Wednesday, March 7, 2012

How Three Germans Are Cloning the Web

A purple rooster sculpture made from recycled grape Fanta bottle labels. Clocks designed to hang in corners. Bauhaus posters from the 1920s. Hand-painted vintage typewriters. These are some of the carefully curated objects for sale on, the fast-growing flash-deal site for designer goods. Launched out of a loft in New York City’s Garment District last June, Fab had sales of $20 million in its first six months and is on track to earn $100 million in 2012. “We owe our success to keeping it real, authenticity, being close to designers,” says Jason Goldberg, Fab’s chief executive officer. That, and “offering people objects and design products they wouldn’t find elsewhere. No knockoffs.”

Six months after Fab launched, it was knocked off. An e-commerce design site called Bamarang opened for business in Germany, the U.K., France, Australia, and Brazil. Bamarang sells cake stands made from vinyl records, miniature speakers handcrafted out of apricot wood, and plates painted to look cracked. Like Fab, it offers discounts of up to 70 percent on designer goods. The layout, color scheme, and typefaces are also suspiciously Fab-like. Bamarang even has a beautiful shot of an Eames chair as the background photo for its sign-in page, just as Fab does.

Bamarang is the creation of Oliver, Marc, and Alexander Samwer, a trio of German brothers who have a wildly successful business model: Find a promising Internet business, in the U.S., and clone it internationally. Since starting their first dot-clone in 1999, a German version of EBay (EBAY), they’ve duplicated Airbnb, eHarmony, Pinterest, and other high-profile businesses. In total, they’ve launched more than 100 companies. Their Zappos (AMZN) clone, Zalando, now dominates six European markets and is estimated to be worth $1 billion by Financial Times Deutschland. Through their venture capital firm, the European Founders Fund, they also invested in European knockoffs of Facebook and YouTube (GOOG), which sold for $112 million and $36 million, respectively.

The Samwers’ base of operations is a startup accelerator in Berlin called Rocket Internet. Rocket launches companies, hires staff, and provides marketing, design, search engine optimization, and day-to-day management until the startup can fend for itself. Rocket’s executives won’t disclose revenue, but a former high-level employee estimates the company is worth at least $1 billion. Oliver Samwer, the middle brother and de facto head of the operation, says the firm has offices in at least 20 countries and has created 20,000 jobs over the years. “I’m in love with startups,” says Oliver, who, like his siblings, rarely talks to the press. He elaborated in an e-mail: “The power of Rocket is really this huge galaxy of stars.”

Groupon (GRPN) got cloned by the Samwers two years ago, and the results were expensive for the daily-deal site. In November 2008 Groupon went live in Chicago and soon became one of the fastest-growing Internet businesses ever. In January 2010 the Samwers launched a knockoff called Citydeal. Within five months it was the top deal-of-the-day site in the U.K., France, Spain, Italy, Ireland, the Netherlands, Switzerland, Austria, Poland, Finland, Denmark, Sweden, and Turkey. Groupon could have fought Citydeal in the marketplace. It also could have filed an intellectual property lawsuit, though the chances of winning would have been slim. Companies can’t be patented, and trademarks apply only within the countries where they’re registered. Perhaps taking the path of least resistance, Groupon in May 2010 bought its German clone for 14 percent of Groupon’s shares. (Rocket now owns 6 percent of Groupon, a stake worth about $1 billion.)

The Samwers are revered for putting Berlin’s startup scene on the map and despised for sticking Germany with a reputation as the copycat capital of Europe. Not that the brothers take offense at the label. “There are pioneering entrepreneurs and execution entrepreneurs, and maybe we belong more to the execution entrepreneurs,” says Oliver, who speaks at a rapid clip, frequently punctuating thoughts with a rhetorical “ja?”

