The Samwers and Elon Musk: Last week wasn't great for Rockets
Last week was a bad one for rockets.
It started with an explosion of SpaceX rocket, one that destroyed a satellite that Mark Zuckerberg hoped would bring connectivity to Africa. It ended with a fizzle: Rocket Internet said its first-half loss widened to €617 million ($688 million) in the first half of its fiscal year from €45.9 million a year earlier.
Unlike SpaceX, which faced a hard setback from which it will likely recover, Rocket Internet's situation is at once less dramatic and more worrisome. The company blamed the loss, primarily, on a writeoff of its investment in Global Fashion Group, a network of fashion startups in 27 emerging-market countries. GFG said it closed a €353 million funding round in July that, according to TechCrunch, lowered the company's valuation to $1.1 billion from the $3.4 billion valuation it had in 2015.
The GFG writedown only contributed a negative €383 million to the €617 million loss. Other properties also added to the overall loss thanks to further “impairments” and “fair-value adjustments.” Rocket didn't say what those impairments were, or which of its portfolio companies were helping to inflate its losses, although it did say that its first-half revenue fell 59 percent to €29 million, thanks to “deconsolidation.”
Just what these vague explanations involve may become clearer later this month, when the company reports its full earnings. This was just a sneak preview, the way a trailer for a horror movie stirs up an audience's blood-pressure to prepare them for the full spectacle. But it was enough to push the stock down nearly 9 percent Friday, pulling $280 million from Rocket's market value in a single day. Rocket Internet's stock ended the week down 59 percent from the offering price of its August 2015 IPO.
One thing is clear: The quarter is shaping up to be quite different from what its CEO Oliver Samwer indicated in the company's last earnings call in May. “I think we are going in the right direction on our path to profitability,” Samwer said then, singling out GFG as a company "making good progress in the path of profitability.”
In a statement Friday, Samwer said, “We still expect at least three of our selected portfolio companies to turn profitable by the end of 2017.” But Samwer didn't specify what kind of profits they will be. Net? EBITDA? Operating? Gross? Nor did he indicate whether any of the portfolio companies could be expected to go public anytime soon.
In the past, Rocket has indicated that some of its more successful companies would list on public exchanges, offering a payday that could benefit Rocket and its own investors. In May, Samwer backed away when asked for a timeline for such listings, saying only that one was unlikely this year. On Friday, Rocket made no mention of any listings, imminent or not, an omission that didn't go unnoticed among investors. “A subtle retraction, maybe?” wrote a Jeffries analyst in a research note.
A JP Morgan analyst took a cheerier view, arguing that writedowns and value adjustments don't necessarily reflect deteriorating operations at Rocket's portfolio companies. Many companies that raised funding a few years ago years are seeing down rounds and reduced valuations more recently, even as the companies keep aspiring to grow their businesses.
While this is true often enough, it's not clear whether it applies to Rocket, which detractors have often called a “clone factory” because of an incubator model that prizes imitation over innovation. Rocket has been compared to dot-com incubators like CMGI, which sought out short cuts to the long, patient paths that venture investing often demands.
Rocket's twist on this model is to seek out even more short cuts, finding a successful company (typically in e-commerce, a risky prospect right there in the age of Amazon) and replicating its business model to other countries if not inside a startup's home market. Here's how Sarah Lacy described Rocket's formula earlier this year.
They rip off not only ideas, but frequently design work and even code of other startups, even picking similar names to intentionally confuse the market. (Pinterest → “Pinspire”)
When competing against Fab, they went so far as listing Fab designers work on the site that the designers had never agreed to sell on Bamarang.
And it’s not just the big guys in the Valley they pick on. I’ve spoken to dozens of entrepreneurs in emerging markets, where the Samwers have come in and copycatted a local startup that was gaining steam, flooding their own entry with more capital that a local entrepreneur in pockets of Africa or South East Asia could hope to raise, picking off their staff and running the local company into the ground.
This may explain the concern among investors that Rocket may have more bad news to report come Sept. 22, beyond the writedown to its GFG investment. Rocket's formula is like dining at a Michelin-starred restaurant and loving it so much you buy a food-truck, cram it full of food you bought at Walmart and try to copy those delicious meals. You're only going to end up with fast food at best. Rocket's approach is to churn out meal after meal, hoping that 1 in 100 will become a hugely profitable hit.
In other words, it's a throw-spaghetti-on-the-wall-and-hope-something-sticks strategy. The problem is, Michelin has never awarded a single star to spaghetti stuck on someone's wall.