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This case was prepared by Anna Waldman-Brown and Georgina Campbell Flatter.

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Soko Jewelry, Fast Fashion, and Building a Virtual Factory
Anna Waldman-Brown and Georgina Campbell Flatter

“Fashion is about dreaming and making other people dream.”
– Donatella Versace, fashion designer

“Soko saved my life.”
– Veronicah Rachiedo, Soko artisan

Ella Peinovich sat under a guava tree in her backyard in Nairobi, Kenya, looking out at the
skyscrapers just visible over her fence. Her husband and young son had picked most of the guavas,
but she still managed to find a ripe fruit which she munched on now, lost in thought. It was the
summer of 2017 and Peinovich, CEO and co-founder of the ethical manufacturing platform Soko,
was reflecting on how her company would position itself for future growth. Peinovich considered
the difference that her company had already made in the lives of jewelry artisans across Kenya as
she rubbed her fingers along her brass necklace.

Soko was a medium-sized fashion company (under US$10 million) producing brass, horn, and
bone jewelry for mid-tier customers worldwide. It had an average compound annual growth rate
(CAGR) of 92% between 2014 and 2017, 60 full-time employees, and 2,300 artisans throughout
Kenya who manufactured jewelry on a contract basis—and Soko’s revenue had been doubling
year-over-year since 2014. The firm was not yet profitable, but had very healthy margins on
jewelry production, and Peinovich’s team was confident that they would break even in the next
several years. Peinovich was especially proud of the fact that her artisans retained 20% of overall
revenue, as compared to the industry standard of only 5–10%—with the exception of highly trained
3D-printed jewelry technicians who capture around 40% of overall revenue as full-time factory
employees, but these technicians do not own their tools (see Figure 1 below).1 Soko’s artisans

1 Personal phone interviews with jewelry supply chain consultant, John Croston, and founder of Au Enterprises,
Linus Drogs, January 2018.

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captured roughly the same percentage of revenue per item of jewelry as fair trade artisans,2 though
they were able to sell more jewelry through Soko due to its seasonal fashion changes (see the
“Staying Competitive in a Crowded Market Segment” section below).

Figure 1: Approximate worker revenue as percentage of company revenue

Source: Case writers, using data from Ebeling, Croston, Drogs, and Soko (as cited in footnotes)

Many of Soko’s artisanal suppliers received roughly a 5x increase in annual income after becoming
contractors for Soko. “They’ve gone from a handful of products by the side of the road every day,”
said Peinovich, “to now hundreds of products in retail shops around the world.” Most importantly,
Peinovich explained how Soko was also contributing to social mobility:

We see a number of people moving out of the slums. They are paying their
dowries for the first time, paying the school fees for their boys and their girls,
and putting three meals on the table every day. This is a huge point of pride,
because we at Soko really believe that we are helping artisans to lift themselves
out of poverty.

Despite her success, however, Peinovich was dissatisfied with the state of her business that
summer. Results from an impact analysis last year indicated that Soko’s impact, indicated by
artisans’ overall share of Soko’s revenue, had decreased from 2014 to 2016 as increasing overhead
costs of sales, marketing, and other key business expenses cut into artisans’ revenue:

2 Ashlea Ebeling, “Ten Thousand Villages Grows With Fair Trade,” Forbes, August 20, 2009.

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Figure 2: Soko’s cost of goods as a % of revenue (Soko company data)

Source: Case writers with data from Soko

As an additional challenge to Soko’s intended impact, the majority of Soko-generated gains were
captured by the 20% of Soko artisans who worked full-time, while the rest of the firm’s artisans
worked part-time and 20–40% of artisans in any given quarter were inactive. Although these
artisans worked for other jewelry companies or practiced in other trades, nearly all had expressed
an interest in working full-time for Soko.

Could Soko provide all its artisans with a decent share of revenue, or would the firm have to shift
its business model in order to actually become profitable? From Peinovich’s point of view, a shift
away from supporting artisans would decrease Soko’s overall effectiveness as an ethical
producer—was this the only way for Soko to compete with modern technologies and assembly-
line factories?

The company’s unit growth had mostly leveled out, and the increase in revenue was partially due
to increased prices and better organization, rather than an increase in sales. Soko’s current demand
had not allowed them to substantially increase jewelry production, better utilize their current
artisans, or even bring new artisans into their network without diluting the overall amount of work.
If Soko’s innovative virtual factory model hoped to globally disrupt the fashion market—which,
after all, was the ultimate mission of Peinovich and her team—then the company would need a
new strategy to scale up production.

