Somewhere Over the Andes – Flying back from Chile this week I was struck by the head-shaking beauty of the country, as well as the commitment to innovation and the steps Chileans are taking to diversify the economy. There are also very clear reminders of how tethered the country is to commodity markets and global political dynamics – and how little control officials have over them.
For a country of just under 18 million people and a GDP estimated to be around $275 billion (the US is $17.4 trillion), there is a remarkably robust innovation ecosystem. StartUp Chile reported that between 2000 – 2014 there were 1,054 privately financed companies, of which 334 stayed in Chile and continue today. Given the relatively modest amount of early-stage capital, another 324 companies emigrated to other countries. They even have a “unicorn” valued at $1.8 billion called Crystal Lagoons, which has technology to produce enormous man-made lagoons.
Corfo, the country’s economic developmental agency, reports that there are approximately 40 PE/VC funds which collectively manage $550 million; only three of them are considered early-stage. It is estimated that angels invested $9 million last year, thus the focus on developing more sources of early-stage capital becomes even clearer. Over the last five years, there was $122 billion of foreign direct investment, although very little of that was early-stage capital. Unfortunately, it is very difficult and quite restrictive for local pension funds and institutional investors to invest in venture capital funds.
As a guest of Corfo, I was speaking at the annual Chilean Venture Capital conference to share “lessons learned” from the US venture perspective, but also to discuss how other emerging markets imported the VC model. Corfo is acutely aware of the ingredients that are required to be successful: there are 14 co-working spaces across the country supported by a network of 1,000 mentors, all of which have a stated goal of launching 1,000 companies each year. Additionally, Corfo has a very directed effort to create venture funds by offering a 3:1 match program to leverage early-stage capital commitments. Alongside that, there are robust grant programs which this year will provide $110 million in research tax credits, up from only $40 million in 2013, with a $150 million target by 2018.
So it was somewhat ironic that across town the world’s largest miners and commodities traders were at their annual conference, likely lamenting the protracted decline in copper prices. To underscore the structural issues in global commodities markets, it is estimated that there are $2 billion of copper inventories stockpiled in China (according to the Shanghai Futures Exchange). The reasons for this are murky ranging from something affectionately called “copper-collateral financing” where copper is backing shadow financing schemes across China to the concern that Chinese smelters may be deliberately flooding local copper exchanges to depress prices given their exposure to derivative contracts. Either way, given that Chile is the world’s largest copper producer, none of this is good news. Last year, Codelco, the Chilean-owned miner, lost $2.2 billion after having earned $3 billion in 2014.
But Chile also has the world’s leading observatory infrastructure as 70% of all space monitoring activity is conducted in the Atacama Desert, which is known as the driest non-polar place in the world. It is therefore not surprising that an emerging data mining infrastructure is developing here. Other sectors with significant comparative advantages appear to include the concept of “smart mining” otherwise known by the tiresome “IoT of Mining” moniker, as well as technologies in agriculture, solar, marine energy, and biotech applied to fishing.
When visiting with US Ambassador Mike Hammer, I had an opportunity to also meet senior attaches from the three US armed forces (I am always so proud of these people who are so dedicated and mission-driven) and learned that the US is also involved in sponsoring early-stage innovation in Chile. Turns out that the Department of Defense has awarded $6 million in Latin America in R&D grants since 2014, over $2.3 million of which has gone to Chilean universities to assist in developing relevant technologies to the military (Brazil was runner up with $2.2 million).
The other fascinating development this week was the release of the “Panama Papers,” which also touched Chile. For the past year or so, Chileans have followed successive revelations of corruption involving illegal political contributions which have snared senior political and business people, many of whom were also listed in the Panamanian documents (including the owner of the largest local newspaper, El Mercurio). While in Chile this week, the Chilean Senate passed a bill which would punish anyone who publicly releases information about existing investigations which is now referred to the “gag law.” And while I found myself often apologizing to my Chilean hosts for the US presidential elections, they all with knowing smiles assured me I was not alone as they have their own presidential election next year.
The Santiago Stock Exchange was established in 1893 and today has a market capitalization of $260 billion with just over 300 publicly traded companies. And while essentially flat over the last twelve months, the stock market more than doubled in the last 10 years. There are thought to be 10 billionaires in Chile according to Forbes who have an aggregate net worth of $29 billion or 11% of the stock market capitalization. In conversations with some of these investors, there is a clear interest in diversifying their holdings and the innovation economy is of particular interest.
Given how a local artist depicted me (which looked like Batman’s nemesis, the Joker), I am thrilled that any of them wanted to meet with me at all!