Shift EV and Algebra Ventures on how to build a successful green business: We sat down with Algebra Ventures Managing Partner Karim Hussein (LinkedIn) and Shift EV CEO Aly El Tayeb (LinkedIn) at the Enterprise Climate X Forum last week for a deep dive into how some successful climate-friendly business are proof of concept for all the climate investment and green growth we discussed at the forum.

Case in point? Egyptian electric mobility startup Shift EV has built a green-energy focused business targeting the acceleration of Egypt’s EV transition — all while overcoming regulatory and market challenges. The potential of their model led Egypt-based venture capital fund Algebra Ventures — which backs tech-focused startups that seek to transform industries, but which isn’t a climate fund — to stretch its mandate to invest in the venture.

Shift EV produces EVs by taking existing vehicles and replacing their internal combustion engines with its own-design, made-in-Egypt battery packs, said El Tayeb. The process costs a few thousand USD and can be done in a couple of hours per vehicle, he added.

There’s significant savings involved: Upfront costs are low and by switching to electric, customers — many of whom are fleet owners operating in delivery or logistics — save some 80% of their operating costs. Commercial EVs are also broadly unaffordable for the MENA market: “It’s a no-brainer that the [USD 70k] Rivian pickup truck won’t be moving groceries in Egypt this decade or next,” El Tayeb said.

Shift EV offers a solution with economic and environmental benefits: Only 10% of the new vehicles added to the road every year are EVs, suggesting a 50-year timeline for a full global transition to EV usage, which is “unacceptable, from an economic and climate perspective,” said El Tayeb.

The company started small and initially self-financed, starting by building prototypes of the vehicles and batteries then testing the waters with prospective customers. When they set up a company at the end of 2020, they decided not to raise capital. They had potential revenue streams — with demand for their batteries as an independent product notably high — and no substantial overheads, El Tayeb noted.

What changed: They decided to raise capital for the chance to work with investors they respected and were aligned with, and to capitalize on the growth prospects. “It didn’t make sense to operate for five years at a bootstrapped, slow pace when we could build something faster,” El Tayeb said. Shift EV raised about USD 9 mn last year, he added.

From Algebra’s perspective, Shift EV’s model and scaling potential made it an appealing investment. “They had the right experience and were a cohesive group,” Hussein said. “We thought it was an elegant solution to a very pressing problem.”

Shift EV has also overcome many of the issues that were there when it first pitched to Algebra: “There wasn’t a factory, or regulation in place to allow for retrofitting when Aly first pitched to us,” Hussein said, but El Tayeb and his team broke barriers. As of a few months ago, Shift EV’s retrofitted vehicles can be fully (and simply) licensed by the authorities in Egypt. Customers bring their vehicles to Shift EV’s factory, they’re converted, and the company provides a letter to Egypt’s Interior Ministry, which then provides customers with a license, said El Tayeb.

How they got there: A lesson on working with regulators: “We assumed regulators were technical experts who wanted technical guarantees that what they’re allowing customers to use is safe,” said El Tayeb. Shift EV used global EV safety standards for reference and then piggybacked on the process of establishing the technical safety of new cars. When all paperwork and test results were presented to the relevant authorities, what was ultimately needed was a small change in the Interior Ministry’s internal regulations, said El Tayeb.

Articulating a clear value proposition was an important part of the process, El Tayeb said.

The Shift EV team was able to demonstrate that the company meets several important needs for Egypt — attracting FDI to manufacturing and addressing the cost challenge of the EV transition, he said. “We weren’t asking for massive subsidies — just the freedom to operate,” he added.

Now the company’s big priority is scaling: “We have a product, factory, and regulatory framework that all work, and we have a customer base that’s strong and growing. So we’ve been thinking, how does this business look at scale?” El Tayeb said.

Equity financing is one way to scale: Along with Algebra, Shift EV has several other investors — including US-based VC Union Square Ventures. Still, “in the end we don’t want to convert every vehicle in the world on equity,” he added.

Carbon credits could eventually play a major role: “Carbon credits are real” and voluntary carbon markets are a great avenue for financing, although this isn’t tangible for Shift EV today, El Tayeb said. There was a growing market for them in Egypt in 2007, and though priorities shifted when the financial crisis hit in 2008, they’re likely to make a comeback, he added.

Emerging tech could help to develop the carbon credit market — particularly overcoming the existing challenges of verification and certification, noted Hussein. “I think there are a bunch of businesses working in data, analytics and certification, where technology can act as an enabler, to unlock carbon credits and enable a company like Shift EV to be able to access them and trade them on the market,” he added.

Financing bodies need to be aware that they’re helping to grow the asset classes of the future, El Tayeb added. “There are in Egypt 1.5 mn vehicles and fleets that need to become electric, and we need to find a way to finance that.” This is a new asset class — one that we could think of as being comparable to future solar projects, El Tayeb added.

It’s all about demonstrating bankability: Establishing bankability starts with one small agreement with a financial institution, allowing companies to continue proof of concept and paving the way for “a flood of capital,” said El Tayeb. Though concessionary climate finance is increasing globally, a greater selection of bankable projects is still needed, he said. “But they can’t all be megaprojects. It has to also be a new class of problems, which require a new class of solutions — and that’s very difficult to finance today.”

Looking at VC climate tech investment more broadly, Hussein identified several areas of potential interest, including using tech for waste reduction and logistical efficiency in agriculture; supportive tech for large infrastructure projects — ranging from tech that monitors energy usage or increases energy efficiency to tech that uses chemicals and nanotechnology to repel dust from solar panels, reducing maintenance costs; and tech that makes reuse and recycling more efficient.

But some interesting fields might require a rethink of financing structures: While there are interesting prospects in using biomass as feedstock for local production, it’s a challenging area for VC investors since life sciences are very long-term investments, noted Hussein. Manufacturing investments — also arguably underrepresented from a VC perspective — could work best with an investment vehicle somewhere between a VC and private equity that can support very early-stage businesses, with a clear growth trajectory and a de-risked tech structure, Hussein added.