“I think the most admirable entrepreneurs are those with original ideas, ja? It’s a unique gift that you either have or you don’t. Just as we might have a very good gift of execution, others have a unique gift for the purest form of innovation.” As for the similarity between, for example, Bamarang and Fab, he says, “There’s a certain humbleness. First you need to learn from people who are more experienced. … From there, you can start innovating yourself.”

Marc, Oliver, and Alexander—ages 41, 39, and 36, respectively—grew up in Cologne, the sons of two corporate lawyers. Their parents often brought clients home, and the brothers developed a love of entrepreneurial ventures. Much of their time was spent dreaming up companies. “Before we started university, we were thinking of starting an airline or a shipping company,” says Oliver. Marc studied law at the University of Cologne; Oliver attended Germany’s elite Otto Beisheim School of Management (known as the WHU); and Alexander majored in politics and philosophy at Oxford before getting an MBA at Harvard. In early 1998, Oliver persuaded a professor at the WHU to sponsor his dissertation on U.S. startups and spent three months doing five or six interviews a day with businessmen in Silicon Valley and Boston. He later published his observations under the title America’s Most Successful Start-ups: An Entrepreneur’s Handbook.

Later that year the Samwers declined job offers in Germany and moved to Mountain View, Calif., where they shared a one-bedroom apartment and interned at various tech companies. “In ’98 it was just amazing,” says Oliver. “Everything was popular, and everything was possible. America at its best, ja?” The brothers studied how people find ideas, raise money, start businesses, and scale up. After a few months they recognized a huge market opportunity: Start an e-commerce company, but in Germany. Their home country had few Internet companies and little venture capital, but it had a lot of budding Internet users with disposable income.

EBay’s business model appealed to them from the start. “It’s a marketplace, you earn a commission, and it’s something we thought maybe German hobbyists would also like,” says Oliver. The brothers moved back to Germany and launched their clone, Alando, in early 1999. They worried right up until the last minute whether they shouldn’t be copying Priceline (PCLN) instead. “Even on the day of our launch we were asking ourselves, ‘Is Priceline maybe bigger?’ ” says Oliver. “Everything is easy now in hindsight, but at that point we wondered who sends something to someone they’ve never met, ja?”

Among the first items for sale on Alando were the brothers’ childhood toys, including a model train and some roller skates. “My mother, who wanted to save the toys for her grandchildren, wasn’t so happy, but of course we needed everything,” says Oliver, remembering the scramble to stock the site. Oliver was in charge of signing up stamp and coin collectors, among others. He called the sellers one by one, persuading them to put their wares on Alando, often scanning their photos and putting them online himself.

Four months after launch, EBay bought Alando for $53 million—and the Samwers became Germany’s first Internet millionaires. “That had a major impact on the entrepreneurial scene in Germany,” says Holger Ernst, a professor of technology and innovation management at the WHU. In the old days, he says, his students mostly went into investment banking, consulting, or corporate careers. Now, “they all want to be like the Samwers.”

Rocket Internet’s headquarters are in a drafty brick factory building set back from a graffiti-sprayed street in Berlin’s Prenzlauer Berg district. A concrete stairwell connects three floors of undecorated conference rooms and open office space. Each floor is eerily silent despite the dozens of casually dressed employees, packed around Ikea tables, working on flat-screen monitors. Space is tight. Workers say the company is hiring so fast that newcomers sometimes have to sit on the floor.

The CEOs of Samwer companies generally reap only 5 percent to 10 percent equity. They also get a lot of phone calls from the Samwers. “It’s probably not common with other investors to call you multiple times per day and at night, or set up early-morning calls to walk through things,” says Johannes Kreibohm, CEO at the Rocket startup Plinga. Although Oliver is the front man, the brothers are equal partners. Alexander focuses largely on Zalando and other Rocket portfolio companies. Oliver manages Rocket companies but spends about half his time working for Groupon. Marc, for the moment, has stepped back from Rocket to concentrate on Groupon full-time. The American daily-deal company hired the two older brothers as consultants in 2010 to guide its international operations in 46 countries and help oversee 7,000 of its 10,000 employees. At this year’s DLD conference in Munich, Groupon CEO Andrew Mason praised the Samwers: “What people have to realize is the idea is the easy part, and that execution is the hard part, and Marc and Oli are the best operators I’ve ever seen in my life—they’re just inhuman,” he said. Says Oliver: “Groupon taught us about the business, and we taught them about internationalization.” He stresses that company-clone relationships often become symbiotic. “It’s not necessarily in the blood of every American to go abroad, but it’s in the blood of every European to go abroad.”

