Sote and Unlocking the Economic Potential of Africa

A Circulatory System for the Global Economy 

The world’s largest container ship, the OOCL Hong Kong can carry more than 20,000 of the containers known as twenty-foot equivalent units, or TEUs that are hauled across every interstate highway around the world. To give a sense of the massive carrying capacity of the OOCL, one TEU can carry 27,000 cans of Coke, meaning the entire ship can carry nearly 550 million cans equating to 52 million gallons of liquid, roughly the volume of 80 Olympic-sized swimming pools. That’s a lot of soda, or socks, shoes, toys, or any of the other millions of items transported by these massive ships. And thousands of these ships, along with even more trucks and airplanes criss-cross the world every month driving the global supply chain. 

Like the body, the global economy has a circulatory system that enables the entire organism to function. To survive, both the body and the economy need to move vital internal elements from one place to another efficiently and accurately. Logistics is the management of the flow of things between the point of origin and the point of consumption to meet the requirements of customers or corporations. Global logistics is nearly a $7 trillion industry whose complexity is on par with that of the human body. Getting trillions of dollars of goods from one part of the world to another by land, air and sea requires intense coordination between commercial and government sectors, across languages, borders and customs as well as a multitude of technology platforms. Freight forwarders and clearing agents help manage the shipping and receiving of goods around the world, enabling this circulatory system to work properly; however, as we will discuss below, this system is in drastic need of a technological overhaul.

In the realm of shipping, the terms freight forwarder and customs broker are used interchangeably. Yet, in reality the two have important distinctions. Freight forwarders are supply chain experts who work with customers to manage the logistics and physical transportation of cargo. They are a touchpoint for the many different entities involved with the shipment of cargo from its point of departure to its destination. Freight forwarders are also responsible for monitoring the movement of goods and completing the required compliance documentation and paperwork. They organize the delivery path required to facilitate the transport of goods.

A customs broker, however, is involved with the transportation of cargo on a deeper level. Customs brokers (aka clearing agents) are responsible for preparing and clearing customs entry once a shipment arrives at a port of entry. They submit the necessary information and payments to the agency on behalf of their clients. They must also be experts in the admissibility requirements, classification, and applicable taxes/fees for imported merchandise in order to represent the shipper in procedures for clearing cargo over international borders.

Africa Rising

Nowhere is this need of a logistics overhaul more apparent than on the continent of Africa. In 2011 and 2012, The Economist and Time Magazine ran cover stories dedicated to the “Africa Rising” narrative which predicted African nations would follow in the footsteps of the Asian Tigers and see substantial economic growth in the coming decade. And in the years since, the world has watched the continued development of African economies and societies. Africa today stands at an extraordinary inflection point: 

• Africa could double its manufacturing output to nearly $1 trillion by 2025.
• Consumer spending in Africa is projected to reach $2.1 trillion by 2025.
• By 2034, Africa is expected to have a larger working age population than India or China at 1.1 billion people, and the entire population is expected to double to over 2B by 2050.
• Africa has fewer large companies than it should, but it has more today than people realize, with over 400 companies valued at over $1B, and on average they are growing faster and are more profitable than their global peers.
• More than 80% of its population growth over the next two decades will occur in cities, and in many parts of urban Africa, there are signs that the simultaneous increases in population and per capita income are triggering exponential growth in demand.
• In cereal production alone, Africa has the potential to quadruple its production to over 900 million tons, enough to feed Africa's growing population and export. Africa has the potential to be the breadbasket of the world.

The pattern of no growth (pre-2000s) to rapid growth over the past 20 years matches patterns seen in other regions like China, whose GDP quadrupled over a 10 year span from 2005 to 2016. Africa's current GDP is very similar to that of China in 2005, and is beginning to bend upwards rapidly.  However, Africa must overcome many challenges with infrastructure gaps, political execution of free trade agreements, and industrialization just to name a few, but it is in these very challenges where the opportunities for growth lie. 

