I read this interesting article about Rocket Internet (RI), the famous German start-up operator. RI has surprised analysts with a quick EUR 600 million equity raise. This comes only months after the IPO in October 2014 where it managed to raise EUR 1.4 billion (valued @ EUR 5bn) from Investors despite annual losses of EUR 150 million.
Now, that’s what I call a cash burn rate!
What happened to the money?
From the FT,
Its biggest recent investments have been in food delivery, including €496m for a 30 per cent stake in Delivery Hero, a Berlin-based online food takeaway service, and €150m on Kuwait-based food takeaway portal Talabat.
Rocket is spending an additional €110m to acquire a majority interest in HelloFresh, a grocery delivery business, also based in Berlin.
Acquisitions – what an innovative company!
They paid 500 million Euros for a 30 percent stake in a company I have never heard of. This is why I had a look at the Homepage of Delivery Hero. They are in food delivery, a famous high margin business ripe for innovation, and have about 12 million orders a month. Oh, and the have invested only USD 1 billion so far.
How did they achieve 12 million meals per month?
Operational excellence, maybe?
Under the leadership of Niklas Östberg and Fabian Siegel, Delivery Hero first expanded to Australia, Russia and Mexico in 2011. In early 2012 the enterprise then acquired Lieferheld in Germany and hungryhouse.co.uk in the UK.
Delivery Hero then raised €25 million in new funding to finance acquisitions in four European countries: Sweden, Finland, Austria and Poland. In August 2012 Delivery Hero started expanding in both South Korea and China and the Asian expansion continued in 2013 when Delivery Hero increased investment in TastyKhana following a successful cooperation period.
According to TNW Tech5 2014, Delivery Hero is one of Germany’s top 3 fastest growing start-ups  and Delivery Hero is now the world’s largest online food ordering network with over 75,000 global restaurant partners and 1,000 staff in 23 countries worldwide.[
Aha, Delivery Hero mainly grew through acquisitions. The company was founded in 2011 and immediately went on an acquisition spree. It seems boring, slow organic growth doesn’t get “investors” exited anymore.
Rocket Internet spent one-third of IPO proceeds for a company which itself only grows through acquisitions and has required ever-increasing outside funding. While not strictly a Ponzi scheme (since I assume no one has received its money back so far, although the increasing valuations must make the original investors equally happy, if not happier), this thing certainly feels like one.
The chances of RI being successful in the long run are close to zero, unless you get out in time. Not only because acquisitions are the most challenging capital allocation decision within any company that even experienced CEOs get wrong more often than not, it is also almost impossible to successfully integrate different businesses at this speed. Also some of the jurisdictions in which RI operates are, ahem, exotic. In any case: expect more dilutive capital raises down the road.
If this can happen in Germany, I wonder what the madness in Silicon Valley must look like…