Why Rocket Internet is struggling in India

While it worked elsewhere, here its rivals were also discounting heavily. India shows cloning without differentiation might not work

Every time the media runs a story questioning Foodpanda India's future, Saurabh Kochar, the chief executive of the global food-ordering and delivery platform, would say "all is well" with the company. Last year, when its operations came under a cloud, he said the company had strengthened processes and the team; however, the firm ended the year by laying off 300 people. Last week, Kochar was quick to scotch reports that Rocket Internet was planning to sell Foodpanda India.

It's not just Foodpanda, which is in the news. Rocket Internet, the German internet firm backed by Samwer Brothers, has struggled with all its India investments - Jabong, Fab Furnish and Print Venue - and it has put almost all of them on the block, confirmed a source close to Rocket. The German firm, though, did not respond an mail seeking confirmation of the same.

Why has Rocket struggled in India with its ventures? "Rocket has an investment horizon of four-six years, but India played out differently in terms of competition or investment coming in. It was outplayed by other players," said a person who has worked closely with Rocket Internet in India. Unlike other markets, Rocket has realised it would take 10 years for these companies to be profitable.

While Rocket is able to raise enough funds for its ventures in most markets, in India, the competition has managed to raise more money, say observers. Besides, Rocket was not able to retain top leadership in these companies: Jabong, Foodpanda or Fab Furnish. In nearly 85 per cent of the cases, the founders left on their own, while in some cases they were replaced by the investor, say insiders.

"There was so much uncertainty. There was no consistency in their philosophy, and they kept changing their strategy. Besides, there was little incentive for the leadership team as they could not encash their stock options," said a former CEO with one of the Rocket Internet companies in India.

In August 2015, FabFurnish founders Vikram Chopra and Mehul Agrawal stepped down from executive roles before being replaced. The third co-founder, Vaibhav Aggarwal, had quit in March 2014. In August 2015, Foodpanda founder Rohit Chadda stepped down after its operations came under a cloud over governance issues and Rocket brought in Kochar from group firm Printvenue.

Unlike other start-ups where founders own a significant stake, the founders and the top team in Rocket firms have 10 per cent, with Rocket possessing the rest.

"It is very hard (and rare) to replicate founder passion and conviction, which plays a crucial role in the success of building a start-up," says Tarun Davda, managing director at venture capital (VC) firm Matrix Partners. "Rocket did not hire talent who had built businesses of scale before. The professional versus founder-entrepreneur divide showed up - and was even more marked in a tough operating environment. Employees with low stake in businesses can behave very differently from 'owners', said a VC.

Rocket Internet is an internet platform that identifies and builds proven internet business models and transfers them to new, under-served or untapped markets where it seeks to scale them into market-leading online firms.

"Rocket's model is of aggressively buying market share by discounting. This model worked in some markets because the competition there does not do discounting. Here in India, all competitors were also discounting, and heavily," says Anand Lunia, founder & partner at VC firm India Quotient. For example, TinyOwl and Swiggy outbid Foodpanda in terms of discounts in India. So did Jabong. Therefore, grabbing market share was not easy for Rocket in India. "They are a clone-factory that believes that pure execution wins over differentiation. They have a mercenary approach to building clones, and they make no bones about it. They've had some success in cloning US internet businesses in European and Latin markets, but India is quickly becoming a graveyard for them," Haresh Chawla, partner, India Value Fund.

Investors say Rocket applied a standard template without paying attention to depth/ economics of the Indian market. "In some businesses, it seems like it got the aggressive managers it wanted, but that was topped with lack of controls, governance which allowed employees to take them for a ride. The hurry to build valuation and sell out to strategic investors quickly drove the decision-making and we'll see that will be the bane of many VCs and businesses," says an observer.

Another reason for their failure in India is of wrong managers.

But, most multi-national firms in India face this issue - smooth-talking executives always swindle them, say VCs.