The country has successfully positioned itself as a leading global player in the field of entrepreneurship. Nevertheless, several actors warn of the need to enhance the sophistication of the local ecosystem, to strengthen the jump being made by start-ups to international markets, to increase the inclusion of women in the segment, and to further develop the system of financing.
By Kamila Cortez
Chile is home to a solitary unicorn start-up, i.e., a company valued at over US$1 billion and which falls into the most successful of all the start-up categories. The unicorn in question is Crystal Lagoons, the company founded by Fernando Fischmann in 2007 which develops artificial lagoons.
Although Crystal Lagoons represents the only successful example of a company in Chile with such a high valuation, the country has, coincidentally, become an entrepreneurial reference point on the global stage since Crystal Lagoons was founded ten years ago.
The results of the 2016 Global Entrepreneurship Index, a ranking compiled by the Washington D.C.-based Global Entrepreneurship and Development Institute (GEDI), exemplify Chile’s strong standing in this regard. The Index measures the strength of the entrepreneurship ecosystem in 137 countries and in the 2016 edition, Chile was ranked 18th, and first at the regional level.
The Acting Head of Entrepreneurship at Corfo, Tadashi Takaoka, explains that this progress can be traced back to 2014. At this time, and in conjunction with the Start-Up Chile initiative, State policy began to focus on reinforcing the system of financing, boosting innovation, strengthening the transfer of technology skills, and ensuring the overall ecosystem became more sophisticated. This was undertaken via the provision of ongoing support to entrepreneurship in general.
“It was crucial to support entrepreneurs throughout the phases of scaling-up and finance conclusion in order to cover the times when they were unable to secure funds from private investors. On the other hand, it was also important to foster the development of different actors within the ecosystem as co-works, angel networks and investment funds”, says Takaoka.
He adds that the last four years have also been marked by notable international initiatives in this field. For example, Amazon has begun to work with start-ups and to provide services in its cloud application. Similarly, MIT and Stanford University now offer entrepreneurship courses, while Singularity University has been holding regular entrepreneurship-related events. Meanwhile, Takaoka points out that “Chile has made significant progress (in the field), generating interest from abroad as a result”. He also notes that while 3,200 start-ups received financing between 2011 and 2015, this number is expected to rise to 1,000 per year during 2016 and 2017. Moreover, while “only 9% of the former were located in the regions, today this figure reaches 32%”, he adds.
Numerous actors recognize that the Start-Up Chile program, which was implemented by Corfo in 2010, has been key not only in developing a local ecosystem, but also in positioning Chile as an international reference point.
Rocío Fonseca, Executive Director of Start-Up Chile, believes that entrepreneurship “has improved greatly in terms of preparation. There have always been entrepreneurs with the ambition to go out into the world, but previously they didn’t see themselves on such a big scale as now (…) Digitization and openness is enabling them to realize that their solutions might be of benefit to people beyond just their own country”.
Fonseca contends that Start-Up Chile has helped to finance the growth of the early-stage process, in which the initial seed is planted, a prototype developed and a product validated. Subsequently, the scale-up phase of Start-Up Chile helps to finance companies with validated products that require scaling or entry into foreign markets. However, she warns that this process does not cover the early phase in which the product is partially validated but still deemed high risk; a stage known as the valley of death and in which “there is a great deal to do”. “Venture capitals are working well, but they are following the traditional model of business analysis, with cash flows”, she affirms.
Another actor to have played a significant role in the development of the Chilean ecosystem is the Chilean Association of Entrepreneurs (ASECH). This body, which has a membership of over 26,000, was constituted five years ago by 40 entrepreneurs with the objective of representing individuals starting out on their own projects.
The President of ASECH, Alejandra Mustakis, notes that, to date, the Association has made significant progress in the area of public policy, demonstrated by the passage of the Companies In One Day Act (Ley de Empresas), the promotion of the Re-entrepreneurship Act (Ley de Reemprendimiento) and a Tax Reform which adequately addresses “our reality”.
