Five years ago, the Chilean government launched Start-up Chile, a bold initiative to draw global entrepreneurial talent to its capital city. This new focus on innovation has since earned Santiago the nickname “Chilecon Valley.” Earlier this week, the Wall Street Journal reported that over 1,000 companies from 77 countries have so far been accepted into Start-up Chile, which provides early-stage startups with $40,000 in equity-free funding and residency visas for their employees, in exchange for locating their business in the country for at least six months.
The creators of Start-up Chile hope the influx of technology companies will ultimately help diversify the national economy, which has long been heavily dependant on the copper mining industry. (By some estimates, this single industry makes up 20 percent of Chile’s GDP and 60 percent of its exports.) Chile has now dedicated over $40 million to the program and its neighbors in Brazil, Colombia, and Peru have already launched similar efforts.
So is Chile on its way to becoming the next Silicon Valley, or at least the startup hub of South America? Well, as the Journal explains, the results are mixed. Most of the foreign startups that relocate to Santiago don’t extend their stays after the six-month program: over 80 percent leave Chile to scale their ventures elsewhere. As the article points out, this trend underscores some significant obstacles to innovating in Chile, in light of a regulatory environment that’s long favored established industries. One former government official noted that Chile can’t just provide public grants for startups, it must also create regulatory conditions that enable startups to challenge entrenched competitors. This is where the outcomes of the Start-up Chile program may offer some important lessons for policymakers around the globe hoping to cultivate tech ecosystems in their own cities, states, or countries.
Depending on who you ask, the tenets of the ideal tech ecosystem vary, but most analyses agree on several key pieces: a strong talent pool; access to financing; a dense network of ideas, mentors, and supporters; and a conducive regulatory environment. (We’ve previously written about some of these essential ingredients here). The concept continues to evolve as successful new ecosystems—from Los Angeles to Berlin—emerge. And seeing the positive economic results startups are generating, more and more governments are looking for ways to grow thriving entrepreneurial communities.
By luring companies with seed financing, Chile has taken at least one of these tenets seriously: access to capital. As the 2015 Global Startup Ecosystem Ranking from Compass points out, Santiago is among several cities, (in addition to Singapore and Tel Aviv,) whose focus on stimulating the financial foundation of its ecosystem has been successful, at least in the beginning stages of the ecosystem’s formation.
However, as the work we do at Engine reflects, government’s role in supporting technology entrepreneurship goes far beyond funding (though, we’d argue that the U.S. government could do more to open up new avenues to capital): every level of government must adapt to innovation-oriented policies. The Journal suggests Chile’s recent tax overhaul, which has been criticized by some for increasing the costs of doing business, could undermine the growth of its emerging startup sector. Regulations in other major national industries (with long, complicated histories), from banking to mining to energy, could further discourage innovation. Simply put, Chile’s greater economic priorities may not yet align with the needs of the nation’s budding entrepreneurs.
Chile’s program is still young and still evolving. The government is actively formulating new strategies to keep startups there longer, most recently with the launch of a $100,000 follow-up grant for select companies that agree to incorporate in Chile, stay for at least a year, and become mentors to local entrepreneurs, conditions meant to commit companies to expanding in Chile. And whether or not the program has generated major economic results, the influx of foreign entrepreneurs has created a valuable network in Chile for its own native entrepreneurs. In the first few rounds of applications, no Chilean companies were accepted. Now, 20 percent of the accepted companies have been Chilean.
Applicants and local entrepreneurs are also recognizing the benefits of capitalizing on existing economic strengths. The Journal points to one promising Start-up Chile company, BioFiltro, with a wastewater treatment technology—some of their first customers were Chilean vineyards that benefitted from BioFiltro’s cost-saving irrigation solution. This type of industry-focused model has already shown great promise in other cities all over the world. A public-private partnership in Des Moines, Iowa, for instance, created an insurance-focused startup accelerator to build upon Iowa’s long-standing insurance industry. In 2010, business leaders in finance joined forces to launch one of the first fintech accelerators in New York City and London, the world’s financial hubs. Startups built in Chile may find greater success by focusing on agriculture or even copper-mining. Chilean lawmakers could consider creating incentives that encourage innovation in these sectors.
What Chile has started to do is undoubtedly laudable, but Chile’s government and entrepreneurial community have more work to do if they’re going to produce leading technology companies and transform major sectors of their economy. As Chilean policymakers evaluate Start-up Chile’s early outcomes and forge a path forward, they should recognize that expanding and sustaining a strong tech ecosystem must go far beyond providing seed capital.