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Is Being A Copycat A Profitable Business Strategy?

 4 min read / 

In the last couple of months there have been quite a bit of news flow around failed startups or cheap merges of the so called, startup “copycats”. Copycats are startups that copy the technology and business model of an already established company and open in another market to the original one to try scale as fast as possible so that when the original company expands, they will be inclined to buy the existing competitor instead of scaling on their own.

A History Of Copycats

The first and probably still largest “clone factory” is Rocket Internet, a company founded by three German brothers to try to bring some of the tech innovation that was happening in the US, also in their home country. The strategy was to copy existing business models and focus on execution. The validation of the Rocket strategy started to become evident with the first few deals. Alando, Rocket Internet’s eBay clone was sold to eBay for $50m after being in business for only 100 days. CityDeal instead was sold to Groupon for $170m, just five months after its inception. From this deal in 2010, Rocket Internet began to scale fast with investments in 75 startup clones in over 50 countries and employing more than 30,000 people.

First Successes

The growth of Rocket started to gain attention and in 2015, the brothers decided to start the process of filing for a company IPO, with a valuation range of $3bn-4bn, of which they still owned a 65% stake. Given this first example of success, and a growing startup culture outside the Silicon Valley hub, many hopeful entrepreneurs, decided to use this strategy to achieve success in their home countries hoping the big US players would grow by acquisition and give them their easy exit and quick profits.

40 Number of Uber clones globally

What happened was that over the last 3 to 5 years, a factory of clones of US successful startups, developed all over the world, managing to attract enough venture money to scale quickly. The most emblematic as of today is Uber, with over 40 clones around the world, and some serious competitors such as Didi Kuaidi in China and Ola in India. Tech in Asia has produced a great infographic (Figure 1) of the global presence of Uber clones and has analysed the funding rounds, exposing how quickly these have scaled to $7bn raised across competitors in 2015.

Uberclones

Figure 1 (Source: Tech in Asia)

But many failures after that…

For a few successful clones though there have been a huge number of failed attempts, starting with the mobility industry. In July 2016, Hailo, the London-based app to call black cabs, sold 60% of the company to Daimler, the parent company of another taxi hailing app, MyTaxi. This was an all-paper deal, meaning no cash was exchanged or no value increase by Hailo.

Moving on from the mobility industry, over the same few days, the restaurant delivery wars in Europe saw another casualty with Take it Easy, the Belgium-based startup, despite celebrating their one millionth order, was forced to stop trading after they failed to raise the next round of funding.

But many other industries have seen the same trend, starting from the e-commerce space, with the sell-off of Jabong, the Rocket Internet online fashion retailer launched in 2012, that was still suffering huge losses and found its investors unwilling to add more capital to fuel growth. Even though the terms of the deal were not disclosed, it is evident these were once again a losing deal for the Jabong investors.

 What Conclusions Can One Draw For Clones?

The clear trend is that clones are easy to start, require very little initial capital and can attract initial funds as they have the benefit of being proven ideas. But their success is not as apparent as it used to be. The issue is that with a more globalised world, the choice of the parent company lies mainly in analysing the two options of acquiring to grow or setting up organically with internal teams. Today entry in a new market has probably become cheaper with the second option, thus limiting the number of quick exits that characterised the initial success of Rocket Internet. With longer time frames before possible acquisitions for clones, it becomes trickier to obtain funding longer term, and many startups fold along the way. Focusing clone startups in regulated markets with higher barriers to entry could be the only way for the cloning strategy to succeed. Otherwise, the original innovating is probably the way to go.

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