Startup Stir Reinventing the Rocket

Rocket Internet was once Berlin's wunderkind and answer to Silicon Valley, but the startup incubater has struggled to gain liftoff. After posting constant losses in online retail, it's now hoping for a new win in the business-to-business market.
With less than 10 percent of the market in the hands of big players like DHL, investors like Rocket Internet are eyeing up opportunities in freight.

Loss-ridden startup incubator Rocket Internet is in desperate need of another win. The upstart firm was once the centerpiece of Berlin's efforts to create a global startup center. But it's posted loss after loss since going public to much fanfare – Germany's biggest IPO in a decade – in 2014. Investors are growing weary: Rocket's business model to date, which has involved building and promoting promising startups in the retail space, simply hasn't had enough success stories to make the entire company profitable.

For the better part of a decade, Rocket has focused on online retail, targeting consumers from Germany to Malaysia and Nigeria in areas like fashion and food delivery services. Its biggest and earliest success was Zalando, which became Europe's largest online clothing retailer. But Rocket has failed to repeat. Now, to answer the critics, the company is dramatically changing strategy and venturing into new territory: the business-to-business segment.

Instafreight is one of the latest startups taken under Rocket Internet’s wing. The online platform matches truckers who have excess capacity with businesses who need to ship cargo. By 2020, an estimated 3.7 million tons will be transported across Germany, 70 percent of it by truck. Instafreight wants in on that business. Its goal is to become the Uber of freight transport.

“B2B is the logical evolution of our market places,” said Alexander Kudlich, chief executive of Rocket Internet. He added that retail clients are already very used to buying goods and services online, but that there is still a lot to digitize for businesses.

There might be another reason for the strategy shift. The e-commerce business has been sluggish. When Rocket presents its annual results on Tuesday, its losses are expected to be huge. Probably not quite as heavy as last year, when the company had to issue a warning to investors, but still in the hundreds of millions of dollars.

Business clients tend to be more loyal than retail customers. It’s much harder to change your logistics partner than your hairdresser.

Rocket’s most successful offspring firms sell cell phones, fashion and meal kits. But their margins are small and they only become profitable if they amass enough market share. To do that, you have to convince consumers to buy your stuff. That's why almost all these startups keep burning money on marketing even four or five years in. Zalando got over the hump, others haven't.

For a while now, many investors have believed that the big e-commerce markets are already divvied up. Many are turning to the business-to-business, or B2B, sector instead. “That’s a general trend,” said Florian Heinemann, who used to work for Rocket Internet and now heads his own investment firm, Project A.

Mr. Heinemann said the oligopoly of US giants like Google, Apple, Facebook and Amazon makes access to online retail clients ever-more expensive. Which is why investors are increasingly betting on platforms with small and medium-sized businesses as clients instead.

One advantage is that business clients tend to be more loyal than retail customers. It’s much harder to change your logistics partner than your hairdresser. Another upside is that budgets are usually bigger. A pizza doesn’t cost more than €15 ($16), but catering for a conference can easily total several thousand dollars.

Christian Pahls, owner of a small foundry near Munich in southern Germany, is one of Instafreight’s – and therefore Rocket Internet’s – new clients. Mr. Pahls produces small metal parts, mostly for the auto industry, such as headlight bodies. His big customers will pick up their own orders, but it's up to him to deliver to the smaller clients. Each delivery is usually only one or two pallets, sometimes within the state, sometimes across the country.

Until now, Mr. Pahls said he has to get a quote, often by e-mail or phone, for each shipment. It's annoying. Big logistics firms often make small companies like his wait for days before even making an offer, he added. With Instafreight, customers can see the quote online and book right away. The platform mostly cooperates with self-employed carriers who are usually contracted with bigger firms.

Rocket Internet estimates the turnover in shipping on European roads to total €200 billion ($217 billion). Large carriers such as Dachser, DB Schenker and DHL don’t even have 10 percent of the market. The lion’s share of goods is transported by small enterprises.

But Instafreight isn't the first startup to see the market's potential: The global logistics market is on the cusp of a digital revolution, according to a study by consultancy Oliver Wyman. US venture capital firms such as Kleiner Perkins and Andreessen Horowitz poured more than €250 million into freight startups in 2016.

Even Rocket Internet isn’t putting all its eggs in one basket. At the same time as building its own platform with Instafreight, Rocket founder Oliver Samwer has also invested in Freight Hub, a rival carrier platform owned by brothers Fabian and Ferry Heilemann.

Investing in other people’s ideas marks a second major shift in Rocket’s strategy. When the company was listed in 2014, Rocket presented itself as an incubator that develops new ideas and puts its own people on realizing them. These days, Mr. Samwer often puts money into other people’s startups instead. That increases his chances of finding not just the right idea, but also the right people for the job.

People like Doreen Huber, founder of Lemoncat, a marketplace for business catering. Six months into her business, she’s collected €9 million. Her investors include Spotify investor Northzone as well as Rocket Internet – even though Rocket built its own very similar firm called Caterwings.

Ms. Huber has been in B2B sales for years. She said one of the differences between retail and business clients is that you can’t win over companies with advertising. You have to convince them with your product. “If you have a contract with Siemens, its has to work. Otherwise, your contract is gone.”

Mr. Heinemann, the investor, said industry experience is also essential in the B2B segment. Products are often more complex.

The question remains whether Rocket Internet can master that business. Mr. Samwer’s people tend to be experienced in cloning tried e-commerce models in different countries and pumping money into marketing. Whenever they found their own startups, they hire youngsters from elite universities who have spent a couple of years with consultancies. Their strength is in execution. They rarely have industry experience.

Philipp Ortwein, head of Instafreight, recently learned that the hardest part of his current job is “convincing a trucker to download the smartphone app,” he said. To connect with the drivers, he hired a 57-year-old who has worked in logistics for many years. He’s probably the oldest employee on Rocket Internet’s payroll. Time for Rocket to grow up.

 

Miriam Schröder writes about the startup scene in Berlin for Handelsblatt. To contact the author: [email protected]