B in Brazil

I’m back at the Startup Mansion here in Sao Paulo today (correction: I was at the Mansion when I began writing this post; now I’m back at the Wharton School in Philadelphia). As you can see, the “Luigi” mural that is being painted in the main work area is nearing completion… pretty cool, pretty edgy. I wonder if the guy who is painting the mural is being compensated in equity by one of the startups here. Reminds me of the guy who made a fortune after taking equity in exchange for designing and painting the murals at FB headquarters…

luigi mural

This week has been insane – since I broke the news about Rocket Internet gearing up for an IPO this past Saturday, I’ve been flooded with inquiries about the implications of the potential event. I’ve also been busy meeting with lots interesting entrepreneurs, VCs, and eCommerce professionals who are actively shaping the future of the Brazilian startup ecosystem – and the Brazilian economy more broadly. Absolutely fascinating. I love this stuff!

I promised in my very first post to address the topic of B2B in Brazil. So here we go. I begin with an analysis of the macroeconomic dynamics that led VCs to heavily “overweight” B2C businesses in their portfolios. I then discuss the major driver of the shift in attention towards B2B (and away from B2C). Finally, I identify four B2B startups that I would personally invest in.

The underpinnings of the B2C frenzy

Let’s begin with a quick overview of how trends in VC investing in Brazil have evolved over the past year two years. I discuss this in a prior analysis, but it’s worth touching upon once more in the context of this post. Back in 2011, B2C businesses were all the rage, with investors clamoring to get into a number of sexy, consumer-facing deals. Peixe Urbano,, Olook, Shoes4you, Oppa, Belezanaweb, Petlove, Elo7, Hotel Urbano… All of these B2C startups raised capital – usually at very favorable valuations – from top-flight US and Brazilian investors including Tiger Global, Redpoint, Accel, Kaszek, and Monashees, among others. Check out the comprehensive list of who got funded by whom here.

At the time, investing in consumer-facing companies made lots of sense. Brazilian GDP growth was on fire, posting a 7.5% increase in 2010. This growth was in large part consumer-driven: the government pushed banks to expand consumer credit, making it easier for lower income consumers to finance purchases of cars, domestic appliances, and other consumer goods. Equally as important were government programs designed to usher previously marginalized segments of society into the consumer economy. Programs like Bolsa Familia and Minha Casa, Minha Vida helped push millions above the poverty line. More specifically, between 2005 and 2011, a staggering 40.3M Brazilians rose from classes D and E (comprised of those individuals below the poverty line, with little-to-no consumptive power) to class C (middle class). In 2011, for the first time in Brazilian history, the middle class represented the majority of the population (54%). This sea-change in the socioeconomic composition of Brazilian society resulted in a dramatic increase in consumption across the economy, making consumer-facing startups look like worthy bets for VCs.

And bet they did. As described above, VCs piled into investments that tapped into the theme of “the rise of the Brazilian middle class.” I would argue that VCs became overlevered to this theme, and that – like any rational investor – they are now looking to diversify away some risk by moving away from B2C.

To be clear, it’s not that the Brazilian consumer today is struggling – far from it. The Class C consumer group in particular remains an important driver of Brazil’s economic growth. But just like an overeager child who eats too much ice cream too quickly, too much consumer exposure across the portfolio can give a VC a real headache (especially when a consumer-play goes sour). Hence the rise of B2B, both as a diversification tool, and as a smart way to tap into big, hugely inefficient markets where few others are playing.

Disrupting the dark pools

The need to move away from plain-vanilla consumer plays and into businesses that tap existing but as-of-yet undisrupted markets is one of the biggest drivers of VC’s rising interest in B2B business models in Brazil.

“Dark pools.” You usually hear this term in financial circles, where it is used to describe trading networks that are opaque, obscure, and hidden from the public eye. But the term is also well-suited to describe a market phenomenon found within the world of startups. In startup land, “dark pools” are markets that are large, unsexy, obscure, and poorly understood. Markets that represent massive business opportunities, but that most people don’t bother to look at; markets that remain antiquated and undisrupted long after the low-hanging fruit within the B2C space has been picked; markets that won’t attract the likes of Rocket Internet. Dark pool markets can most often be found within the B2B arena, because this is the domain of the non-obvious.

Identifying these dark pools of unexploited market opportunity requires a willingness to think outside the box about difficult problems faced by everyday businesses (not consumers). These opportunities are by definition less well understood and less obvious. It’s easy and natural to come up with B2C ideas, because as buyers of everyday goods and services, we intimately understand consumer problems and can thus more easily conceive of the B2C business ideas that would solve them. The B2B opportunities often escape us because they exist behind the scenes, at a level removed from our day-to-day consumptive activities. But they do exist. In fact, they are plentiful. And those savvy enough to identify and exploit them will reap big rewards down the line.