Peinovich furrowed her brow, wondering whether she had saturated her current market segment
of fashion-conscious millennials in Europe and North America. An even bigger challenge was that
40% of Soko’s sales took place in the last quarter of the year for the holiday season, and Soko’s
overall production capacity for the rest of the year was sorely underutilized, at around 35%. If
Soko’s suppliers had consistently spent half their capacity working for Soko throughout 2017, the
company could have increased its revenue by a factor of five.

So, Peinovich mused, what should be the next step for Soko? Should she continue to sell jewelry
to her current market segment of socially conscious consumers, or would it make more sense to
diversify her product offering and/or her customer base? Most importantly, how could Peinovich’s

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team scale up without sacrificing their mission to provide both livelihoods for their artisanal
suppliers and elegant products for their customers?

Ella Peinovich’s Story

As far back as Ella Peinovich could remember, her primary passions in life had been art, creative
problem-solving, and social impact. An architect and designer by trade, Peinovich grew up in an
artists’ colony in Wisconsin. Engagement with her church brought her on several mission trips and
Habitat for Humanity excursions to work with under-resourced Native American communities and
rural towns in Montana, West Virginia, and Colorado. These trips focused on public service
projects such as helping the visually impaired and rehabilitating natural landscapes—which led to
the realization that she could harness the power of design to “organize creative thought” and
generate systemic, lasting impact for underprivileged communities.

“Art and math were my favorite subjects in school,” Peinovich recalled, so she found architecture
to be a natural fit. She graduated with a Bachelor in Architecture from the University of
Wisconsin–Milwaukee, then joined a corporate architecture firm as a designer. But Peinovich had
grown up with the idea that art and design could be powerful forces for change, and she grew
dissatisfied with corporate life after three years. She enrolled at MIT to pursue a Master of
Architecture. There, a digital fabrication course and a class on design thinking further motivated
Peinovich to apply her design expertise toward “disruptive scale and impact.” In her first year of
graduate studies, she also joined the urban sanitation startup Sanergy, which provided toilets to
slum communities in Nairobi, Kenya, then processed the resulting sewage into fertilizer products
for farmers to subsidize the costs of toilets and sewage collection. As Sanergy’s first architect,
Peinovich helped to design the actual toilet stalls.

Peinovich loved her first trip to Nairobi, which was also her first time visiting the African
continent. She also realized that even though designing toilets satisfied her love of impact, it would
never satisfy her love of art. Visiting craft markets around Nairobi, she was astounded by the brass
craftsmanship of local artisans. She started purchasing suitcases full of jewelry to sell in her
family’s art gallery back in Wisconsin, and was successful enough to cover her airfare and turn a
small profit.

Back at MIT, Peinovich was writing her master’s thesis on “Localized Design-Manufacture for
Developing Countries.” She investigated methodologies for fostering entrepreneurship among
informal artisans by introducing new technologies such as friction-fit molds, fiberglass forms, and
molding/casting technologies. The following year, she returned to Nairobi with Sanergy while
continuing to explore her interest in art and design. Peinovich was running a workshop on design
for development at the University of Nairobi—introducing 3D modeling and digital fabrication to
students—when she met Catherine Mahugu, a Kenyan software engineer. Peinovich and Mahugu
began discussing the idea of building a platform for Kenyan jewelry makers to sell their wares on
the international market. They developed a proof of concept for what Peinovich called an “Etsy
for Africa” mobile app, which quickly gained interest with the artisanal community.

During a later visit to Nairobi, Peinovich was invited to speak at New View, a high school program
implementing technology in slum communities. Her talk impressed Gwendolyn Floyd, an

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American industrial designer who was teaching at the school, and the two women quickly became
friends. Peinovich then brought Mahugu and Floyd together to discuss how they might work
together to build upon Peinovich and Mahugu’s app.

Throughout Peinovich’s time at MIT, the three co-founders continued to develop their startup
which combined Peinovich’s three passions: art, technology, and social impact. As Floyd put it,
Soko “was born out of a love of design, the combining of global perspectives, the desire to connect
and empower entrepreneurs using technology, and the belief that women can change the world.”3
Building upon Mahugu’s proof of concept, the company Soko emerged as an effort to bring state-
of-the-art technology and a global market to cottage industries. Soko’s team joined a three-month
startup accelerator for MIT students called delta v, which helped them get off the ground and find
investors.

Kenya’s Artisanal Industries

The Informal Craft Sector

The global craft sector, comprised almost exclusively of “informal” enterprises, is the second
largest source of jobs in emerging markets. Peinovich explained, “The artisanal sector produces
about 60% of the creative goods globally, and yet about 70% of this population are just outside of
digital connectivity so they don’t have the access to be able to sell on eBay, or Amazon, or their
own web store.”

