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Fueling the Growth of Ethiopia's LogiTech Startup Ecosystem
By Andrew Larsen | Thu May 18 2023
USAID’s Bureau of Humanitarian Assistance seeks to strengthen the trucking, transportation and logistics sector through technology innovation
From late 2020 through February 2021, USAID’s Bureau of Humanitarian Assistance (BHA) conducted a Private Sector Landscape Assessment (PSLA) for Ethiopia that identified and prioritized concrete opportunities to integrate high-impact private sector engagement (PSE) initiatives into USAID BHA’s emergency and non-emergency programming for Ethiopia. Ultimately, the PSLA recommended focusing on two thematic areas for new PSE opportunities:
- Expanding businesses to rural areas in support of the Mission’s Resilience Food Security Activities (RFSAs); and
- Strengthening the trucking sector within Ethiopia through improving standardizations, planning requirements, utilization of new technologies, and improving driver requirements to both improve the delivery and reduce the costs of providing food assistance.
In support of these recommendations, USAID BHA started the Strengthening Humanitarian Assistance and Resilience Private Sector Engagement In Ethiopia (SHARP-SEE) Project in partnership with Renew Capital in March 2022, during which the project teams have been working to strengthen urban to rural linkages and enhance the trucking, transportation, and logistics sector in Ethiopia. This collaboration has resulted in market and ecosystem research and culminated in a 12-week, intensive training program focused on 10 logistics and technology (or “LogiTech”) startups in Ethiopia. Key takeaways from project activities include:
- There are several persisting challenges that undermine the growth and modernization of Ethiopia's trucking, transportation and logistics sector.
- Trucking and transportation companies are not tech-enabled, and most companies still operate with manual processes.
- Macroeconomic conditions and regulatory barriers continue to undermine the Ethiopian startup ecosystem.
- Only 0.07% of capital invested in logistics and transport startups in Africa was raised by Ethiopian companies from 2019 to January 2023.
- The average deal size for Ethiopian logistics companies was $170K, significantly lower than other African countries from 2019 to January 2023.
- Ethiopian startups only raised 5.82% of total capital raised by startups in Africa from 2019 to January 2023.
Percentage of Capital Invested in Logistics by Country (USD, Millions, 2019 - January 2023)
(Source: Renew Capital analysis of publicly reported deals tracked in “Africa: The Big Deal - Startup Deals Database”)
In other words, trucking and transportation companies are not tech-enabled, and most companies still operate with manual processes. According to interviews with SMEs throughout the SHARP-SEE project, trucking and logistics companies are interested in implementing technological solutions to address challenges associated with financial forecasting, accounting and operational efficiency. At the same time, while many companies have implemented solutions that allow them to track vehicle driving data, like location, speed, and fuel levels, the technologies in current use do not include logistics applications that support in the completion of tasks in the following key areas:
- Fleet Management Systems
- Cargo Tracking and Matching Technologies
- Last Mile Communications
- Digital Work Orders & Digital Truck Tasking
- Efficient Unloading & Loading
- Digital Bidding and Tendering
- Digital Warehouse Management Systems
- Vehicle Space and Route Optimization
- Public Transportation (Bus Fleet Management, E-Ticketing for Intercity Travel)
- B2B Logistics between Urban and Rural Areas
Furthermore, macroeconomic conditions and prohibitive government regulations undermine investment in the sector:
- Government directives on priority goods and quotas curtail the capacity of the private transportation, trucking and logistics sector.
- 49/51 percent company ownership in freight forwarding and shipping agency services discourages foreign investment and multinational innovations.
- Investment Proclamation Number 1180/2020 requires that foreign direct investments must be no less than $200,000, undermining foreign investors’ ability to invest in startups and pre-seed companies.
- Forex shortages, capital controls and the high cost of spare parts undermine investment and the growth of Ethiopia’s fleet.
- Finally, the Ethiopian Shipping Line monopolizes approximately 85% of cargo that travels on the Djibouti corridor, leaving only 15% open for private contracts. The majority of this is humanitarian cargo, which receives an ESL waiver. At the same time, Investment Regulation 474 (2020), prohibits foreign ownership of inland trucking operations for loads under 25 tons, which constricts an estimated 15% of the total Ethiopian trucking market open to foreign investors and foreign companies, valued at approximately $350M, according to a trucking market size model developed by Renew Capital.
As a result, private investment in logistics in Ethiopia lags behind regional counterparts and the country lacks an investable pipeline of tech-enabled logistics startups. The average deal size for Ethiopian logistics companies from 2019 to January 20230 was $170K, significantly lower than other African countries.
Average Ticket Sizes for Logistics Deals in Africa (USD Millions, 2019 - January 2023)
(Source: Renew Capital analysis of publicly reported deals tracked in “Africa: The Big Deal - Startup Deals Database”)More broadly, Ethiopia’s startup technology ecosystem also remains underdeveloped with a limited pipeline of investable companies: Limited investment in Ethiopia is not just isolated to the logistics sector. For context, across sectors, Ethiopia only attracted 5.82% of capital invested in African startups from 2019 to Q1 2023. When adjusting for only tech startups, this number drops even more significantly, as Ethiopia’s largest startup deal in recent years was a $26M deal in a beverage startup, which dramatically skews these numbers.
This is due to two primary reasons. First, as discussed, the limited pipeline undermines investor interest in the country. Second, high foreign investment investments ($200K) and the inability of foreign investment entities to provide debt financing undermines the ability of foreign investors to provide investment in smaller rounds, which is typically more appropriate for asset-light tech startups.
Ethiopian startups only raised 5.82% of total capital raised by startups in Africa since 2019.
Breakdown of investment funding by sector in Ethiopia as a percentage of total capital invested across the African continent by sector (2019 to Q1 2023).
Capital Invested in Ethiopia By Sector as a Percentage of Total Invested Capital in Africa (2019 - Q1 2023)
(Source: Renew Capital analysis of publicly reported deals tracked in “Africa: The Big Deal - Startup Deals Database”)
The LogiTech Investment Sprint Aims to Mitigate These Persisting Challenges: As such, the USAID BHA SHARP-SEE project team’s approach and solution to these persisting problems has been focused on helping build a pipeline of investment ready LogiTech startups with the ability to attract funding to Ethiopia’s Logistics sector. The 12-week training program focused on foundational business topics including strategic planning, organizational structures, managing business finances and investment preparation.
The program also worked with startups to re-evaluate the effectiveness of their existing minimum viable products and seek true product market fit. Product development activities included in-depth customer interviews, the development of primary growth targets and KPIs, and continual target versus actual analysis and accountability.
Participating startups’ products range in focus including, intercity logistics, intraregional public transportation, commuting, last mile delivery, business to business logistics and a digital solution for truck operators participating in import and export operations.
Combined, these developing solutions fit well into Ethiopia’s modernizing digital economy and pave the way for a more tech-enabled future for Ethiopia’s logistics sector. At the same time, while in their infancy, some of these solutions are laying the foundation for improving the delivery of humanitarian aid by introducing digital tools to a traditionally undigitized sector. Furthermore, urban to rural linkages, between manufacturers and suppliers and retailers and between agricultural producers and export and local markets can be strengthened through the provision of tech-enabled logistics services. Finally, while still largely manual, busing and public transportation is moving towards digitization with two of the pitching companies focusing on improving the flow of people both within cities and between cities. In turn, these innovations can supercharge technology for logistics and continue to work towards more efficient delivery of humanitarian aid and the strengthening of urban to rural market linkages.
Join us on May 31, 2023 as the final six companies from the LogiTech Innovation Sprint pitch their startups. Register here.
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.
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