When Nathan Lustig, a 26-year old entrepreneur from Wisconsin, arrived in Chile in 2010 to develop his digital estate planning start-up Entrustet with cash provided by Start-Up Chile – a government program which gives entrepreneurs US$40,000 each to spend six months developing their ideas in Chile – he found that many of his Chilean friends weren’t too excited about entrepreneurship.
“Many looked at entrepreneurs as simply unemployed,” he says.
But that has changed according to Lustig, who sold Entrustet to a European competitor last year and returned to Chile in January to join Welcu, a corporate event management start-up.
“Chile still has a long way to go to match the US entrepreneurial culture, but things are moving in the right direction,” he says.
This is shown by the growing number of Chileans taking the entrepreneurial plunge. Since President Piñera took office in March 2010, Chileans have started over 100,000 new businesses, which was the government’s goal for its four-year term. This includes 15,007 in the first three months of this year alone, up 37% from the same period in 2011, according to figures from the Ministry of Economy.
These figures are particularly impressive in an economy at, or close to, full employment. Around 30% of total entrepreneurial activity in Chile is still out of necessity, and most new businesses have less than five employees, but the percentage with the ambition to grow is climbing.
According to the 2011 report by the Global Entrepreneurship Monitor (GEM), 23.7% of Chileans surveyed said they had started a new business within the last three and a half years – roughly 1 in 4 Chileans – compared to 17% three years ago. Of these, 17.6% said they planned to hire 20 or more people in the next five years, which is up from 14% in 2009.
“The report shows Chile has reached an inflection point in terms of entrepreneurial activity,” says José Ernesto Amorós, director of research in the Economics and Business Faculty at the Universidad del Desarrollo, which participated in the GEM study.
Part of the surge in new business creation, after a decade of sluggish growth, can be explained by a cultural change in Chilean society in the last five years that has increased the “social valorization” of entrepreneurship, says Amorós.
And, as entrepreneurship has become fashionable, the number of small business owners calling themselves “entrepreneurs” – from the empanada vendor on the street corner to the founder of an Internet start-up – is rising.
“Being an entrepreneur still isn’t cool in many circles, but as success stories come out, some attitudes are changing,” observes Lustig.
According to Cristián López, executive director of the Chilean association of entrepreneurs (ASECH), Chile feels like Silicon Valley or Israel – a small country, like Chile, which has developed a huge high-tech industry in the last decade.
“It’s exciting, a lot is happening in terms of entrepreneurship,” says López. “Chile is starting to be seen as a country of entrepreneurs, which it wasn’t a few years ago.”
The Year of Entrepreneurship
But Chile’s entrepreneurial explosion would not have been possible without public support. President Piñera understands the importance of entrepreneurship as a tool for increasing social mobility and meeting his government’s goal of making Chile a developed country within this decade.
In fact, he has declared this to be Chile’s Year of Entrepreneurship to be followed next year by the Year of Innovation. This includes measures to reduce paperwork for entrepreneurs and a series of events throughout the country organized by the government’s Economic Development Agency (CORFO).
“Today, there is much more concern for entrepreneurs than ten years ago. This government has put a lot of emphasis on this issue,” says Andrés Concha, the president of Chile’s manufacturers’ association, Sofofa.
For example, it has reduced the time required to start a new business from 27 days to seven, and a bill currently before Congress would allow this procedure to be completed in a single day at zero cost, which Concha says would be a blessing for entrepreneurs.
In January, CORFO created a new Entrepreneurship Division to coordinate and expand the agency’s programs in areas such as venture capital, loan guarantees and seed capital. But it’s not only about the money, says Cristóbal Undurraga, CORFO’s manager of entrepreneurship.
“Money is important, you need it to grow, but there is much more to making a successful business,” he says.
According to Undurraga, entrepreneurial spirit, like athletic ability in soccer players, is innate in Chileans, but CORFO must create the conditions for them to thrive. “Many Chileans have the skills to succeed, they just need the right environment,” he said. “We’re trying to create an ecosystem of entrepreneurship.”
This starts with education. In this regard, CORFO has created a program that has benefited 40,000 students by getting them excited about entrepreneurship from an early age.
Chilean women are another largely untapped source of entrepreneurial potential. Some 45% of women are not currently part of the workforce, but CORFO is working with 10,000 women throughout the country to help them start their own businesses.
