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STARTUP

The Silicon Valley of South America?

To spur innovation, Chile is offering American start-ups $40,000 in seed funding.
8 Hours: About how long it takes to fly from Miami to Santiago (pictured); 17 Million: The population of Chile, about the size of Florida; 6 Months: How long Start-Up Chile companies must stay in Chile; 300: The number of companies expected to be participating in Start-Up Chile by the end of this year; $40,000: The amount of equity-free seed money given to Start-Up Chile participants; 85 Degrees: The average high temperature in Santiago in January. The average high temperature in July is 57.

Tapping New Markets By 2013, Erika Anderson hopes to be collecting water data in all Latin American cities with populations of more than two million.

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Erika Anderson has something of a Silicon Valley pedigree. She graduated from MIT and Cornell Law School before bringing her socially conscious business plan to the Bay Area's Singularity University. That program, started by inventor Ray Kurzweil and Peter Diamandis, the creator of the X Prize Foundation, helps future leaders develop business solutions to hunger, poverty, disease, and other intractable problems.

But last fall, rather than head down the usual path of wooing Silicon Valley investors, Anderson hopped a plane to Chile. Her company, H2020, which uses smartphones to gather data on water quality and availability in emerging countries, was one of 23 businesses selected by the Chilean government to participate in a new initiative designed to attract entrepreneurs.

Called Start-Up Chile, the program offers a $40,000 grant and a one-year work visa to entrepreneurs who agree to stay in Chile for six months. The initiative also offers an entrée into the country's tight circle of well-heeled venture capitalists, whose investments are being matched as much as 3 to 1 by the Chilean government.

Chile is one of several countries launching aggressive initiatives designed to create local hubs of tech innovation and entrepreneurship. Other countries such as Singapore and Malaysia are offering similar perks—grants, work visas, and business tax exemptions—in an attempt to draw promising start-ups. "Money is not the problem. It's finding good companies to invest in," says Vivek Wadhwa, a former tech entrepreneur and Duke University engineering professor who helped create Chile's program after being tapped as an adviser by people he knew in the government.

For Anderson, receiving an offer from the program was particularly fortuitous. "Latin America is a key area for us," she says, "and we were going to need feet on the ground here eventually." The grant will help keep H2020 going as Anderson works to land potential customers such as national governments and industrial companies. She is also eager to network with Chilean investors, who she hopes will be receptive to her business, since it has the potential to address local water issues.

Latin American investors, of course, are just as eager for big payoffs as their Silicon Valley brethren. Latin American investors have seen success stories like Brazil's BuscaPé.com, a comparison-shopping site that was acquired for $342 million in 2009, and Argentina's MercadoLibre, an eBay-like business that's listed on Nasdaq and worth $3 billion. Both of those homegrown companies built a formidable strategic advantage by being first in the Latin American market, says Alan Colmenares, who worked for Intel's venture capital arm in Mexico and Brazil and now serves as a facilitator in his native Colombia for the Founder Institute, an incubator focused on tech start-ups across the globe. "It's like when Warren Buffett talks about investing in companies with a large moat—that's what Latin American investors are trying to do," says Colmenares. Only now, he says, they are hoping to attract a new crop of entrepreneurs as a way to create their own Silicon Valley–like pipelines.

That's a welcome opportunity for Numote, another U.S. start-up participating in Chile's program. Numote, which makes a mobile app that pulls double duty as a TV remote control and a social networking platform, plans to use its $40,000 grant to target customers in Europe and Latin America, with the ultimate goal of proving the model in the U.S. "All the investors I've talked to tell me to keep bootstrapping for as long as I can," says founder Vijay Kailas. "This allows us to do exactly that. We're not having to sign the company away before it gets a chance to launch."

That's not to say everything has been perfect. First of all, there's the language barrier. Plus, Kailas misses the buzzing hives of entrepreneurship in the Bay Area, an atmosphere he likens to the dinner-party circuit that helps grease the wheels of Hollywood's film and television industry. Still, Kailas says, the opportunities—like access to Sebastián Piñera, Chile's president, who happens to own a major TV network—are too good to pass up.

By the end of this year, Start-Up Chile expects to expand to include some 300 companies. Nicolas Shea, who heads innovation initiatives for the Chilean Ministry of Economy and founded Start-Up Chile, says the government's $40 million investment in the program will be worthwhile if it can build ties with interesting new companies, even if they don't stay in the country over the long term. "If we can provide someone with an extra six months to focus on their business, that could mean the difference between selling an idea for $100,000 and selling it for $1 million," says Shea, a former entrepreneur who was educated in the U.S. at Columbia University and Stanford's business school. "What Chile gets out of it is the chance to build our global network."

Chile has $200 million in uncommitted venture capital, says Shea. To help keep that money in Chile, the government is working to establish a reputation as having a business-friendly climate. "Governments have proven consistently bad at trying to create innovation centers around a particular industry," says Shea. "Our thesis is that if we bet on and attract serious entrepreneurs, everything else will fall into place."

Chile's initiative is impressive, says Steve Blank, a longtime Silicon Valley entrepreneur who now teaches at the University of California, Berkeley's Haas School of Business. Blank, who recently spent two weeks in Chile lecturing about innovation, says Start-Up Chile could offer a breakthrough model for other small countries hoping to create a start-up climate.

Still, he sees areas for improvement. For the program to succeed, he says, Chile needs to make it easier for start-ups that fail. Although bankruptcy is never easy, in Chile it produces both cultural shame and harsh legal retribution. "If your small business goes bankrupt in the U.S., you're looking at a couple months' worth of paperwork, and then you're back at it," he says. "In Chile, it won't take you a couple of months to get out from under your burdens, but years." Blank adds that Chile should tap universities, offering incentives for them to commercialize new technology.

"This is a great program run by really smart people," he says. "They've got a lot of kindling going and have the potential to catch fire. They're just not there yet."

IMAGE: Corbis
From the April 2011 issue of Inc. magazine

RYAN UNDERWOOD

Ryan Underwood is a writer and editor living in Nashville, Tennessee.




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