This article also appeared in Finweek Magazine in their 31-Jan-2013 issue

Starting and growing an internet business is hard. Even though the barriers to entry are dropping every day, the odds of success are still worryingly low. It is very difficult to predict what the market will like and what it won’t. Is there a way to increase our chances of success? Yes, it’s called the copy-cat strategy.

South Africa tends to lag behind First-World countries in the adoption of certain trends and technologies. For example, daily deal sites like Groupon, online shopping platforms like eBay, and online music stores like Apple iTunes were well-established overseas before coming to South Africa. The iTunes Store launched in South Africa in 2012, some 9 years after Apple first launched its iTunes Store in 2003 in the US. This lag-time means South Africa holds a crystal ball on global trends and the businesses that arise from them. We can see the trends happening in First-World countries before they happen in South Africa.

In the eyes of an entrepreneur, there is huge opportunity in this. Based on these trends, we can start local businesses that copy successful overseas ventures, before these trends become established in SA. This means it is a matter of when, not if, they take off here. Me-too concepts that have worked overseas and are copied to SA are proven concepts. So your odds of building a successful business out of them are a lot higher.

Not only does the copy-cat strategy increase your chances of success, but it also offers a number of other advantages:

1. Funders like proven concepts, as it takes the guess work out of their investment and lowers their risk. This makes it a lot easier to get funding for clone businesses. Zando, a South African online fashion retailer that imitates the model of US company Zappos, closed a sizeable €20 million round of funding in November 2012. This was barely nine months after Zando’s launch, with the help of Rocket Internet, the European Incubator of Internet start-ups.

Overseas, an even more remarkable story is that of Wimdu, the German knock-off of Airbnb. Both Wimdu and Airbnb enable anyone to rent out their homes or rooms online to strangers for a fraction of what a hotel would charge. Following their launch, Airbnb knocked on the doors of many investors in 2008, but most felt the market was too small. Running out of capital, Airbnb resorted to selling collectible cereal. Four months after launch, it managed to get $20,000 from Y-Combinator’s Paul Graham, who thought the Airbnb idea was “terrible” but liked the founders. Compare that to the $90m that Wimdu raised only 100 days after its launch, earning it the nickname “the world’s largest start-up”!

1. There’s a natural acquirer because the successful parent company will acquire the South African offspring venture. This happened in the case of the Groupon parent acquiring local daily deal site Twangoo in 2011.
2. There is less chance of competition from outside SA because the big overseas version is unlikely to open up here as our market is relatively small.
3. The need for customer education in SA is low because the successful overseas concept is already well-known to the SA market. This means the time to success in the South African market is shorter. Zando is a case in point. In less than one year since its launch in February 2012, Zando has grown into one of the leading five online stores in South Africa. Similarly, in just two months, Arne Bleckwenn and his team recreated Wimdu, while Airbnb took four years to produce.

The main problems with the cloning approach, however, are twofold:

1. There are very low barriers to entry. Because they are proven concepts that are easy to copy, within a short space of time there is often lots of local competition to the clone offspring. Zando faces stiff competition from the likes of local players Takealot, 36boutiques, Diligo and newcomer HelloPretty. The success of Groupon overseas led to a huge proliferation of local daily deals sites in South Africa. In 2011, there were already an estimated 50-plus Groupon copycats in South Africa.
2. Cloning is a high-risk, high-return strategy with lots of casualties. A large number of local competitors often isn’t sustainable and often many of these pull the plug soon after launching. A case in point is Groupon SA. In the last two years, we’ve seen the closure of numerous South African group-buying sites such as Avusa’s Zappon (launched in March 2011, closed shop in November 2011) and Naspers’ Dealify (opened June 2011, closed November 2011, just days after Zappon).

The cloning approach has made Oliver Samwer, Rocket Internet’s co-founder, an extremely wealthy man. His net worth is estimated at $1 billion – not bad for a 39-year-old. Samwer is notorious for his effectiveness, his über-aggressiveness and his fondness for brazenly mimicking the finest creations to come out of Silicon Valley. Think of a top American start-up, and chances are Samwer and his two brothers, Marc and Alexander, have copied it somewhere around the globe. Understandably, he isn’t well-liked.

Rocket Internet runs an international ecommerce mecca — roughly 38 companies in 58 countries. Embracing the same model as Zando, Rocket Internet’s other offspring include Zalando in Germany and the UK, Japan’s Locondo, The Iconic in Australia, and Singapore’s Zalora.

Interestingly, Rocket Internet employs a focused HR strategy; the business recruits MBA-trained executives to be ‘Founder and Managing Director’ of its copycat businesses. Most of these people have prior experience at multinational banks and management consultancies. This formula – a potent mix of the company’s overall expertise and management and a clone of a proven website – often leads to Rocket Internet being the second or third player in the new marketplace which the start-up company with the original idea generated.

Cloning successful overseas businesses may not be for everyone, but it is often a very successful strategy. In the words of Zando co-founder Eugen Petersen, “The winds of change are blowing through Africa, you just have to get the timing right”.