“We believe entrepreneurship is an important vehicle for women to create value for themselves, their families and the country,” says Undurraga.
CORFO’s programs are national, but the proximity to clients and support networks makes it easier to develop high-tech businesses in Santiago. Start-Up Chile, which has selected over 300 start-ups from around the world through five rounds of applications, is also biased towards Internet ventures that can be easily moved on a plane.
“Chile’s a great place to be if you want to target South America,” says Nathan Lustig.
Elsewhere in the country, reconstruction after the February 2010 earthquake helped to drive entrepreneurship in the hardest hit areas, but it is also climbing in areas that weren’t affected.
According to the GEM study, the highest rates of entrepreneurship are in the northern regions of Antofagasta and Tarapacá – 27% and 29% respectively, versus 24% in Santiago – mainly due to growth in services related to the mining industry.
The rate is also growing in southern Chile, especially in areas related to agroindustry and tourism, but the regions of Valparaíso, Santiago and BíoBío have the lowest overall rates because they offer more employment opportunities.
“The opportunity cost of entrepreneurship in these areas, especially in Santiago, is much higher,” points out Amorós.
Barriers to entrepreneurship
Despite efforts to reduce red tape, there are still important obstacles for entrepreneurs, especially in terms of access to banking services.
CORFO’s programs and better protection for intellectual property have had a positive impact on entrepreneurship, but more could be done, says ASECH’s López.
For example, in some cases it’s almost impossible for entrepreneurs to open a bank account. Many banks require IVA sales tax receipts, which is a problem when you’ve only just created your company. “If you don’t have a bank account, you don’t have a place for clients to deposit payments and this creates a vicious cycle,” says López.
Then there is the high cost of financing. Even with CORFO guarantees, banks are reluctant to loan money to early stage entrepreneurs who are considered very risky. Even if they do succeed in getting a loan, they are charged relatively high rates.
“This is a major obstacle to entrepreneurship and something we’re working on,” says CORFO’s Undurraga. “But this can not only come from the government, it’s a public-private effort.”
There is also the social stigma attached to failure. While this is considered part of the normal business process in other countries, in Chile it can mean difficulty in obtaining loans and even the end of a career.
Part of the problem is Chile’s bankruptcy legislation. It can take months for entrepreneurs to extricate themselves from a doomed venture and, by the time they do, their assets have shrivelled. In the United States, lenders recover about 80% of the value of their investment, versus about 30% in Chile.
But the government is working to change the law to make it simpler and faster to close a business. “This represents a significant change from the past where bankruptcies were synonymous with death of the enterprise and the entrepreneur,” says Concha.
Finally, another obstacle is the high concentration in some sectors of Chile’s economy. This is a fact of life for entrepreneurs everywhere in the world, but even more so in Chile’s small market.
By bringing entrepreneurs together, however, ASECH is trying to level the playing field. “We’re not asking for a free ride, but the self-made man needs a chance to make it on his own,” says López.
Building a support network
For entrepreneurs starting out the challenges can be daunting, but beyond CORFO’s programs there is help available through universities and networks of fellow entrepreneurs.
More universities are offering courses in entrepreneurship and some, like the Universidad del Desarollo which has a partnership agreement with Massachusetts’ Babson College, are actively facilitating the creation of new businesses.
But academic courses will only take you so far. What entrepreneurs really need, says Julie McPherson, executive director of Endeavor Chile and co-founder of wireless data technology provider Tiaxa, is a support network of other entrepreneurs.
Endeavor is a New York-based non-profit organization which acts as an accelerator for “high-impact” entrepreneurs around the world. Its Chilean branch currently has 35 active companies on its portfolio which were selected by an international panel based on innovation and scalability.
“It’s the only organization in Chile that gives advice and mentorship without expecting anything in return,” she says. But Endeavor entrepreneurs are expected to “give back” by sharing their experiences, which is an important part of the entrepreneurial process.
“At the end of the day, the entrepreneur ecosystem works when you have mentors, role models and access to financing,” McPherson explains.
The approach seems to be working. Six years ago, Endeavor Chile picked only two start-ups out of 15 that applied, but last year it screened 350 of which eight were selected and this year it will take 11.
The growth reflects the fact that more university graduates want to be entrepreneurs. Historically, Chile’s best and brightest wanted to become executives in multinational firms. This was partly due to family expectations but also because the opportunity cost of being an entrepreneur was too high.
