Creating the Next Silicon Valley - The Chilean Experiment

I spent two weeks of December in Chile as a guest of Professor Cristóbal García, Director of EmprendeUC at the Catholic University of Chile, which just signed up a 3-year collaboration partnership with Stanford's Technology Ventures Program. I did a keynote on innovation hubs at the newly created DoFuture program, spoke at Santiago's Startup Weekend on Customer and Agile Development, and at a Conference in Patagonia supported by the Ministry of Economy's Innovation Division.

I got smarter about the world outside of Silicon Valley, met some wonderful people who made me feel part of their family and shared some thoughts about entrepreneurship.

This post is a personal view of what I saw in what I call "Chilecon Valley"--in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few weeks doesn't make you an expert (heck I've lived in Silicon Valley for over 30 years and I'm still surprised), I'm not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn't see enough.

Creating the Next Silicon Valley--The Chilean Experiment
Chile has decided that it wants to be an innovation hub in South America.

In my short time in Chile, I spent time meeting with:

The good news:
Entrepreneurship and innovation is being talked about continually in Chile. This isn't some small-time effort. The country is dead serious in all levels of government and universities about making this happen. They've been thinking hard and smart about the lessons to be learned not only from Silicon Valley, but with only 16 million people, they are also looking for lessons from other small innovation clusters such as Israel, Singapore and Finland. These countries are great models of countries too small to sustain startups of scale on just domestic consumption yet have managed to create innovation with a global reach.

What needs work:
As an outsider I was incredibly impressed with how far Chile has progressed in making the country an innovation hub. However I had questions about the challenges that still needed to be addressed.

Venture Capital
Perhaps it was just who I was meeting, but for a country so focused on innovation and startups the lack of venture capitalists was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the place would have been crawling with VC's fighting over deals. Instead it felt like the government--through CORFO - was doing most of the risk capital investing. Given that great VC's are much, much more than just a bag of money, this means that startups lack experienced board members with practical experience. There seemed to be very few who knew how to coach entrepreneurs and to build companies. Finally, it wasn't clear if everyone was on the same page; that for a Chilean startup to scale it was going to have to reach past Chile and go global. There seemed to be few tools, techniques and strategies to do so.

A sign of progress will be when some of the CORFO guys leave the government and start their own VC firms.

Corporate Connections
Entrepreneurship in Chile seems to be disconnected from the country's largest industries and core resources. The clearest example is the country's copper mining industry, which contributes 20% of the Chilean Gross Domestic Product. (Chile produces 35% of the world's mined cooper.) The largest company, the state-run Chilean National Copper Corp CODELCO, has $23 billion in sales. Yet the copper companies import nearly 100% of the advanced technology they use. Interestingly, CODELCO is required to contribute 10% of its revenues to the armed forces, but the mining industry seems to have little or no connection with innovation and entrepreneurship efforts in universities and startups. (Perhaps it's because the Ministry responsible for Mining is separate from the Ministry responsible for the Economy and Innovation.)

I suggested that Chile's mining industry could contribute to building innovation leadership by funding a multi-tiered initiative in the country's leading universities:

  1. Professional management training (obvious and immediate payback)
  2. Applied engineering (top 10 annual challenges from the mining companies)
  3. Basic research (copper based materials science, robotics, materials handling)

Small Business versus Scalable Startup versus Corporate Entrepreneurship
There's confusion in both the Government and Universities about the difference between small business entrepreneurship (startups designed to be family businesses,) scalable startup entrepreneurship (startups designed from day one to scale big inside Chile and then expand globally) and corporate entrepreneurship.

I suggested that they think about educating (and funding) each class of entrepreneurs differently and realize different regions of Chile have different needs. In Santiago the concept that startups are not smaller versions of large companies and traditional business school classes and methods don't apply, is starting to take hold and will help shape how they educate entrepreneurs. In contrast, over lunch with the governor of Ultima Esperanza (the "Last Hope" province on the Southern tip of Chile,) it became clear that there's a pressing need for training and education in small business entrepreneurship, dramatically different then the scalable startup education wanted in Santiago.