Characteristics of “informality” may include operating out of households rather than dedicated
shops or facilities, a lack of connections to established businesses, a failure to go through official
routes for legal registration, and a general avoidance of business taxes. Across sectors, such
informal enterprises make up about 90% of micro and small businesses worldwide, and up to 75%
of non-agricultural jobs in emerging markets.4

Despite its predominance, few people actively choose to work in the informal sector. Wages tend
to be low, and there are few unions or other workers’ organizations with any power. Informal
businesses are also subject to exploitation, accidents, and unreliable supply chains, and there are
few mechanisms for legal protections or insuring one’s property. Due to the small scale of most
informal firms, as well as the general lack of literacy and education, informal workers have
difficulty procuring loans and expanding their businesses, so most enterprises tend to focus on
local needs.5 Such an environment leads to highly variable profits and constant stress, and most
informal workers must hold several different jobs at once to make ends meet. These unfavorable
conditions explain why informal firms are only about 25% as productive as small formal firms
overall.6

3 FEED, “Behind the Scenes with Soko,” FEED (blog), unknown date.
4 “Informal Economy,” International Labour Organization, 2016.
5 Ibid.
6 World Bank cited in Steve Daniels, Making Do: Innovation in Kenya’s Informal Economy, Analogue Digital,
October 7, 2010.

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The Kenyan National Bureau of Statistics estimates that the informal sector accounted for 83% of
Kenya’s employment in 2016, employing around 13.3 million people. Out of 832,900 new jobs
created in Kenya in 2016, a full 747,300 of those jobs were created in the informal sector. That
year, 2.7 million Kenyans worked in the informal manufacturing sector, including 0.5 million
craftspeople, comprising the second-largest workforce after agriculture.7

The breadth of the global informal economy could provide a massive, untapped opportunity for
the local processing of raw materials as well as the production of finished goods, on both domestic
and international scales. Despite a dearth of full-time employment opportunities, formal jobs
remain the ultimate goal for many informal workers across emerging markets; informal artisans
lack social services and many other forms of support, and full-time jobs tend to be more socially
prestigious. While networks of informal firms will never substitute for large-scale infrastructure
development, Soko’s virtual factory would demonstrate that the informal craft sector could become
integral to a new model for inclusive industrialization. “Many [jewelry] artisans are micro-
entrepreneurs,” said Peinovich, “living on less than US$2 a day, and working for that day to put a
meal on the table.”

Like most workers in the informal industrial sector, Kenya’s jewelry artisans had historically
lacked the resources necessary to innovate on their own. According to Peinovich, Nairobi lore held
that one man named George launched the metal-casting industry across Kenya, building furnaces
and torch equipment with local materials, and the knowledge had since spread through
apprenticeships and informal knowledge sharing. However, that had been decades ago.

More recently, around 1998, a collaboration between the Italian non-governmental organization
(NGO) Terra Nuova and the University of Nairobi revealed that water pumps could be retrofitted
into grinding machines. This led to a government-supported training program that introduced
precision horn and bone work to Kenyan artisans, who, up until that time, had used machetes and
other crude tools to shape their jewelry.8

By 2017, artisans were still purchasing water pumps and hiring local metal workers to convert
them into grinding machines. Terra Nuova had since moved on to other initiatives, however, and
innovation among jewelry artisans had mostly stagnated. To further upgrade their skills and
techniques, especially to meet the demands of international clients, they would need a new
intervention.

While individual microfactories may have lacked the financial incentives to upgrade on their own,
an aggregating company like Soko could deliver benefits via the collective improvement of all
suppliers. Thus, Soko was able to provide the expertise and organization needed to keep its
suppliers globally competitive, and all its artisans reaped the benefits.

Policy incentives for manufacturing and small business development played a significant role in
supporting, or discouraging, local production. The more that businesses saw value in informal-
sector firms, the more local policymakers might pay attention to the possibilities. The government
of Kenya had several legal structures in place to support small businesses; but their current “small

7 “Economic Survey 2017,” Kenya National Bureau of Statistics, 2017.
8 “Our Story,” Terra Nuova, 2015.

