Is this worse than 2000? The case of Rocket Internet

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?

From Wikipedia:

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.[4]

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[5] and the Asian expansion continued in 2013 when Delivery Hero increased investment in TastyKhana following a successful cooperation period.[6]

In 2014 Delivery Hero acquired a controlling stake in Latin American market leader PedidosYa [7] and in August 2014 the group acquired German market leader and rival, pizza.de.[8]

According to TNW Tech5 2014, Delivery Hero is one of Germany’s top 3 fastest growing start-ups [9] 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.

Conclusion

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…

 

 

Advertisements

7 comments

  1. They own Helpling (cleaning) too. It has stopped it’s expansion plans in Spain. Only Madrid and Barcelona works. Other cities had been put on hold.

  2. Snapchat, raising another round at a USD16-USD19 billion valuation ?
    http://www.businessinsider.com/report-snapchat-raising-at-19-billion-valuation-2015-2

    Big hedge funds have unloaded Alibaba
    http://www.businessinsider.com/r-us-hedge-funds-unload-alibaba-shares-in-fourth-quarter-2015-2

    The LinkedIn Bubble
    http://seekingalpha.com/article/2893736-the-linkedin-bubble

    Incredible! Uber raises ANOTHER USD1.2 billion round!
    http://vator.tv/news/2014-12-04-incredible-uber-raises-another-12-billion-round

    Even Apple Inc. (AAPL) is overvalued.
    Perhaps in the same road as:
    Pandora Media, Inc. (P)
    Yelp, Inc. (YELP)
    Groupon, Inc. (GRPN)
    Twitter, Inc. (TWTR)
    Zynga, Inc. (ZNGA)
    MeetMe, Inc. (MEET)
    even
    IAC/InterActiveCorp (IACI)
    They seem to be big bubbles full of dark smoke.
    I am anxiously waiting them to explode.

  3. whats so bad about aquisitions? makes sense in a fragmented sector.
    just have a look at a long term chart of XPO (NYSE). they are consolidating the logistics industry. aquisition after aquisition. it´s CEO is Bradley Jacobs. he was very succesful doing the same thing in the waste management and equipment rental industries: http://en.wikipedia.org/wiki/Bradley_S._Jacobs

  4. @Green AB.
    Generally speaking there is nothing wrong with aquisiitions, it is just that most academic studies show thad aquisitions destroy value over time (and it is my personal experience in certain sectors)…so the odds are against you.
    And there are good reasons why this is the case:
    Think about the operational nightmare of integrating whole companies (IT, business culture…)
    Also, do not forget that the owners of the target have owners that have an informational advantage on the value of their business…
    For you as an outsider it is very difficult to judge whether consolidation makes sense. This is the case even if you are an industry expert. There is no way you can gauge manatment’s synergy estimates. Remember, that managment has an incentive to overstate the benefits (empire building etc.). It also distorts accounting and gives crooks the most leeway for cooking the books…

    Most importantly, If I give money to a start-up it is because i like their idea, their business plan. Only then I am willing to forego the shortcoming of not having good historic figures. I am certainly not pumping money into anything that just aquires other companies. Where is the innovative idea in that…a consolidation play should not be valued like the next Google in my view….

  5. VC: it´s hard to re-invent the food delivery business. if you have the capital then it might make sense to buy out your competition (before they go public) and create synergies. from my amateurs viewpoint there should be plenty of costs you can bring down by combining food delivery companies.

    disclosure: i don´t follow Rocket Internet. just stumble upon your informative blog folling some twitter recommendation. and i failed miserably shorting XPO despite weak fundamentals. 😀 so i learned my lesson that aquisitions CAN be a growth strategy.

    1. Thank you,
      not sure what to make of it: his businesses certainly are burning cash. A lot of his concepts rely on classic advertising (TV, even on buses etc.) which is untypical for successful internet companies. Have Google, Amazon or FB needed much ad-spending? Do not recall any…
      I think the ads merely serve to get attention from investors to pump ever more money into the company.
      I once read his cornerstone investors include the Family offices of Mittal, Berlusconi and the like…Guys he met at Davos…
      These are precisely the people who certainly cannot evaluate this type of business, but are impressed by ads everywhere (“look honey, it’s one of my companies”)…And regardless of how many “talent” these Family offices hire, it’s always the principal who makes the ultimate decision in my experience….
      I do not believe that running so many diverse businesses successfully and in different locations is feasible…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s