Four Brazilian B2B startups that I would invest in

The best way for me to paint a compelling panorama of this hidden landscape is to talk about some of the startups who are disrupting dark pool B2B markets in Brazil at this very moment. I have met and engaged with the founders of each of these companies, and I would personally bet money on all of them. Why? Because the Founders have (1) Vision (they have charted a path to the creation of something massive); (2) Magnetism (they have the charisma, poise, and presence to attract top talent and intelligent capital); (3) and Drive (they possess an unrelenting, irrepressible determination to achieve success no matter what). The icing on the cake when it comes to each of these companies is that they’ve made the wise choice of focusing on dark pool markets that are large, ripe for tech-driven disruption, and unlikely to attract the attention of predators like Rocket Internet.

So which companies would I invest in? You’ll have to check back on Tuesday to find out :-)

Até a próxima gente!

Footnote: The “Vision, Magnetism, Drive” framework for identifying investment-worthy founding teams is an adaptation of a framework I learned about in Professor David Bell’s class on Digital Commerce at Wharton. Professor Bell in turn learned about the framework from Kirsten Green, Managing Partner at Forerunner Ventures, who uses it to help evaluate investment opportunities at her fund.

Rebuttal: Why a Rocket IPO Would Indeed be a Big Deal

Yesterday, Sarah Lacy of Pando Daily responded to my post on Rocket Internet’s IPO preparations in a typically Silicon Valley-centric report which fails to grasp the international implications of a potential public offering by the Samwer brothers. While I respect her track record as an astute observer of tech trends, I fundamentally disagree with some of her assertions. In this post, I explain why.

(1)    Lacy says that the news of a potential Rocket IPO is not a big deal, that no one in the startup world will care. WRONG. The startup universe does not revolve entirely around Silicon Valley. Yes, Silicon Valley is far and away the most important and dynamic startub hub on the planet. It is without a doubt where the overwhelming majority of VC returns come from. But there are other fast-growing startup ecosystems all over the globe, full of intrepid entrepreneurs trying to build and scale new businesses in new markets. And there are lots of emerging market VCs who have put significant capital into ventures that may be threatened by an increasingly well-capitalized army of Rocket clones. I can assure you that for all of these individuals, a several hundred million dollar public offering by Rocket would be a very big deal. I won’t belabor the point here, as I’ve elaborated upon it in a prior post. But from my seat here in Sao Paulo – and from my recent conversations with emerging market entrepreneurs in markets such as Indonesia and Nigeria – this is undoubtedly big news. Ironically, I think Lacy knows as much herself, although she would be loath to admit it. Why else would she dignify my “effusive” reporting with a post of her own?

(2)    Lacy says Silicon Valley investors would never invest in those who steal “color palates, names, and code.” Really? Why is New Enterprise Associates an investor in Payleven, the Rocket-backed Square clone? Why is Summit Partners an investor in Lazada, Rocket’s Asian Amazon clone? Lacy’s assertion that Silicon Valley is too proud to put money into clones seems off base in light of the facts.

(3)    Lacy says that entrepreneurs in the Valley no longer pay much heed to the machinations of Rocket. I’m not so sure about that. If I were Stripe, for example, I would probably be paying attention to Rocket’s moves. As David Meyer of GigaOM points out, Stripe is available in the U.S. and Canada. Paymill, Rocket’s Stripe clone which launched a mere five months ago and just raised $13M from Holtzbrinck and Sunstone, is available across 34 countries in Europe and elsewhere. I find it hard to believe that a Rocket IPO – if it were to include Paymill – would not hold major repercussions for Stripe and its investors. Especially given Stripe’s intentions to expand internationally.

The Birchbox / Glossybox battle serves as another example of how US startups and their backers are almost certainly keeping a wary eye on Rocket. Glossybox is Rocket’s Birchbox clone. Despite being launched well after Birchbox, Glossybox is now live in 16 countries, versus Birchbox’s 4. In terms of capital raised, Glossybox recently announced 55M Euros in total funding, versus only $11.9M to date for Birchbox. I’m quite sure Katia Beauchamp (who I interviewed previously here) and her investors thus find Rocket Internet more than a little irritating. I’m not saying Glossybox will ultimately take home the grand prize – and moving more slowly on the international front is probably a deliberate strategic move for Birchbox – but I’m sure they would regard the news of a Rocket IPO as a material event as it pertains to their competitive landscape.

(4)    Lacy seems to imply that Rocket provides “angel money” to new ventures in emerging markets. This isn’t really accurate. Perhaps I’m being a bit nitpicky here, but I want to make sure everyone understands the reality of the situation. To be clear: Angel rounds are usually about $300,000 to $400,000 in size, and are funded by Angels. Rocket generally gives its startup “founders” $10M or more to launch a new entity, and the money doesn’t come from Angels, it comes from Rocket and Rocket’s investors. These are institutional entities, not angels.

Yes, as Lacy points out, there isn’t much mentorship or credibility attached to this capital. That’s because Rocket isn’t looking to nurture a relationship with a talented entrepreneur who came to them with a disruptive idea. A traditional entrepreneur dependent on VC capital to fuel growth would demand these things from investors. But Rocket doesn’t really work with individuals of this ilk. Rather, Rocket recruits bright but generally risk-averse former bankers and consultants and tells them to execute on a business model according a defined strategy that comes from Germany. They don’t need to offer mentorship or credibility to recruit these folks.

That’s all for now. Felt compelled to set the record straight. As I alwasy, I welcome your comments and feedback. Check back soon.