Oliver, who sets the pace and tone of the Samwer empire, once described Rocket Internet as “McKinsey on steroids.” He was referring to his company’s international network, but he could just as well have been talking about its corporate culture. Rocket’s employees work long hours—often from 9 a.m. to 11 p.m. One former high-ranking employee, who says he left the company in part because of a climate of aggression, recalls seeing a list of international managing directors accompanied by a note that read, “Keep this list updated and check it regularly because fluctuation should be around 5 percent every month.”

In December the blog TechCrunch published an internal e-mail from Oliver Samwer to his employees. In it, Oliver exhorts his team to do business like “a blitz-krieg invasion.” The e-mail continues (punctuation Samwer’s): “i do not accept surprises. i want this planned confirmed by all three of you: you must sign it with your blood … I am the most aggressive guy on internet on the planet. I will die to win and i expect the same from you!” The e-mail went viral in Germany, even inspiring a song called Blitzkrieg, the New Single By Oliver Samba, in which Samwer’s manic commands are set to a throbbing techno beat. He apologized for his word choice but said, “I write 4,000 e-mails a day or something, lots of e-mails; I often write them after midnight, whatever midnight means in whatever country I’m in … and I think that, just like a lot of people we build companies with, I’m very passionate.”

The Samwer style may have spread to Groupon. On Feb. 17 the respected German magazine Gründerszene published internal Groupon e-mails and letters from employees that paint “a shocking picture of personal attacks, massive psychological pressure, problems making deals, and crammed work quarters.” One of the leaked e-mails, reprinted by Gründerszene’s sister site, VentureVillage, is from Daniel Glasner, a former managing director at Citydeal who’s now Groupon’s Central European CEO. In it, he threatens managers with demotion if they fail to achieve a certain number of deal targets and customer acquisitions. “Any one of you who does not achieve the following two goals in the next week will lose his ‘Director’ title,” he writes. An unknown sender of another leaked e-mail complained to VentureVillage in September that “team meetings are full of insults, non-performers openly bashed in meetings as well as via e-mail.” Groupon declined to comment to Bloomberg Businessweek, but in a statement to VentureVillage it said the complaints “in no manner mirror the daily working routine at Groupon.”

The Samwers’ reputation for ruthlessness extends well beyond their offices. In 2007 another set of German brothers, the billionaires Andreas and Thomas Strüngmann, who founded the generic drug company Hexal, agreed to collaborate with the Samwers in joint investments. The plan, according to a 2011 article in Manager Magazin, was for the Strüngmanns to provide 80 percent of the cash, with the rest coming from the Samwers. To get things going while a contract was being legally vetted, the Strüngmann twins handed over €10 million ($13 million) to invest in several companies. That included the German Facebook clone StudiVZ (from the German for “student directory”) founded by Ehssan Dariani. The Samwers then took a 13 percent stake in StudiVZ and helped stage a bidding war for StudiVZ, finally selling the company to Holtzbrinck Ventures, one of Germany’s biggest publishing houses, for €85 million ($112 million). Shortly before the sale, they returned the Strüngmanns’ €10 million, saying they hadn’t needed the money and effectively cutting the Strüngmann twins out of several million dollars. Insiders confirmed the details for Bloomberg Businessweek but refused to speak on the record for fear of reprisal. Oliver Samwer says joint investments with the Strüngmanns had been planned, though a final agreement was never reached.

