Igniting Startup Companies in Chile

The economic development agency of the Chilean government, CORFO, believes that companies in Chile started by foreigners should be subsidized. Start-Up Chile plans to grant $40,000 to 1000 companies with few strings attached. Will Start-Up Chile succeed or fail?

The Bill and Melinda Gates Foundation and other organizations try to solve problems by identifying a specific point of intervention and applying their efforts against a theory of change. Unfortunately, Start-Up Chile refuses to identify a specific point of intervention, as Steve Blank advised after his visit to Chile last December:

My sense is that Chile has not yet “declared a major.” Saying that you support entrepreneurship and innovation is a start, but the sentence needs to be finished. Entrepreneurship and innovation in what field? …. alternative energy? materials science? food science? cellulose outputs? video games and film? South American web commerce hub? automated mining? UAV’s?

Start-Up Chile lacks focus and rejects Steve Blank:

We accept projects from all business scopes ranging from biotech to energy to mobile and beyond. Throughout the 2010 pilot phase, there have been a number of Start-Up Chile participants who exemplify the diversity that the program strives to seek.

The second part of the Gates Foundation principle, applying efforts against a theory of change, implies that the government should justify intervention into a healthy free market by identifying the supposed “market failure”; in other words, telling a story that describes a process in which the intervention will be phased out and the free market revives.

Marxists need no story because they assume that free markets always fail, but capitalists, including investors and entrepreneurs that might consider applying, are persuaded by a credible story where everybody prospers, including taxpayers, investors, and companies in Chile. If entrepreneurs sense that something is hidden in the “fine print” or that taxpayers are being fleeced for the benefit of the infotech industry, then it will hinder efforts to attract the goal of 300 entrepreneurs during the next 12 months.

There is no statement of a problem that Start-Up Chile is trying to solve that justifies a government intervention, nor is there a proposed theory of change to solve the supposed problem, but this video provides clues:

The video stresses the value of connections between Chile and the rest of the world. Chile believes that it is isolated and thus not reaching its full potential. While Chile is further than Mexico from the United States and Europe, it is closer than Australia and India, both of which are not only more isolated, but suffer from time zone incompatibility, while Chile is on New York time half the year and only two hours away during the remainder.

The Internet and Skype have broken barriers of isolation, so India and Australia have built thriving infotech industries, while Mexico has failed despite adjacent to the wealthiest region in the world. Chile is exaggerating a minor disadvantage into a major “problem” that doesn’t exist! I suspect that the government of Chile overvalues connections because it is a society where who you know matters more than what you know. Fortunately, Europe and the United States became rich because they better approximate meritocracies.

Chile is ignoring its greatest strength – it is much more than an “upside-down” California in a compatible time zone offering a $40K handout. Abinash Tripathy, writing from India, describes why Chile is a better place to start a company than India or China:

I know two young very dynamic European founders in Pune who decided to make India their home and setup their services startup. However, the Indian government has dished out nothing but red tape and bureaucracy to these founders instead of embracing them and providing them all the support they need to succeed. These two young founders have setup a company that grew to 30 employees (all Indians) in just a year and are bringing in significant $$ from mostly european customers. These young entrepreneurs have faced all kinds of government red tape all the way from having to pay bribes to immigration issues.

Chile is a unique country because it embraced the economic philosophy of the Chicago Boys by reducing the portion of the economy consumed by government from 34% during the Allende administration to 19% today. Government debt is low and some regulatory barriers were removed, too, although doing business in Chile would be easier if more laws were repealed. Ironically, the United States has rejected the philosophy that is responsible for Chile’s success!

Steve Blank identifies another reason Start-Up Chile will fail:

Perhaps it was just who I was meeting, but for a country so focused on innovation and startups the lack of venture capitalists was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the place would have been crawling with VC’s fighting over deals. Instead it felt like the government – through CORFO – was doing most of the risk capital investing. Given that great VC’s are much, much more than just a bag of money, this means that startups lack experienced board members with practical experience.

Start-Up Chile would establish more credibility with investors if the private sector were partially funding the program. If investors and philanthropists paid 20% of the costs and that portion were scheduled to increase to 100% in a few years, investors could help select, screen, and mentor the applicants, as well as identify niches where companies in Chile could specialize. Nobody values something that’s free.

Start-Up Chile is also failing because it is attracting mostly infotech entrepreneurs, a market in the midst of an investment bubble where foreign angels are monopolizing the best deals. Chile is more likely to profit by serving an unmet need that foreigners have overlooked or unable to fill. The success of Chilean infotech company Needish, bought by Groupon and renamed ClanDescuento, which received no government subsidies, shows that foreign investors are aware that Chile has been the fastest growing American country during the last 20 years.

CORFO should suspend the Start-Up Chile program until it can assemble a private sector coalition that will pay 20% of the expenses at the beginning and all costs after an incubation period of two years. As the private group is assembled, niches where the country should specialize and be successful should be defined. If a private group cannot be formed, then CORFO should abandon Start-Up Chile.

CORFO should also require that any company attracting private funding pay a 5% commission on the first million dollars raised. If fewer than 30% of the companies in Chile attract funding, then the program should be considered a failure. CORFO seems to believe that $40m is not much money, and that the program would be a success by attracting 1000 entrepreneurs that accept a $40,000 handout. A government program should benefit all citizens rather than a faction.

Start-Up Chile should attract investor partners and clarify goals with clear objectives. It can mean the difference between success and failure as they attempt to catalize a culture of innovation and entrepreneurship for companies in Chile.

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