“Since last year we have been working on a public policy program for entrepreneurship that will be promoted over the coming years. Among the ten measures included, we propose a compulsory 30-day payment period and for value-added tax to be charged to the buyer, which is a progressive form of income tax that depends on the invoice procedure of the company in question; and a flexible working system that supports an expeditious employment process”, states Mustakis.
Regarding metrics, one study that has been measuring distinct factors related to entrepreneurship in Chile is Global Entrepreneurship Monitor (GEM). This study has been applied in the country since 2002 under the leadership of the Universidad del Desarrollo. Its aim has been to research a number of variables including the entrepreneurial dynamism of the adult population and across the regions in order to gauge areas of opportunity that may be contributing to the development of programs and policy.
Vesna Mandakovic, Academic Director of GEM Chile, explains that “there is no doubt that the country has made progress in strengthening the entrepreneurship and innovation ecosystem. (As a result) the social worth of entrepreneurship has increased significantly over the last ten years. Nowadays, being an entrepreneur is considered a desirable career path”.
In terms of the findings of this metric, Mandakovic clarifies that in the nine countries which constitute the GEM study, over 60% of entrepreneurs lack clients in foreign markets. In Chile, more specifically, 50% of those in the early stages claim to have no clients in international markets.
The internationalization of projects is precisely one of the challenges facing local entrepreneurs, and this situation has its roots in a cultural phenomenon. María de los Ángeles Romo, Executive Director of Endeavor Chile, an organization which provides support to high-impact start-ups, believes this phenomenon is a key factor. She contends that while the country is an excellent tester location, it is very important that entrepreneurs make the effort to jump into larger markets.
“Chile is a comfortable place to live, which gives rise to the creation of a comfort zone. From the perspective of an entrepreneur, there are numerous possibilities to secure early-stage financing in the country and this means that there is no real sense of urgency to view the international market as offering genuine opportunities in terms of scaling up their company”, she states.
Accordingly, Romo argues that the US is one of the most attractive markets for local entrepreneurs because of its size and the fact that it is home to so much technological development. “Significantly, and from the point of view of start-ups, the US is more advanced in terms of evaluating companies, investing in them, and assisting them to grow quickly” she adds.
This information is not lost on the entrepreneurs passing through the Start-Up Chile program. As such, the US represents the number one destination for companies in this scheme that are seeking to establish themselves abroad for the first time.
Another of the persistent challenges in the local entrepreneurship ecosystem relates to the gender gap. In Chile, there are six female entrepreneurs to every ten male entrepreneurs. It should be noted, however, that this gap is not unique to Chile as it is also prevalent in the other countries that constitute the GEM study.
Moreover, Start-Up Chile states that only 7% of technology-based projects that the initiative helps to accelerate around the world are run by women, compared to 20% within the country itself.
Rocío Fonseca adds that in terms of financing beyond Start-Up Chile, only 3% of venture capitals provide investment to women at the moment of fund raising.
In response, and with the aim of strengthening the incorporation of women in this field, a number of different organizations and programs have emerged that focus of providing support to women who wish to launch a start-up, whether for opportunity or necessity. Among these are Kodea, Laboratoria, Girls in Tech and The S Factory, all of which are linked to Start-Up Chile in an effort to attract women to create and develop more sophisticated start-ups.
Alejandra Mustakis from ASECH affirms that while the conditions to pursue a start-up in Chile are “infinitely” better than just a few years ago, she warns that the ecosystem, in addition to overall economic activity, remains highly centralized. This centralization means that entrepreneurs running their micro, small and medium-sized enterprises from areas located beyond Chile’s Metropolitan Region have to confront numerous difficulties that hinder the growth of their businesses, including a lack of connectivity, technology, technical training and access to financing.
Furthermore, Tadashi Takaoka from Corfo warns that although excellent progress has been made over the last ten years, a number of challenges still remain. In response, he believes that “it is important to build an equity-based market”, as well as to “professionalize the ecosystem with a methodology and infrastructure in the scale-up phase; generate a quality standard regarding the work of start-ups, so that they incorporate boards of directors and conduct R&D; and, definitively, continue to promote cases of success in order to demonstrate the subsequent impact achieved”.