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and medium enterprise” category required a minimum of 15 full-time employees, so Soko did not
initially qualify. Peinovich admitted that Kenyan startups preferred “to remain under the radar” for
as long as possible, and in 2015 it was “practically impossible” for a Kenyan startup to get its
paperwork correct the first time. Indeed, Peinovich had to hire a tax attorney to deal with the
bureaucracy of Kenya’s accounting scheme for locally manufactured products—and then she
needed to navigate import/export regulatory systems both in Kenya and in Soko’s countries of
import. In contrast, the US African Growth and Opportunity Act reduced the taxes of some
imported products from certain African countries by 25%, and even eliminated some taxes
altogether. These tax cuts played a key role in helping Soko to reach the American market.

Networked Craft Production

One historical example of Soko-style networking across cottage industries was the practice of
“putting out,” in which a large manufacturer delegated work to a number of geographically
distributed artisanal workshops. Although most decentralized production along these lines had
disappeared with the advent of the Industrial Revolution, select industries found putting out to be
competitive with traditional mass production in certain regions. The Italian knitwear industry in
the 1990s, for example, was one case in which contracting to microfactories provided higher
overall profits for clothing manufacturers than traditional mass production. Production-rate
asymmetries in various stages of knitwear manufacturing naturally led to substantial inventory
costs for large factories, giving an advantage to the microfactories that produced their wares just
in time.9

Indeed, networked craft production maintained several advantages over traditional large-volume
production: minimal inventory, low upfront capital costs, the ability to utilize existing
microfactories rather than build new facilities, the creation of local employment and expertise,
increased factory agility, and potential savings on transportation costs. Upholding traditional rural
industries could also help to mitigate unsustainable urban migration by providing more jobs in
disenfranchised regions. As indicated by the high-end local food movement across the United
States and Europe, some consumers were demonstrably willing to pay a premium for ethically
produced and/or locally made goods. Although Soko’s artisans used only manual tools, Soko’s
production model bore similarities to the supposed promise of distributed microfactories
employing on-demand 3D printing and CNC machining.

Most importantly for emerging markets, networked craft production did not require the extensive
infrastructure needed for traditional industrialization. “We can aggregate small-batch production
into high volume,” Peinovich said, “and this allows us to compete in mainstream consumer fashion
markets.”

Just as Bangladesh “leapfrogged” landline telecommunications networks by jumping straight to
infrastructure-light mobile phones, some foresaw a similar trend for manufacturing. Why would
emerging markets—which already suffered from costly and convoluted supply chain logistics—
burden themselves with the outdated infrastructure of traditional, high-volume manufacturing in
sectors where distributed production could be equally competitive? Soko’s model offered a more

9 Mark Lazerson, “A New Phoenix?: Modern Putting-out in the Modena Knitwear Industry,” Administrative Science
Quarterly 40, no. 1 (March 1995): 34–59.

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inclusive and sustainable manufacturing paradigm for sectors that did not benefit from traditional
economies of scale: specialized components like airplane engines, customized or on-demand
products such as medical devices, and labor-intensive handicrafts like jewelry and apparel.10

Soko V1: Etsy for Africa

Soko began as a simple platform for informal jewelry artisans in Kenya to sell their own products
on the international marketplace—an Etsy.com with additional marketing support for Kenya’s less
technically savvy informal sector. While Peinovich and Mahugu built the mobile-to-web
marketing platform, Floyd curated a high-quality selection of jewelry sourced from artisans around
Nairobi. This platform became a virtual marketplace for informal artisans to sell their goods
directly to international consumers, so artisans wouldn’t have to rely upon locals, tourists, and
middlemen.

Unexpectedly, Soko’s team found themselves unable to consistently grow sales for their products
after six months—and, as with many marketplace solutions, Peinovich struggled to properly
manage everyone’s expectations. None of the co-founders had ever run a retail business, and
Soko’s early days involved many challenges. The team knew how to find and market excellent
products, but they lacked a sustainable business solution to reach profitability. They realized that
they were solving the wrong problem: Connecting Kenyan artisans to international markets would
never be enough, since the key challenge for artisans was the fact that they didn’t know what
international customers wanted to buy.

After exhausting their market of friends and family, Soko’s team had to come to terms with their
stagnating sales. They initially expected that wealthy North Americans and Europeans would be
willing to pay far more than Kenya’s local market for handicrafts, but Soko’s estimated price of
its handmade goods and the actual price that customers were willing to pay (given the proliferation
of similar machine-made goods) were, in Peinovich’s words, “completely misaligned.” As she
discovered through this failed Etsy model, it was very difficult to sell large volumes of diverse
products—especially when the artisans creating these products had little exposure to international
trends, no concept of foreign customer preferences, and no experience with quality control
standards. Every item in Soko’s online store turned out differently, and traditional Kenyan designs
were not always attractive to young, fashion-conscious consumers.

