Rocket Internet’s Troubles Mount After Startup Down Round

  • German startup factory cuts Home24 value by 57% in financing
  • Down round raises new questions about Rocket’s business model

Rocket Internet SE Chief Executive Officer Oliver Samwer, the poster boy of Germany’s Internet economy, is under growing pressure to prove his startup factory can produce returns after a profit warning and down rounds hitting two of its key companies.

Rocket, which seeks to be the biggest Internet name outside the U.S. and China, cut the value of online furniture retailer Home24 by more than half in a new financing late Wednesday. The setback comes a week after Rocket’s 617 million-euro ($698 million) first-half loss, caused by the writedown of yet another high-profile portfolio company, Global Fashion Group.

Rocket, which holds dozens of startups in areas including food delivery, furniture and fashion, has seen its stock price cut in half since it went public in October 2014 as some of its investments faltered and others have failed to reduce losses. Analysts have criticized the company’s reporting for a lack of transparency and questioned its ability to wring profitable growth out of companies that operate in commodity sectors in unproven markets.

“There’s no clear path to how Rocket can IPO any of its businesses, funding structures remain as opaque as ever and we see a rising risk of more down rounds,” Neil Campling, head of tech, media and telecom research at Northern Trust Capital Markets in London, said by phone. “That’s why we remain sellers of Rocket Internet.”

Samwer, known as a canny entrepreneur who’s mastered the art of raising money from investors, promised a year ago that Rocket’s losses would narrow after 2015. He also pledged to make three of his startups profitable by the end of 2017 and has since vowed to further raise transparency to make his businesses easier to understand.

“With the proceeds from this funding round, Home24 is well positioned to reach its strategic goals,” Samwer said in the statement.

Rocket declined 4.4 percent to 18.02 euros at the close of trading in Frankfurt on Thursday.

Samwer rose to prominence -- and considerable personal wealth -- in the German Internet industry through a string of deals when the market was still in its infancy. In 1999 he and his two brothers Alexander and Marc started Alando, an EBay Inc. clone that was later bought by the real EBay, and the trio also cashed in from selling their ring-tone company Jamba.

Rocket and the Samwers helped grow online fashion retailer Zalando SE, which started out in a Berlin apartment, into one of Europe’s most successful e-commerce businesses. Zalando went public in 2014 and its value has risen 70 percent since then.

But while Rocket has convinced investors including Goldman Sachs to give it money and sold a stake in its Lazada startup to Alibaba Group Holding Ltd., it has yet to prove it can sell shares in one of its bigger startups after it shelved plans to IPO food delivery service HelloFresh last year.

Investors at the time balked at the high valuation of HelloFresh, a similar problem that’s now affecting Home24. Rocket had branded the furniture seller as one of its “proven winners” -- a term the incubator has used for its investments with the most potential for an initial public offering or successful sale.

It’s now valued at 420 million euros, versus a previous 981 million-euro valuation based on a financing round in March. Home24 raised 20 million euros from investors including Rocket and Scottish asset-management firm Baillie Gifford, according to a statement late Wednesday.

For more on the valuation differences, click on this Gadfly column.

Global Fashion Group shares a similar fate. Rocket in July contributed 68 million euros to a 330 million-euro funding round for Global Fashion Group, completing a deal first announced in April. The financing valued the online fashion retailer at 1 billion euros, less than half what it was worth last year.

Some analysts remain optimistic. Of 11 tracked by Bloomberg, eight rate Rocket a buy, compared with two holds and one sell. On average, they predict the share price will rise to 32 euros in the next 12 months.

Rocket values its startups much more generously than shareholder and co-investor Kinnevik AB, which priced Home24 lower before the current funding round and that’s a cause for concern, according to Jefferies analysts James Lockyer and David Reynolds.

Kinnevik is "less promotional, more balanced, and measurably more conservative,” the analysts, who rate Rocket hold, said Thursday in an e-mailed note. The analysts are "concerned" about the valuations of Rocket’s startups, they wrote.

The down round is a reflection of “current market conditions,” Home24 founder Philipp Kreibohm said by phone. The retailer is working to raise efficiency by optimizing, for example, product returns, processes, marketing and IT, and is making good progress on an operating level, he said.

“With the money from this latest round, we can keep investing in key growth areas and at the same time continue our path to profitability,” Kreibohm said.

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