Berlin's First Copycat Startup Success Story
Zalando, an online fashion retailer, will sell shares to the public in Frankfurt before the end of this year in the first truly big exit from Berlin's supposedly hot startup scene. The initial public offering will put Berlin on the map as the copycat capital of the technology world, proving the viability of the ruthlessly practical, unromantic approach to the online economy practiced by the Samwer brothers, investors in Zalando and creators of startup factory Rocket Internet.
It's been reported that a startup is born every 20 minutes in Berlin. The city is fun -- and relatively cheap -- for young people to live in, international talent is plentiful and the local authorities are supportive, hence the German capital's reputation as one of Europe's hottest tech hubs.
Late last year, however, Wired magazine wrote that "a backlash of sorts" had started because of a lack of an "exit of global significance." There had been deals, sure, but not billion-dollar deals, not even half-billion-dollar ones. Berlin companies such as SoundCloud and ResearchGate aren't exactly household names.
Zalando will be huge. Kinnevik, the Swedish holding company that's the online store's biggest shareholder, estimates Zalando's value at more than $5 billion. The IPO will float 10 percent to 11 percent of Zalando's equity, potentially crossing the $500 million threshold and creating the first new-generation tech company in Berlin with a multibillion-dollar market valuation.
On the face of it, it's another Silicon Valley-type success story, but it won't turn Zalando's founders, Robert Genz and David Schneider, into instant billionaires. That's because Rocket Internet is involved. When it helps start a company, it typically takes a majority stake and displaces the founders, appointing its own management and taking control. If you sign with Rocket Internet, your business idea is out of your hands: Rocket's method is extra-fast, cookie-cutter imitations of existing business models and their deployment in countries where the original is either weak or absent.
According to a Forbes profile of Zalando published last month, Genz and Schneider were desperate after their first copycat startup, a Latin American Facebook clone, failed in 2008 because Facebook beat them to the Mexican and Argentine markets. Oliver Samwer, one of Rocket's founders, gave them a chance to start afresh -- and the airfare to Berlin. Zalando began as a replica of Zappos, the U.S. online shoe retailer, from site design to business practices. Even the names of Rocket companies appear cloned: There's Zalora and Zando, and one of Rocket's most successful enterprises was Alando, which it sold to eBay after unashamedly copying the latter's business model and website.
Rocket has a nasty reputation. Berlin techies talk of dictatorial management, breakneck work tempo and abrupt firings as a result of failed trial-and-error ventures. In the best-case scenario, the Samwer brothers mimic a well-known service and quickly sell the copy to the original, as with Alando or Groupon imitator CityDeal. Zalando's story is different in that one of Rocket's own investors, Kinnevik, became interested in a business that's been growing 50 percent a year. It now owns 36 percent of Zalando; a further 17 percent belongs to Rocket. The founders' combined share is less than 10 percent, and the company is now run by former McKinsey consultant Rubin Ritter.
Zalando, which enjoys 95 percent brand recognition in Germany, sued German TV station RT for allegations about working conditions made by one of its reporters who worked undercover at a Zalando warehouse for three months. It's in 15 European countries, and said it made in the first half of 2014 an unidentified pretax profit on sales of 1.047 billion euros ($1.37 billion). In typical Rocket fashion, the IPO plans came immediately after.
If the story of Zalando and Rocket proves anything, it's that the tech business is no different from any other and that ideas are worthless without speedy, purposeful execution. Rocket builds tech companies the way a fast-food restaurant creates hamburgers. Its ventures lack Google's inspiration or outlandish elements, and they don't sink their profits into Amazon-like quests for advantage in unexplored areas. They function in the most efficient manner to grow and make money.
So far, this mode of operation is Berlin's single biggest contribution to the tech world. There's nothing poetic about it -- in fact, for Silicon Valley dreamers it's a vision of hell. If hell works, however, why not trade it on the Frankfurt exchange? Rocket itself is an IPO candidate. Its eventual sale may establish the Berlin model as one of the most productive in tech -- for those who dare to imitate it.
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Leonid Bershidsky at email@example.com