Should You Copy Startup Ideas From Other Markets

Should You Copy Startup Ideas From Other Markets

December 16, 2021

If imitation is the sincerest form of flattery, then Rocket Internet has gotten copying into an art form. In 2014, Rocket Internet went public with a valuation of US$8.5B, making it the second largest technology IPO in Germany at the time. The CEO, Oliver Samwer called Rocket Internet a "startup factory", unabashed in its business model of churning out copycats of e-commerce startups that took off in the US to markets in Asia, Europe and Latin America. And why not, since it is much faster to copy a business model that already works than to invent one. Their approach has been justified by successes of their startups such as Delivery Hero, Lazada and Hello Fresh. But equally, they have had flops: remember Payleven (Square clone) or Pinspire (Pinterest clone)? Nope? Me neither. Last year, as their share price plummet, they are valued at less than half of their IPO valuation.

Rocket Internet's story is, in a nutshell, the advantages and the drawbacks of copying startup ideas from other markets.

Startup founders know that finding product market fit is one of the biggest hurdles to be successful. Understanding users' pain points and building solutions that customers are enthusiastic about is hard, something most startups don't achieve and they fail as a result. Taking a business model that has worked well in other markets and copying them for your own market makes sense then, as it reduces risks and jumpstarts your go-to-market.

Joel Leong, CEO of ShopBack, an ecommerce startup, was "inspired" by Ebates (now Rakuten Rewards), a cash back startup in the US. The model is simple: both Ebates and ShopBack are paid a commission when shoppers shop online through their platforms, a commission that they then share with their users. This model has taken off so successfully in Southeast Asia that ShopBack has 30 million users across 7 countries. They also raised a round in October this year that valued their company at US$539.4 million.

But a business model that works in a more mature market may not work as well in a less developed market. Take KFit—they raised US$15 million trying to replicate ClassPass's concept of subscription-based, fitness services across multiple gyms. KFit CEO, Joel Neoh, later explained that the model had a negative unit economics, as the more users they get, the more they had to pay gyms and the more money they lost. This is not unusual, given that ClassPass themselves had had to adjust their pricing, doing away with their unlimited tier, to make their business more sustainable. But while KFit did the same pricing adjustment, that model still did not have enough momentum such that they had to do hard pivot to a completely different business model focusing on offline-to-online commerce.

At a fundamental level, 50% of the "product market" pair is the market. And the market matters a lot:

  • The market determines how quickly customers will adopt a new product. For example, say a product like Shopify, which is an intuitive drag and drop e-commerce website builder, can start off in markets like the US and Australia by targeting pretty tech savvy users, who tend to be e-commerce first entrepreneurs. But the adoption rate will not be so quick in markets like Malaysia or Indonesia. This is because, to have a meaningful addressable market, Shopify will also have to appeal to more traditional SMEs to get them to go online. So without substantial on the ground customer development, adoption won't be the same in a less mature market.
  • The market dictates execution in terms of sales and marketing. For example, in a market with high digital penetration, it may make sense to sell directly to the customer, while in another market, using offline affiliates or channels may be a better strategy.
  • It also matters a lot to a startup runway: a mature market means that a startup can be cashflow positive in 12-18 months whereas if a startup has to develop the customer, it may take years to be profitable. In richer countries, a business can charge at a higher rate than a low income country. One rate could result in a positive unit economics while another may result in a negative one. Taken together, this will affect cashflow.
  • The market determines the product design, to fit its own peculiarity. Using the example of Uber again, it entered the Southeast Asia market without significant localisation to its app, whereas local competitor like Grab and Gojek understood that the region was still very dependent on cash and offered cash options.

So while the business model gives you a bit of a heads up, you do have to adjust for the market.

How can you think about copying strategically? Here are six things to think about before copying an idea from another market:

  1. The biggest one is understanding the problem that the incumbent is solving for and recognising if your market has the same problem. If yes, then study the solution: why was the product and business model designed the way they were designed? Are those design choices appropriate and relevant for your market? Going back to the ShopBack example again, CEO Joel Leong said that when they started off, they realised that in Southeast Asia, many brands that had done well offline were only then finding their footing by going online. This contrasted with the market in the US where shopping rewards were driven by brands that were already online. As a result, ShopBack made a choice to focus only on online rewards to help these brands, whereas Ebates at the time reward shoppers for both online and offline shopping (today ShopBack has both online and offline rewards). By making the choice to help these brands do well online, they focused on a narrower set of customers early one to effectively create the supply side of their 2-sided market.
  2. What are the underlying assumptions that the incumbent made when they launched the business? For example, if Amazon launched an e-commerce business with the assumption that online payment largely works well and that the delivery infrastructure is reliable, are those assumptions true for your market? And if not, how can you mitigate accordingly? One example is how e-commerce players in Indonesia almost universally offer cash-on-delivery (COD) as an option, to make up for the low credit card penetration rate.
  3. What are the incumbent's revenue stream and do you need to reconsider that? For instance, Eventbrite offers ticketing services for self-served event organisers and charge a commission for it. Commission range from 4.5% (including payment processing) to 6%. Ticketing companies in Southeast Asia cater to more cost conscious customers by lowering the commission but then diversify their revenue stream by offering marketing services etc to stay sustainable. What other forms of diversification can you do to be sustainable?
  4. How defensible is what you do? If you are able to copy an idea that already works, then chances are, others think the same way as you. What is your unfair advantage that makes it likely for YOU to succeed? Is it deeper understanding of the industry? Is it the executing capability of your startup?
  5. What are the cultural blindspots of the incumbent that you can leverage on?
  6. What are the regulatory issues in your market that may make it substantially harder to run on the same business model?

So it is not as simple as copying an idea. Andrew Chen, in an article about minimising time to market, uses an 80-20 formula: emulating 80% of the fundamentals while innovating on the 20%. We see ShopBack doing this: expanding their product line to include vouchers and offline cashback. ShopBack's co-founders, Joel Leong and Henry Chan were both formerly at Zalora, another Rocket Internet company. Perhaps that's why they learned from successes and mistakes of the ultimate imitator: copy, but not completely.

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