In other words, Soko’s Etsy for Africa would never amount to a profitable business. Peinovich,
Mahugu, and Floyd applied their design expertise to the problem and, after several harrowing
brainstorming sessions, they pivoted toward developing their own fashion brand rather than relying
upon local artisans as designers. Peinovich explained, “There’s a spectrum: At the far end you
have art, one-of-a-kind individual pieces [Soko V1]. Soko [V2] is somewhere between art and
small-scale manufactured products… Can we meet the volumes that we’re seeing in retailers?”

10 Anna Waldman-Brown, “Exploring the Maker-Industrial Revolution: Will the Future of Production Be Local?”
(working paper, Berkeley Roundtable on the International Economy, Berkeley University of California, 2016–17).

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Soko V2: Creating a fashion brand

Soko’s team never set out to develop a revolutionary production model, but they were not going
to waste an opportunity. “It’s not just simply product being sold to customers,” said Peinovich.
“There’s an entire value chain, an entire ecosystem that frankly we had to develop in order to make
Soko successful. But we did not start there.”

Soko’s co-founders always knew that their ultimate goal was large-scale distribution and
competition with major fashion brands; they did not intend to limit themselves to local craft
markets or niche fair trade companies, but they were unsure of how to stay competitive while
employing informal artisans. Peinovich’s passion for problem-solving eventually led Soko’s team
to revive a pre-industrial model of geographically distributed production, with the addition of
modern networking technology and smart algorithms to select the right artisans for the right jobs.

Soko’s eventual business model matched talented artisans with both an international marketplace
and highly competitive jewelry designs. Since Soko began with a strong commitment to supporting
existing brass artisans, the co-founders wanted to leverage their current ecosystem of skilled
jewelry artisans rather than build their own infrastructure or train unskilled workers. This also
allowed them to save on capital costs by contracting out to existing microfactories rather than
building their own factory. Nonetheless, as befits a new production model, Soko had to invent its
own manufacturing system. Peinovich said, “We’re building the next-generation supply chain:
more distributed, more agile, and more ethical. I see this as a necessary step in revolutionizing
retail and the fashion space as we see it today.”

Many fashion manufacturers viewed cottage industries as a potential liability in their supply
chains, due to a long history of factories outsourcing handicraft production (especially beadwork
and embroidery) to informal-sector subcontractors at exploitative rates.11 Peinovich, however, saw
these informal cottage industries as a potential asset. Soko eliminated middlemen through vertical
integration and direct interactions with suppliers, and further trained artisans so they were able to
earn above-market wages by manufacturing jewelry for a discerning global audience. Soko’s
business model turned semi-skilled informal artisans into highly skilled manufacturers for the
global jewelry market, providing them with the skills and resources to compete with the formal
sector on their own terms. “Formalization,” said Peinovich, “is not the answer. Rather, networked
infrastructure will bring progress.” Indeed, Soko’s virtual factory model of networked craft
production combined the scale, efficiency, and collective intelligence of high-volume
manufacturing with the benefit to local economies provided by small, artisanal businesses.
Peinovich explained:

We really asked ourselves: With the way that the retail sector is going and
consumption is leading us down this fast fashion path, the way that artisans are
really marginalized due to access, not talent, what if fashion and consumerism
could work for the poor rather than against it? At Soko, we believe that we can
enable human capital through the use of technology. And this is in contrast to
mass manufacturing, where technology is automating people out of the supply
chain. We at Soko believe that humans are our best asset!

11 “Standards for Ethical Compliance in Homes and Small Workshops,” Nest, December 2017.

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The technical innovation behind Soko’s operations, and its key piece of intellectual property, was
its mobile-to-web virtual resource planner (VRP), which allowed for the coordination of its
massively decentralized supply chain with minimum variability.

Figure 3. Soko’s Virtual Resource Planner (VRP)

Source: Gilbert Kimutai, Head of Technology, Soko

This system allowed Soko’s small-batch production model to compete with (and sometimes even
outperform) traditional mass producers. Soko designed its jewelry in-house, sent these designs out
via mobile app to the most suitable artisanal workshops for any given product, provided in-person
training and support for artisans making new products, and finally collected all completed items
at its central office in Nairobi for finishing, quality control, packaging, and distribution. Since all
orders and payments were digitized, Soko was able to continually improve which artisans were
selected for which jobs based on machine learning algorithms. Soko also kept up-to-date on trends
of which particular skills were in rising demand based on market shifts, so the company could train
artisans in new skills when necessary and thus keep all its suppliers employed for the long term.
Peinovich explained:

We have constant data about every single artisan group that we work with, so
we can actually tailor every …

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