One of the keys to unlocking sustainable economic development in Africa is increasing intra-African trade. The current state of regional trade in Africa is not great: 

• Total trade from Africa to the rest of the world averaged US$760 billion in current prices in the period 2015–2017, compared with $481 billion from Oceania, $4,109 billion from Europe, $5,140 billion from America and $6,801 billion from Asia.
• The share of exports from Africa to the rest of the world ranged from 80% to 90% in 2000 –2017. The only other region with a higher export dependence on the rest of the world is Oceania.
• Intra-African exports were 16.6% of total exports in 2017, compared with 68.1% in Europe, 59.4% in Asia, 55.0% in America and 7.0% in Oceania.
• Intra-African trade, defined as the average of intra-African exports and imports, was around 2% during the period 2015–2017, while comparative figures for America, Asia, Europe and Oceania were, respectively, 47%, 61%, 67% and 7%.

Trade is the backbone of the modern economy, and yet Africa trades the least with itself and the rest of the world out of any other region. It is one of the fastest-growing economic regions in the world in spite of this trade friction. Fundamentally, physical trade has only two parts: the exchange of money and the physical exchange of goods. For Africa to thrive, trade friction must be solved. And one piece has been solved already: fintech and mobile first payments solutions like Mpesa have been exploding across the continent for almost two decades. However, logistics remains largely untouched, presenting an enormous untapped opportunity. 

Holding Back Growth

Transforming the African logistics industry through technologically-enhanced clearance and freight forwarding is a key to unlocking economic growth. There are several factors clogging up the arteries of this economic circulatory system: 

• Underdeveloped Infrastructure: According to SAP, two of the primary challenges faced by African ports are long cargo clearance times and under-developed port/supplier infrastructure. The region is also hindered by low levels of automation and rampant container theft. While much investment has been made in transit infrastructure (eg, widening of holding basins and parking lot expansions), this is only one piece of the puzzle. Making the most of the region's existing infrastructure depends on supply-side interventions that facilitate the movement of cargo. Digital interventions (eg, smart logistics platforms and advanced analytics solutions) can manage container theft, predict supply-chain disruptions, and track cargo in real-time.
• Inefficient and Manual Operations: It takes 90 texts, calls, and emails to move a single TEU container--meaning over 1.8 million individual pieces of communication to coordinate all of the TEUs on a single container ship--and so much of that is just making sure the right people have the right information at the right time. Because of this, roughly one employee is needed to ship every 10 containers. There is also inefficiency of information exchange between the government bodies, the warehouses, the shipping lines and the trucking companies. The flowchart below illustrates the complexities of clearing and forwarding today. 

• Fragmentation: Because of the inefficient and manual nature of how the system currently works--requiring the coordination of thousands of people through complex manual processes--no single company has greater than a 5% market share (Bolloré Transport & Logistics is the largest logistics company in Africa with just under 5% total market share). There are thousands of clearing agents across the continent viewed as the “used car salesmen” of the industry. 
• Opacity: Customers don’t know where their cargo is in its journey or when it will arrive. There is no transparency into shipping manifests or customs documentation.
• Hidden Costs: Tied to the opacity problem above, additional and hidden costs can be added during each step in the process. 

These factors have a meaningfully negative effect on the African economy. According to PWC, of the 72% of world container throughput commanded by developing countries, Africa collectively only sees 1%. A hypothetical improvement from 1% to 3% would increase the economic value of oceanic trade by a magnitude equivalent to the GDP of some African countries. And inefficiencies within the freight forwarding industry produce losses in excess of $17B each year.

Unclogging the System

Flexport in the United States provides a great case study on how a technological approach to logistics can lead to immense value creation. Founded in 2013, Flexport has raised over $1.3 billion to date and was last valued at $3.2 billion, with less than 1% global logistics market share (the global logistics market leader Kuehne + Nagel is currently valued at $22 billion with just around 5% global market share). Flexport built the first real visual software data platform for the shipping industry, allowing for unparalleled coordination and transparency of moving manufactured goods around the planet. But Flexport is not focused on the African market, leaving open a large whitespace for logistical innovation. 