Even the Samwers’ longtime business partner, Holtzbrinck Group, hasn’t gone unscathed. Just months after offloading the German social network, the Samwers invested in Facebook (a stake they’ve since sold), and Alexander went on record with Germany’s Der Spiegel magazine, saying Facebook was “light-years ahead” of StudiVZ. Asked whether siding with Facebook would seem like “competing with your own child,” Alexander answered, “StudiVZ is now owned by the Holtzbrinck Group and not by us. It’s open competition between the best ideas, and the best company will be the winner.” The German site has since tanked.

For the past two years the Samwers have been at war with yet another set of German brothers—Fabian and Ferry Heilemann, founders of a rival Groupon clone called DailyDeal. In early 2010 they sent job offers to nearly all of DailyDeal’s employees, luring them with promotions and raises, according to a person close to the Heilemanns. Of the handful of DailyDeal employees who defected to Citydeal, most lost their jobs in a mass firing a few months later.

Next, the Samwer company began spreading rumors that the Heilemann company was close to bankruptcy and that it was instituting a punitive arrangement with vendors, whose money would be held in special escrow accounts for three years—all untrue statements, according to the acquaintance of the Heilemanns. Asked about these tactics, Oliver Samwer was not apologetic. “I cannot speak for every single sales person, but it definitely didn’t happen systematically,” he said. “I think it’s all within the normal laws of competition.”

Normal or not, StudiVZ’s Dariani told Manager Magazin in February 2011: “To put it nicely: I wouldn’t recommend that anyone do business with the Samwers.”

Rocket is in the process of relocating its headquarters to a beautifully renovated building in Berlin’s chic Mitte district. “We’re moving into a building that is five times the size of the old Rocket building, ja?” says Oliver. The new digs will give Rocket some much needed space and, perhaps, an image upgrade. “I think they’re trying to look a bit like Google (GOOG), be this Web company, kind of friendly, with these amazing offices,” says Ciáran O’Leary, a partner at the German venture capital firm Earlybird. “But there’s the saying, ‘If you hire sharks, you can’t expect them to act like dolphins.’”

An image boost couldn’t hurt. Last summer a local startup called 6Wunderkinder called for an anti-copycat revolution. And Berlin has begun to attract non-clone entrepreneurial ventures. Some say the Samwers have provided a bridge from the old risk-averse Germany to a more fertile startup climate. “OK, we respect the fact that you’re really good at execution and copying business models,” says Jessica Erickson, 6Wunderkinder’s communications director. “But we can do better than this.”

In January about 20 Rocket employees, some the Samwers’ closest allies, announced they were leaving to launch a rival startup factory, called Project A Ventures, that will focus on backing original ideas. “Things have changed, gotten speedier in terms of rollout, more aggressive, and done more in a copying way,” says Uwe Horstmann, who worked as a managing director at Rocket and is a founding partner at Project A Ventures. “The shift was maybe from quality to quantity. Not everybody was fully on board with that.” In February, Russian entrepreneur Yuri Milner, an investor in Facebook, Zynga (ZNGA), and Twitter, pulled out of a plan to invest in Rocket. The German media speculated it was because of Oliver’s bad reputation. Responding to this claim, Oliver says, “None of this is a problem. Over the years probably 20 VC firms have invested with us, private equity firms have invested with us, media companies have invested with us.”

As for, the design site on Feb. 21 announced its acquisition of a German non-Samwer facsimile, Casacanda. “They’re less of a copycat and more a group of people who came up with a similar idea,” says Goldberg. “There are other clones that copy Fab very closely out there, but at least they use different colors,” says Goldberg, who’s sitting at his desk flipping back and forth between Fab and the Samwers’ Bamarang site. He points out the similar font and word choices on the “About” pages. “We even saw a job posting they had that was basically copied and pasted from Fab. It’s kind of flattering, but come on: If you’re going to do something about design, at least design your own website.”

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