Today, however, McPherson has noticed a change in attitude. Ten years ago, the ambitions of most Chilean entrepreneurs stopped at the Andes, she points out, but today they are “born global”.
The next step for Endeavor is to create a global network of investors. “We have entrepreneurs, but we don’t necessarily have the investment capital to accompany them in their new businesses,” she says.
Show us the money
Endeavor has proven there is no shortage of entrepreneurs with good ideas in Chile, but lack of investment means many are discouraged from trying while others, who do succeed initially, end up going abroad.
“The venture capital industry is not very developed in Chile so when entrepreneurs need money to grow they often have to leave the country,” says López.
But this is changing. Several venture capital funds have been established in Chile including two by Aurus, an asset management firm formed by a group of Chilean businessmen in 2008. Through its Technology and Life Sciences funds, each worth around US$32 million, Aurus invests in companies with a global value proposition.
“When we started out there were less than five people trying to do this and we were a new type of investor” says Alex Seelenberger, a managing partner at Aurus and head of its Life Sciences fund.
One third of Aurus’ portfolio is financed by high net-worth individuals and two thirds by CORFO, which offers co-financing up to three times private capital investment with an initial cap of US$9 million. This means that it can provide up to US$27 million of additional funding for start-ups.
A caveat is that investments must have trickle down externalities in Chile, which means the funds must be used either to invest in a Chilean company or an offshore firm with a local subsidiary.
“If it weren’t for CORFO, it would be very hard to raise venture capital in Chile because it’s hard to get the minimum critical mass to be able to operate,” explains Seelenberger.
Finding start-ups with the potential to solve global needs is not a problem, especially in life sciences. “Some people say there is not enough deal-flow in Chile, but we think there is,” says Seelenberger.
Aurus expects both its funds to be fully committed by the end of next year and is considering raising more money. Moreover, with biotechnology start-ups currently facing a financing crunch in the United States, Chile can be an interesting place for them to perform early stage clinical trials at a fraction of the cost, notes Seelenberger.
“Chile has the structural capabilities that can help solve international companies’ needs,” he says.
Despite Chile’s lack of a venture capital track record, Seelenberger says high net-worth individuals would invest more in entrepreneurship if the risk was lower. But, for that to happen, Chile needs more success stories.
“We live in this Catch-22 and our objective when we came to market was to break it,” he says. So far Aurus hasn’t hit the jackpot with any of its start-ups, but Seelenberger isn’t worried. “This is a long race and this is still very early days.”
There are glimmers of hope – some start-ups have already started subsequent financing rounds after one or two years – but this is an “interim check point”, he admits.
The real test down the road will be whether any of these generate high revenues or are bought for a large amount. “We’re confident we might be on track with some of them,” he says.
Some Chilean start-ups have found buyers. Zappedy and Clandescuento.com were bought by Groupon, and others, like Andes Biotechnologies, are gaining traction or have already made the leap abroad; take Crystal Lagoons, a company that is making waves in the global luxury resort industry.
None of these have yet to generate the kind of impact that could kick-start the investment cycle, but that doesn’t mean it won’t happen soon.
“Young people will know that if they have a good idea, there will be money to fund them,” says Seelenberger.
Of course, luck plays an important role in entrepreneurship. So to stack the odds, Aurus is co-financing as many early-stage start-ups as possible with the hope that a few will succeed. US venture capital firms are also interested in Latin American start-ups with growth potential, but they prefer a local partner to go forward.
Building trust is a key part of this process, which is why Endeavor is inviting US venture capitalists to meet with Chilean investors and entrepreneurs.
“We need to catalyze this ecosystem so investors can identify opportunities,” says McPherson.
Ultimately, it might take five years for the entrepreneurship ecosystem to be truly formed in Chile, but the government, universities and entrepreneurs share a common objective.
As for entrepreneurs like Nathan Lustig, Chile is an exciting place to be. “I think it’s amazing to see a country taking entrepreneurship seriously, not just talking about it,” he says.
There are still obstacles, but the tidal wave of entrepreneurial fervour appears unstoppable. For the sake of the country’s economic and social development, that is a good thing. As Undurraga says, “Chile will only become a developed nation if people can develop themselves.”
Julian Dowling is Editor of bUSiness CHILE