Arnon Kohavi, head of Yarden Venture Capital, announced this week that he is leaving Chile because he was unable to raise capital for his fund. He hoped that with matching funds available from the central economic planning agency of the Chilean government, CORFO, he could attract sufficient interest from local investors.
It’s a shame that Kohavi doesn’t read the Start-Up Chile section of this blog, as he could have saved himself much trouble. Investors in Chile are similar to investors in Arizona; they invest in what they understand. Most of the capital in Arizona was earned in real estate, so they are uncomfortable investing in technology, although some recent migrants who earned their fortunes in information technology are investing in tech startups. Similarly, capital in Chile was earned in mining, food, and wine, and those investors aren’t likely to invest in infotech, either.
Chile must find the intersection of traditional businesses and infotech that Arizona exploits. For instance, an investor in a large retail chain with headquarters in Arizona is considering investing at seed stage in a product to improve Internet marketing, and even though he ordinarily avoids technology, he recognizes that retailers benefit from using products that make retailers more visible than the competition on the Internet.
Kohavi also violated the first rule of investing: don’t finance any investment that cannot profit without government subsidies. Functionaries and politicians are irrational, erratic, and restrict business managers. Worse, most have never managed a successful business, they don’t care whether you profit or lose capital, and believe that businesses can tolerate continuous bureaucratic abuse.
Kohavi was also hindered because proud Chileans are mentally isolated and provincial. For example, I had a Venezuelan friend in Santiago who spoke Spanish as a first language, whose job included translating standard Castilian Spanish to the local Chilean dialect. Kohavi insists that Chileans make presentations in English because that’s the standard world business language. Nevertheless, Chileans ignored him, insisting on speaking Spanish! In contrast, Asian entrepreneurs work hard to master English, and Kohavi is accustomed to evaluating their investment proposals. Although the education vouchers system in Chile produces the best educated Latin Americans, Argentines and Mexicans speak better English.
Chileans are dismayed because Kohavi capitulated in 6 months, a short time by Latin American standards, but entrepreneurs in the USA expect to raise capital from strangers in 60-120 days. Six months is a long time in technology! Chile is a society of mistrust where negotiating a contract is a protracted ordeal, and after a contract is signed, Chileans don’t hesitate to ignore the terms, disparaging the other party. Kohavi should have researched Chile thoroughly, and learned that venture capitalists in Santiago prefer to invest in the USA. Entrepreneurs in Chile prefer to raise capital in the USA, too.
Chileans were hoping that Kohavi would attract foreign capital rather than compete ineffectively for investors in Chile. They believed that after investors such as former Google CEO Eric Schmidt of TomorrowVentures invested in a software developer in Santiago, Welcu, other investors would follow. Unfortunately, Chile must make wrenching cultural changes to attract more foreign investors in software technology.
Arnon Kohavi informed La Segunda newspaper that the tree of Chile is insufficiently mature to bear fruit:
The key is the private sector because it’s the market that gives you money. New entrepreneurs like Daniel Undurraga of Groupon sell businesses and have money, and they want to help the new generation. People like him are becoming role models. But that takes time, perhaps 5 to 10 years.
Kohavi is relocating to Singapore, which was a Third World country 50 years ago and today boasts per capita GDP higher than the USA, Norway, Switzerland, Germany, and Hong Kong. Chile may enjoy a superior climate to Singapore, but better government is more important to many investors.