Today we are pleased to announce that MaC Venture Capital led the series seed round of Nairobi Kenya-based Sote, the digital logistics infrastructure for Africa. Marlon Nichols led the deal and has joined the company’s board of directors. Sote's mission is to increase Africa's GDP by increasing trade. Their first solution, a licensed tech-enabled customs clearing and forwarding service gives industrial cargo owners a central dashboard that acts as a single record of truth for all involved parties in clearing and forwarding. They are positioning themselves as a technology company that happens to provide supply chain services. Sote has developed a software platform that is a workflow tool used to manage freight clearing and forwarding as well as a dashboard to passively keep track of shipment status, payment history, and ETA of containers, drastically reducing the effort of communication between the customer and Sote staff while providing their customers with more real-time visibility than they have ever had.

Sote’s founders bring a wealth of experience in freight forwarding and clearing as well as retail technology and product management. CEO Felix Orwa is a Kenyan native, former pilot and logistics industry insider. CPO Meka Este-McDonald graduated from Stanford and was previously a PM at Verizon and Gigster. CTO Scott Yacko was director of software engineering at Amazon and director of architecture at Walmart before that. 

As both a freight forwarder and customs brokerage, Sote is able to provide its clients with a seamless, door-to-door export/import experience and access an initial TAM of $20B. Given this vertical integration, Sote is able to coordinate the transportation of goods and necessary paperwork, clear the goods at port of entry, and arrange for final delivery--all while increasing market transparency for customers and automating processes to cut intermediary costs. 

The African Logistics Market

20 million containers move through Africa yearly, equating to a $20 billion logistics market. Over 1 million containers move through Kenya alone--Sote’s launch market--a number that has more than doubled since 2007 according to the World Bank. The majority of cargo in Africa comes through six major ports, known as the gateways of Africa: Kenya, South Africa, Mozambique, Nigeria, Morocco, and Egypt. These major ports serve entire regions. For example, Kenya’s Mombasa Port is Africa’s fifth-busiest port, and serves as the main gateway for trade in the Eastern Africa region. Its roads connect Kenya with neighbors including Tanzania, Uganda, Somalia, Rwanda and South Sudan.

As Africa’s economies continue to grow, the size of the logistics market could double. Sote’s business model is to charge roughly $1,000 per container handled on their platform. Managing just a quarter of one percent of Africa’s total yearly cargo volume over the next 10 years could get Sote to $100 million in annualized revenue. 

And digital clearing and forwarding is just the beginning.  Sote’s goal is to build the digital logistics infrastructure for Africa which puts them in the broader logistics market. According to KPMG, logistics costs represent 18% of China's GDP, and according to Flexport, 12% of GDP globally. Applying that to Africa, logistics is a $430B industry today.

Value-Added Products and Services 

What Flexport successfully figured out was that if you can be the data system of record for the movement of cargo through the entire supply chain, you can be the provider of choice for a multitude of value-add products and services that include insurance, warehousing, financial services and loans. Once Sote establishes themselves as the clearance agent and freight forwarder of choice in Africa, and thus aggregating and analyzing large volumes of shipping data, they will have the unique opportunity to offer these aforementioned products and services to their growing customer base. 

Sote is creating the conditions for Africa to build huge businesses that generate generational wealth for Africans. To give Africans a seat at the global economic table so they can start to dictate rules that are more equitable and fair. To exert their influence on the world rather than to be simply subject to the world’s influence on them. And in doing so, they are going to make a huge African logistics market even bigger.

About MaC Venture Capital 

MaC Venture Capital is an early stage venture capital firm focused on finding ideas, technology, and products that can become infectious. We invest in technology companies that benefit from shifts in cultural trends and behaviors in an increasingly diverse global marketplace.

MaC Venture Capital is the result of the merger between successful Los Angeles and Bay Area based Seed funds, Cross Culture Ventures and M Ventures.