Start-Up Chile

By Maximiliano Santa Cruz S., National Director, National Institute of Industrial Property, Eduardo Bitrán C., Executive Vice-President, and Inti Núñez U., Entrepreneurship Manager, CORFO, Chile

In a bid to transform Chile into a hub for innovation in Latin America, the Chilean government launched the Start-Up Chile program in 2010. This ambitious initiative, a first in global innovation policy, has attracted considerable global attention. The initial aim of the program – its focus has since broadened - was to attract young entrepreneurial talent from around the world to Chile to catalyze the development of home-grown, high-growth start-ups; this with a view to strengthening Chile’s long-term economic growth prospects.

Rolled out under the direction of CORFO, Chile’s development agency, this novel business accelerator program, now in its fourth year, is being restructured to increase its economic impact on the national economy and to strengthen the country’s entrepreneurship culture and its innovation ecosystem.

Under the pilot scheme, successful applicants were offered US$40,000 in seed capital, a work visa and office space to launch their companies. The only requirement: spend 6 months working in Chile to establish their companies (there was no requirement for the start-up to begin activities in Chile) and engage in innovation and entrepreneurship outreach efforts with students and local businesses. The response was overwhelming. Competitions to select suitable candidates were held three times a year, attracting over 5,000 applications from which over 240 projects were selected each year.

To qualify, applicants could submit either early-stage ideas without prototypes or projects that were less than two years old. A key criterion for selection, however, was the scalability of the proposed business models.

In a move to boost the development of Chilean start-ups, the program, which initially targeted foreign applicants, is now open to Chilean entrepreneurs. In the last round of applications, 35 percent of applicants were Chilean, 30 percent of which were admitted to the program. The program’s emphasis has also shifted away from spawning high-growth, billion dollar companies, towards the broader goal of fostering a country-wide pro-innovation entrepreneurial culture. In just four years, Start-Up Chile has emerged as one of the most respected publicly-run business incubators in Latin America.

Initial achievements

In addition to attracting high-caliber foreign entrepreneurial talent to Chile, the program has established a credible, transparent and efficient process for connecting the country’s start-ups with world-class innovation and entrepreneurship ecosystems.

Chile has also acquired international recognition as a country willing to develop a forward-looking policy approach to innovation and entrepreneurship. The program has put Chile on the map as a favorable place for business, inspiring similar programs in many other countries.

A 2013 survey of Start-Up Chile grantees during the period 2010 to 2012 showed that around 83 percent of Chilean entrepreneurs started their activities in Chile. Just 10 percent of Chilean grantees started their businesses outside Chile. The majority of projects run by foreigners (59 percent of the total), however, were operating outside Chile (only 24 percent of foreign grantees started their businesses in Chile), suggesting that many foreign grantees saw the program as a means of securing seed capital without having to give up any equity to third parties. It also suggests that these projects found networks, markets and opportunities for raising a second round of equity funding more accessible outside Chile.

Equity funding, employment and sales

Weaknesses in Chile’s venture capital sector became all too clear in rolling out the project. Projects initiated in Chile attracted just US$26 million in equity funding, whereas those starting operations abroad raised, US$72 million - more than twice as much. However, in terms of the average amount of capital raised by individual companies, the survey showed that many more Chile-based start-ups raised capital than those with operations outside the country.

Of the 149 companies in Chile, 96 raised on average US$270,000 each; while of the 199 based outside Chile, just 86 raised additional funding (on average US$840,000 each). Many of the start-ups raising equity outside Chile had access to early-stage risk capital, while those in Chile relied on State or other funding. Only exceptionally were Chile-based start-ups able to obtain venture capital.

In terms of employment creation, a significant number of Chile-based start-ups hired an average of 6 workers. Many of the start-ups operating outside Chile, however, also retained staff (2.9 workers on average) in Chile for programming and support activities, taking advantage of wage cost differentials.

Of the 149 Chile-based start-ups 96 (65 percent) had average annual sales of US$119,000 although only 49 percent of them had clients outside Chile. The pace of business development as a function of where start-ups are established will make for interesting future analysis.

ICTs stand out

Although Start-Up Chile favored no one business sector, over 80 percent of funded projects related to information and communications technologies (ICTs). This, however, may well have resulted from the online application process, the resources available under the program and the way in which it was promoted.

