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Chile Keeps Nurturing Seeds for ‘Chilecon Valley’

23 August 2015

(WSJ) When Andy Josuweit graduated from Boston’s Bentley University, he didn’t head to Silicon Valley to pursue his tech start-up dreams. Instead, he packed his bags and flew to Chile, lured by a government program offering a residency visa and $40,000 in funding to entrepreneurs from around the world.

The program, called Start-Up Chile, was launched in 2010. Its goal was to reduce the country’s dependence on commodities by becoming Latin America’s innovation and technology hub—a bold experiment hailed by economists who have long lectured resource-rich nations on the need to diversify.

Five years later, the results are mixed. Start-Up Chile has put a country best known for its vast copper mines on the radar of global techies, who have nicknamed Santiago, its capital, “Chilecon Valley.” Almost 18,000 start-ups from 130 countries have applied. And about 1,050 firms from 77 countries, 20% of them Chilean, have been accepted into a program that requires them to operate here for at least six months.

The influx of start-ups is credited with boosting local interest in entrepreneurship. Supporters say it has changed Chileans’ attitudes and provided them with a global network of business contacts.

But since Start-Up Chile spent $40 million on grants, its economic achievements have been limited. About 80% of the foreign firms that are accepted leave after meeting the required six-month stay. Some 300 new companies are accepted annually, but the large portion opting to depart highlights the obstacles Chile still faces in fostering entrepreneurship and innovation outside its core industries.

Josuweit, a 28-year-old from Pennsylvania, returned to the U.S. after eight months. He now runs Student Loan Hero, a student-loan repayment service, from New York. “That is where our customers are, and we felt we needed to be doing customer interviews and being close to that demographic,” Mr. Josuweit said.

Aljosha Novakovic, a 25-year-old graduate of the University of California, Santa Barbara, returned home to San Francisco after 1½ years in Chile running Medko Health, which helps Americans find reputable doctors abroad.

“The investors and the advice that you receive there and here is a little different,” Mr. Novakovic said. “There aren’t that many sophisticated investors, people that are true start-up advisers, in Chile. So there isn’t as much incentive to stay.”

Tech funding in Latin America remains far lower than in the U.S., but it is growing fast. Last year, venture-capital deals in Latin America totaled $526 million, up from $63 million in 2010, according to the New York-based Latin American Private Equity and Venture Capital Association. Most of the money managers are in Brazil and Mexico, the region’s largest markets.

Chilean and foreign entrepreneurs say the lack of early-stage investors is only one snag when trying to expand here. Investors often demand a big stake—and sometimes a controlling interest—in a company.

“Raising funds is insanely hard,” said Francisco Troncoso, a Chilean entrepreneur and a co-founder of Uanbai, which allows companies to receive payments on Twitter and other social media. “They don’t understand entrepreneurship. They want the security, the done deal. And they want a big cut.”

Meanwhile, diversifying Chile’s economy has become more urgent as demand for copper, the nation’s top export, has declined. Last year, Chile’s economy grew just 1.9%, down from 5.8% in 2010.

Chile has a lot going for it. Businesses are attracted to its political stability and its ranking as one of Latin America’s least-corrupt countries. Residents enjoy its wine, snow-capped mountains and rugged coastline.

But new businesses in Chile still face complications. The World Bank’s 2015 Doing Business report, which compares regulations in 189 countries, lists Chile below Colombia, Mexico and Peru in terms of the ease of operating a company there.

Alberto Rodriguez, the World Bank’s country director for Chile, Bolivia, Ecuador, Peru and Venezuela, said that the countries need to create a more business-friendly environment by focusing on such areas as regulation and infrastructure.

“That is where Start-Up Chile concerns me a little bit,” said Mr. Rodriguez, who thinks the program is still a “fascinating” initiative. “They are helping a lot of companies to start, but the evidence of their growth is very limited.”

Hernan Cheyre, the former vice president of Corfo, the government agency that oversees Start-Up Chile, said that President Michelle Bachelet’s recent tax reform and plans to change the labor code could hurt entrepreneurs while other regulations continue to undermine competition.

“If we just focus on more public grants for projects but don’t create the conditions to have an open field for anyone to challenge an [established competitor], like Steve Jobs did with IBM, we will get nothing,” he said.

Some Start-Up Chile skeptics also question whether it has brought in the types of entrepreneurs who can build on Chile’s current strengths, such as mining or agriculture.

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“The idea that Start-Up Chile could create a Google in Chile is nonsense,” said Gonzalo Rivas, the head of the government’s national innovation council. “You need to build from where you are really strong. If you’re able to sell to a mining company operating in Chile, you know that you are going to be able to sell to any company in the world.”

Indeed, it is those Start-Up Chile companies that have keyed off the country’s economic strengths that have been successful. Biofiltro developed an organic wastewater-treatment technology that it deployed in Chilean wineries, food-processing plants and dairy farms before expanding to similar industries in California. Bureo makes skateboards from fish nets recycled from Chile’s fishing industry that it sells online and in the U.S.

Start-Up Chile says it is working to get more of the entrepreneurs to stay. This year, it started a follow-up fund to provide select companies with an additional $100,000. This time, though, the firms have to incorporate in Chile, agree to stay at least a year, provide mentoring to prospective entrepreneurs and meet other requirements.

“Economic development in Chile was losing opportunities, and we thought we could do something about it,” Sebastián Vidal, the executive director of Start-Up Chile, said at the program’s workspace, where entrepreneurs huddle over their laptops or lounge on couches while brainstorming new ideas. “We strongly believe the entrepreneurs can stay and create companies in Chile and then grow abroad.”

Devin Baptiste, a globe-trotting entrepreneur from Houston, didn’t plan to stay in Santiago after Start-Up Chile accepted him in 2013. His business, Group Raise, was already expanding across the U.S., helping restaurants host large group meals in exchange for donating some of their sales to charities.

But after qualifying for the $100,000 follow-up fund, Mr. Baptiste decided to use Santiago as a test market for expanding his business in Latin America.

“I thought it was going to be much harder to explain the concept,” he said. “But the restaurants in Chile get it even faster than in the U.S. I literally have five-minute meetings where they say, ‘Ok, I get it, when are we going to do this?’”