These three types of entrepreneurship need to be explicitly recognized, encouraged and managed.

A Magnet for Talent
My sense is that Chile has not yet "declared a major." Saying that you support entrepreneurship and innovation is a start, but the sentence needs to be finished. Entrepreneurship and innovation in what field? Where will Chile establish technical and innovative leadership? Is the only way they will attract talent by paying entrepreneurs to come to the country? Or will students and entrepreneurs come to Chile because it is one of the best places in the world for innovation in certain specific industries (pick your favorite--alternative energy? materials science? food science? cellulose outputs? video games and film? South American web commerce hub? automated mining? UAV's? etc.)

Already there are multiple centers of excellence in the engineering schools in Santiago with strong entrepreneurial professors. Yet no dean, provost or government minister seems to want to issue a declarative sentence that says, "For the next five years we're going to focus on building world-class leadership in these three areas." (Perhaps because the cost of a public failure is so high in Chile. See below.)

I suggested that what seems to be missing is a stated goal for Chile to become a magnet for talent in specific domains. Why will people from South America stream to Chile, besides its magnificent geography? In what fields will Chile's universities and entrepreneurial culture create such an irresistible pull?

A Culture that does not accept failure
Chileans I met were concerned that their culture was not accepting of business and/or personal failure. This is not the land of second chances where failure means you are an experienced entrepreneur. Partially due to a lack of bankruptcy or commercial courts, the bankruptcy process in Chile is draconian. In discussions with accounting and financial professionals, I learned that getting caught up in it feels like a Dickens's novel, it can take years to shut down a company.

In addition, in Chile the cost of personal failure is high. If you fail, you've failed your family, your community and your country. As a result, societal pressures favor people who avoid risky ventures. Because its entrepreneurs are unlikely to make commitments or definitive statements which they know might be risky, i.e. "we're going to be a leader in our market" or "our startup will be $100 million in five years," Chile can't foster the "reality distortion field" that underlies a dynamic entrepreneurial culture.

I suggested that perhaps using a science analogy could help change Chilean perspectives about the risk and experimentation it takes to build new ventures. Entrepreneurship and incubators could be described as an "Innovation Laboratory" - similar to a scientific laboratory where entrepreneurs develop and test hypothesis (iterative guesses) about new business models. And like science, starting a new venture is not a linear process but one that involves failures, dead ends and changes in direction.

Lessons From the Valley
At one of my presentations the audience was a mix of deans of multiple schools at Catholic University, government officials from the Ministry of the Economy, active entrepreneurs and students. I offered that Silicon Valley's rise was serendipitous, that you can't reverse engineer an accidental Entrepreneurial Cluster formed in the Cold War. However, we can point out the elements that made our valley successful, and point out the ones that may be helpful in Chile; the role of Universities and defense-driven university R&D, the rise of venture capital, a failure-tolerant culture and the emerging science of entrepreneurial education. Slides 22, 36, 97 and 117 are the key points.

Come to Chilecon Valley
If you're serious about understanding centers of entrepreneurship outside the U.S., Chile is now one of the required stops. The progress in the last few years has been nothing short of outstanding.

I'll be back.

Lessons Learned

  • Chile is trying to engineer an entrepreneurial cluster as a National policy
  • They've gotten off to a good start with a committed Ministry of the Economy
  • The universities are on board with passionate faculty and excited students
  • The country needs to build a deeper Venture Capital industry
  • Chilean core industries need to view entrepreneurship as an asset, and technological innovation as an opportunity to leap forward
  • Second chances are hard to come by in current Chilean business climate and culture

Reprinted from SteveBlank.com

Steve Blank is a prolific educator, thought leader and writer on Customer Development for Startups, the retired serial entrepreneur teaches, refines, writes and blogs on "Customer Development," a rigorous methodology he developed to bring the "scientific method" to the typically chaotic, seemingly disorganized startup process. Now teaching Entrepreneurship at three major Universities, Blank is the author of Four Steps to the Epiphany. Follow him on Twitter @sgblank.

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