Rocket Internet A Falling Trajectory

Rocket Internet, Germany's biggest start-up incubator, is keen to cash in on some of its corporate babies and take them public. But cautious investors are worried about costs.
Oliver Samwer, one of three brothers who started Rocket Internet, is pushing new investment funds and new companies.

Visitors who enter the Berlin headquarters of Germany’s largest startup incubator are often disappointed.

Large, open offices line the interior courtyard of Rocket’s Werft complex. At best, a couple of empty pizza boxes on the desks give the sense of a startup atmosphere. Bits of conversation in German and English swirl through the air and every couple of days boss Oliver Samwer hurries through the hall with his rolling suitcase.

But the days in Werft are numbered, because in a couple of months Rocket wants to move into its new headquarters in the Kreuzberg district of Berlin. The move does not just mark a turning point in terms of location; the company is also on the verge of far-reaching changes.

A reorganization is in the pipeline that could change the structure of the company from the bottom up: The firm is exploring the option of initial public offerings for several core holdings, including such heavyweights as the online furniture store Home24, Delivery Hero and the cook-at-home ingredient kit deliverer Hellofresh.

Mr. Samwer is also collecting money from investors for the development of the company’s own venture fund, according to sources in the finance and startup scene. In doing so, Rocket is moving from being the classic startup incubator, which earns through manufactured replicas of tested online-concepts, to a type of holding company for digital business models.

The expenditure of cash is currently the greatest concern of investors. Edward Hill-Wood, Analyst, Morgan Stanley

The new path seemed to already be on the horizon at the annual shareholders’ meeting at the end of June. Mr. Samwer campaigned for their trust, which had suffered significantly since Rocket’s debut on the Frankfurt Börse almost a year ago. The share price lies about 25 percent under the issue price of €42.50 ($47.20).

In February, just four months after going public, Mr. Samwer shocked shareholders with his push for more money. He collected about €600 million through recapitalization and sent the shares into a decline. In July, the fiasco repeated itself when the company issued a convertible bond and the shares fell by up to 15 percent at the peak.

For the first time many investors were aware of how much money the development and operation of Rocket holdings worldwide was eating up. “The expenditure of cash is currently the greatest concern of investors,” said Edward Hill-Wood, an analyst at the investment bank Morgan Stanley in London.

According to calculations made by the German business magazine WirtschaftsWoche, the losses at the 12 central holdings, including Home24 and Lamoda, a Russian version of online retailer Zalando, amounted to more than €650 million. Since Rocket does not hold a majority in the companies, their losses do not flow into Rocket’s financial figures.

Nevertheless, it is clear that the loss-making Internet portals, which Mr. Samwer confidently describes as “proven winners,” will still be on a drip-feed from Berlin for years.

Morgan Stanley calculates that by 2018 they will accumulate another €1.2 billion in losses, after which though, the company may make it back into the black.

The analysts indirectly point to the major weakness in the Rocket kingdom, namely that the current financial strength is not enough to heave the proven winners into the profit zone. At the same time, Mr. Samwer wants to found new startups and to roll out the “emerging stars,” as the new company’s creations are called.

For this reason, the head of Rocket is planning to get the firm’s assets on the Börse floor.

The biggest, but also the most difficult, candidate is Delivery Hero, which is known in Germany as“Lieferheld.” The online platform lets city dwellers order pizza, pasta or sushi from restaurants from their neighborhoods, and charges a fee for each completed order.

The business is considered a growth market. Worldwide, some 200,000 fast-food restaurants in 34 countries are handling their delivery service through Delivery Hero, and it has increased the value of the food portal to €2.8 billion.

The snag from Mr. Samwer’s point of view is that he only holds a 38.5 percent share in the company, and as such has limited influence. Rocket does not even have a seat on the supervisory board.

Rocket will shortly be moving to new headquarters in Berlin.

 

Rumors have been circulating for months about a fight between Delivery Hero founder Niklas Östberg and Rocket about the timing of an initial public offering. While Mr. Östberg said he foresees an IPO for the beginning of 2016 at the earliest, Mr. Samwer would like to ignite his most valuable rocket this year.

He has more room to negotiate when it comes to Home24, where Rocket holds almost 50 percent of the shares. A new cash infusion pushed the value up to almost €1 billion in June.

Hellofresh demonstrates how meaningful such valuations are. The company, which delivers the ingredients for specific recipes to a person’s home, was on Rocket’s books with a total value of €131 million at the beginning of the year.

At that time, Rocket held 37.4 percent of its stock. In a round of financing at the beginning of February, Rocket contributed €100 million of the total €110 million and secured an additional 14.3 percent of Hellofresh.

As a result, Rocket can now reign over the company. The price paid by Rocket will also be the basis for the valuation for the entire company from now on. In one fell swoop it was no longer worth €131 million, but rather a healthy €624 million, at least on paper.

When it’s ready for its planned IPO in the fall, the recipe kit delivery service could even have a valuation of more than €1 billion. That is a lot of money for a company that may be growing steadily, but still addresses a somewhat negligible clientele of shopping-weary amateur chefs.

Rocket Internets IPO Candidates-01



Many Rocket startups are now battling for small-scale niche markets. There is little in the second tier that is mass-produced. Stressed-out wealthy consumers can order freshly ironed shirts from ZipJet, rent their homes through the real estate service RightHome, or organize cleaning services through Helpling.

Rocket recently had to close down its start-up grocery service Shopwings in Germany, which it launched in fall 2014. The price-conscious German shoppers did not go for the online grocery service, so Shopwings is now concentrating on other countries.

The fact that the most recent creations do not have the goods to plug into successes such as Zalando may not have escaped Rocket, and that is likely why it has been betting on acquisitions. Recently, Rocket acquired a majority interest in the shopping app Shopkin, the fitness studio platform Somuchmore and the food delivery service Foodora.

The number of outside investments could increase next. Several insiders in the startup and venture capital scene report that Mr. Samwer is apparently already collecting money for a new venture fund with a volume of about €1 billion. The working title of the financial vehicle is reportedly “Rocket Internet Growth Fund.”

Nenad Marovac, the manager of the London-based investor DN Capital, asked Mr. Samwer about rumors of the fund on the sidelines of the NOAH startup conference in Berlin in June. The Rocket CEO was evasive in his answers, saying that Rocket is looking for opportunities to achieve value for the shareholders wherever the opportunity exists.

In an email to WirtschaftsWoche, Mr. Samwer also did not provide concrete answers, but rather referred to his fund that has existed for a long time, through which investments are handled.

A company insider was more direct when he said that there is currently “a lot of money” on the market. “And things are still happening there.”

 

This story first appeared in Wirtschaftswoche. To contact the authors: [email protected] and [email protected]