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Wednesday, June 29, 2022

Swedish Kinnevik Invested €1.1 Billion Into Rocket Internet. Should we care?

“Well, of course we should, it is one of the highest investment numbers we have ever heard of” – Screams the crowd. However may I remind you what Rocket Internet really is? A simple, thought highly profitable, copy-paste button. They take unique and interesting ideas and use their assets and knowledge to replicate them in other markets before the original company has the time or money to do it. 

For instance they took Groupon and created CityDeal in Germany which they later sold it to, you guessed it, Groupon for $126 million. Sure, we can’t argue that it does not take skill or planning to enter these new markets, especially considering that many of them are very unique.

Still when we heard that the Sweden based investment firm Kinnevik disclosed in their annual reports that they have invested over €1.1 billion into Rocket Internet, we could not be as excited as we normally are with large investments.

Business is business and there is nothing wrong with copy-pasting successful business models, but we just have to ask the question what would happen if Kinnevik would instead invest €1.1 billion into local high-growth companies such as Wrapp?

Kinnevik is a publicly traded investment with nearly a century of history. They position themselves as a value creator and a company with a long-term investment approach. From their annual report we can find that their strategy is to identify growth opportunities, usually in emerging markets, invest at an early stage, support the best, focus on operational side of things and hence provide a long-term value creation. In other words they want to grow the companies in their portfolio and focus on returns as opposed to exits.

To contrast that, companies in the Rocket Internet portfolio, however, are usually plain copies of services such as online coupons, daily deals, e-commerce, etc. The coupons and daily deals sector is not doing all that well and the companies struggle to develop a highly long-term approach and usually aim to be eaten up by larger corporations.

Of course, we cant ignore the fact that there is a chance that some of the portfolio companies such as Zalando, valued at over €2.8 billion, of which Kinnevik has 35% stake and options for another 3%, can in fact grow into long-term businesses.
Yet, at a more global scale, investments in copycats prevent original companies from expanding globally and damages competition. Not to mention the fact that the local companies and entrepreneurs that are based in countries where Rocket Internet opens shop are deprived of a chance to fill the market gap as they usually have very limited resources in comparison.

These are at least some of the arguments that can be made against copy-cats and investments in them. Can you think of more or perhaps you think that this can be counter-argued using economics and the cost-benefit analysis for the whole community? Feel free to discuss it with us and others in the comments.

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