Frankfurt, we have a problem

1201_rocket

Image source: Alexander Tolstykh / Shutterstock.com

What's going on?

Rocket Internet, the major European startup investor, announced some disappointing news on Thursday as it told shareholders that its high-profile startups wouldn’t start turning profits until next year…

What does this mean?

Rocket is a bit of an anomaly, as it’s both a startup incubator (meaning that it helps startups grow in exchange for a piece of ownership) and a publicly traded company on stock markets. For investors, that means Rocket’s financial success is all based on how well its startups are performing – and they’re still not doing quite as well as initially hoped.


Right now, none of its top startups are generating profits, even though Rocket promised that some would be by the end of this year. However, it says it’ll come good in 2018, pointing in particular to narrowing losses at two high-profile protegés: HelloFresh and Delivery Hero.

Why should I care?

For markets: Shares in Rocket fell by around 4% as investors digested the lukewarm news.

While the stock is flat for the year, it’s still worth less than half the price at which it started publicly trading in 2014. Since then, it’s become more and more apparent that Rocket’s investments would take time to lift off. The incubator will be hoping that HelloFresh’s recent IPO will create at least one success story, even if the timeline for its success is extended somewhat.



The bigger picture: Startups can take a while to be profitable…

Some investors have called for Rocket to start paying dividends and to buy back more of its own shares. However, Rocket says it can’t spare the extra cash, as it needs to invest more before its startups become profitable. It’s definitely not unusual for high-growth firms to post some substantial losses (here’s looking at you Uber, still) before generating profits. However, when a company becomes publicly traded, the expectations of its new investors tend to be a bit different — perhaps one reason why startups don’t really trade on stock markets all that often!

Originally posted as part of the Finimize daily email.

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