Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Rocket Internet needs to embrace the fact it's a venture capital firm at heart, not an internet business, if it's to win back investor confidence.

When the company went public in October 2014, founder Oliver Samwer pitched Rocket as an "operating platform company" that used its expertise to build e-commerce and financial technology start-ups in emerging markets.

Sputtering Rocket
The European technology company is trading about 40 percent lower than its IPO price
Source: Bloomberg

But from the outset, the Berlin-based company has faced criticism it's opaque, overly complex, and difficult to value. With its shares down more than 40 percent since the IPO, Rocket needs to embrace change.

It could start by explaining what it actually is. While Rocket's founders describe it as a start-up incubator with 250 engineers who bring technical know-how to its companies, its model resembles that of a venture capital fund that happens to be publicly traded.

Rocket backs dozens of young firms in the hopes that within ten years one or two of them turn into profitable businesses. It only makes big money when those stars are sold or taken public. If the company had emphasized that it operates like a venture fund, some of the current disillusionment among investors might have been avoided.

Secondly, Rocket needs to do a better job of explaining how it values its investments. Shareholders are clearly skeptical of the valuations the company ascribes to its assets: based on its November valuation of 6.06 billion euros ($6.8 billion), the company trades at a 35 percent discount to its portfolio.

Rocket's Stars
Valuations set by Rocket for its biggest portfolio companies as of November
Source: Company reports

The company has 140 fully consolidated subsidiaries, 330 others, and dozens of legal entities to account for, according to its 2014 annual report. It discloses sales and other metrics for only 13 of its companies, those it dubs "proven winners." The biggest of them are Global Fashion Group, a largely Russian and Latin American e-commerce company, and Delivery Hero, which brings food to your door.

Rocket devises a "last portfolio value" a few times a year for each of its companies based on what outside investors pay to buy a stake in those businesses. More transparency around that process would help persuade investors of those valuations.

Thirdly, Rocket should commit publicly to narrowing the discount between its share price and net asset value. The company could buy back some its shares. Granted, such a move would be uncommon for a young tech company, but it has the money to do so, and the $420 million co-investment fund it recently raised would still allow it to go on investing in its companies.

That would help Rocket deal with the problem that many publicly traded investment funds have traded at a discount to the value of their assets. The idea of giving stock investors liquid access to early-stage technology ventures is great on paper: it spreads risk in a business where firms count themselves lucky to find one winner out of every hundred bets.

In practice, though, it's hard to make the model of publicly traded private-equity funds work. Only a small number of public shareholders have the patience to wait years for a bet to pay off.

Rocket needs to sell one of its portfolio companies at a profit to demonstrate its model works and its valuations are right. That's going to be tough given the growing headwinds in public markets: technology companies have only raised $276 million selling shares this year, Bloomberg data show.

Rocket pulled an IPO of Hello Fresh, which delivers recipes and ingredients to home cooks, last year because it couldn't get an adequate valuation. Rocket has promised only one IPO by the middle of the 2017, subject to market conditions.

Short-sellers smell blood. About one-third of Rocket's free float is out on loan to investors betting against it, according to Markit data.

One way Rocket could silence them for good is by going private again -- but that's unlikely given that Samwer became a billionaire when his company went public. Short of doing that, Rocket could help itself by better explaining what its business really is.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net