Program’s sustainability questioned

Despite its significant achievements, some have questioned the long-term sustainability of the program. Measured against similar, earlier initiatives, Start-Up Chile may appear to fall short in terms of its benefits to the Chilean economy. For example, only 37 percent of Start-Up Chile participants between 2010 and 2012 began activities in Chile, compared to CORFO’s Seed Capital Program (which provides up to US$120,000 in seed capital to selected ventures) where around 94 percent of funded companies began activities in Chile (according to a survey covering 2008 to 2012).

Data, although incomplete, also suggest that business survival rates under the Seed Capital Program are more than twice those of the Start-Up Chile program. However, after factoring in the differences in the programs (and the bigger grants and higher administration costs of the Seed Capital Program), it is not at all clear that the impact of the Seed Capital Program (in terms of employment, investment and company formation) is so much greater than that of Start-Up Chile.

Interestingly, under the Seed Capital Program, only 16 percent of grant beneficiaries operated in the ICT sector, compared to around 54 percent under the Start-Up Chile program. In the digital economy, traditional economic metrics do not fully capture the positive impact of Start-Up Chile, in particular, its ability to foster global relationships in the area of innovation and entrepreneurship. Participants in Start-Up Chile effectively join a global network of forward-looking entrepreneurs and benefit from rapid and easy access to valuable resources, including mentors and investors, creating significant opportunities for entrepreneurial and innovative talent to grow.

Catalyzing innovation in Chile

The introduction of high-caliber, well-connected foreign entrepreneurs is also catalyzing innovation and entrepreneurship within Chile. When foreign entrepreneurs interact with their local counterparts, albeit for short periods, business practices and skills and understanding of product development and commercialization are strengthened.

Effect on entrepreneurial skills of Chilean participants in Start-Up Chile

A recent change in Government, however, has prompted a re-think of the program’s place in the country’s economic growth agenda. Now that the program is well established and has acquired international reknown, how can it be improved to support national development goals?

Start-Up Chile Mark II

In restructuring the program, the aim is to translate the investment, prestige and quality of the talent cultivated by Start-Up Chile into tangible national economic growth by encouraging more rapid rates of company formation and expansion to boost sales, income and job creation in Chile. Particular attention will be paid to improving access to business finance and to strengthening intellectual property (IP) awareness so start-ups can more easily scale up their operations in Chile.

Previously, after the required six-month stay in Chile, many foreign-run start-ups moved back to their home countries. Under new arrangements, funding will be more rigorously structured and geared towards encouraging start-ups to continue their activities in Chile. In addition to seed capital of US$40,000, which will now be disbursed in two phases to ensure the commitment of participants, projects that demonstrate high growth potential can also apply for a non-refundable grant of US$120,000. Thereafter, innovation and technology projects which raise funds in Chile will be eligible for up to 50 percent of their equity funding under a specialized Early Investment Fund to be set up in late 2014 (See Figure 2).

Restructuring the Start-Up Chile Program, 2014

Another priority will be to link participants into more sophisticated and complex industrial networks so they gain first-hand experience of tackling industry challenges.

A new IP focus

Corfo and INAPI are working together to ensure that Start-Up Chile applicants and grantees are familiar with how IP can create business value. IP training programs covering all aspects of the IP system – from trademarks, patents and utility models to trade secrets and copyright – will be available.

Practical workshops on, for example, the advantages of using public databases, such as WIPO’s PATENTSCOPE, to enhance product development and quality; patent drafting and IP licensing; and various IP evaluation tools (such as those available under INAPI-Proyecta) to support effective IP management will also be offered. The aim is to ensure that all participants know how to use the IP system to protect their valuable IP and can develop an effective business strategy that will enable them to generate, protect and transfer their IP within Chile and abroad.

Other areas of focus include creating opportunities for Chilean entrepreneurs to enter into joint ventures with counterparts in Latin American and beyond; identifying global challenges to attract talent to different regions of the country to foster links between start-ups and industry; and encouraging the repatriation of Chilean talent educated abroad.

With these measures, we anticipate that within three years, Chile will have at least three innovation hubs operating. While global in scope, these hubs will address local problems, provide high-quality employment and further catalyze a culture of innovation. Since its inception, Start-Up Chile has disrupted the national innovation and business landscape, introducing fresh, new ideas and enabling local entrepreneurs to gain access to global innovation and business networks. While some business circles have questioned its future, Start-Up Chile is thriving and now lies at the heart of the country’s innovation strategy. As such, it will continue to shape the future evolution of entrepreneurship and innovation in Chile and enhance the economic prospects of a country that remains overly dependent on its natural resources.