Venture Capital in Chile: An overview of the Chilean start-up ecosystem

Venture capital in Chile is relatively new but has grown exponentially in the last 15 years.

Economic and political stability, easiness to incorporate business, very significant internet and smartphones penetration, one of the worlds’ most extensive networks of Free Trade and Double Taxation Agreements, government support for start-ups, together with an increasingly sophisticated venture capital ecosystem, have placed the Chilean entrepreneurship market in a prominent position within Latin America and the developing world.

This article briefly describes the venture capital industry in Chile, illustrating the main features investors need to know before entering the market.

1.  The Early Ages

Entrepreneurship in Chile dates back to 1989, when a new regulation allowed the creation of public funds. Then, in 1997, Chile’s Economic Development Agency (CORFO), the government body in charge of promoting the development of the country’s economy, launched a long-term credit lines program offered to the referred public funds.

Initially, these loans were not necessarily allocated to innovation endeavors, but to consolidated companies. The entrepreneurial networks were limited.

However, over the years, the industry developed. The international experience showed that putting money into venture capital could generate higher returns than the average investments. Investors spotted an opportunity, which, coupled with a reliable institutional framework and a growing spirit of innovation, led the industry to reach a size of US$409.9 million, by 2010.

From that point on, two additional laws were enacted to promote investments and entrepreneurship: (i) the funds’ regulation was amended, providing more incentives to its partners, and (ii) in 2007 a new type of corporate form (Sociedades por Acciones) more akin to a Delaware C-corp was created. Also, CORFO launched “Start-Up Chile,” a world class seed accelerator which provides equity-free investment to startups from Chile and abroad. Also, several innovation centers were created, mainly in partnership with universities, to develop new technologies and its business applications.

2.  A Mature VC Ecosystem

Today, the venture capital industry in Chile deserves worldwide attention. If back in 2010 all the venture capital funds were financed through CORFO programs, nowadays private financing has become more prevalent, and along CORFO’s initial goal of creating a naturally growing ecosystem, many private funds have evolved and are now investing only private capital. Local GPs have also grown, having raised their third or fourth fund, with a regional or cross regional focus. Some VC firms have also launched their own accelerators, incubators, and angel investor networks, giving them their unique stamp and further growing the ecosystem.

On the other hand, several companies founded in Chile have had noteworthy exits or acquired unicorn status, putting the market on the map of foreign investors, as further described below.
This success was made possible, largely, by the hard work of local founders, VC firms, angel investors, accelerators, and incubators. Importing the “Silicon Valley” mindset, they shaped the market standards necessary to take these ideas to become successful businesses.

This success was made possible, largely, by the hard work of local founders, VC firms, angel investors, accelerators, and incubators. Importing the “Silicon Valley” mindset, they shaped the market standards necessary to take these ideas to become successful businesses.

Further, the professionalization of startups has led traditional investors like family offices to be willing to take more risks. This type of investors are now recognizing VC investments as part of their alternative assets’ investment strategy, either investing directly in start-ups or as LPs of local and regional funds. In recent years we have also seen a surge in the creation of corporate venture capital divisions in traditional local companies.

3.  Investment rounds: what to expect?

The structure of investment rounds and rights given to investors are very similar to the standards of more developed markets like Silicon Valley or New York. However, the amounts involved at all stages of maturity (early stage or growth) are smaller.

Entry tickets for very early stage startups may be as small as US$10,000. In these first rounds (or “family and friends” series) investments hardly will exceed US$1 million, either through equity or convertible instruments.

For pre seed or seed rounds, somewhat larger tickets are required, with some financings reaching up to US$5 million in amount raised. These higher investments may require the execution of a more developed shareholders agreement securing investors’ preferential rights, but SAFEs or convertible notes are more prevalent for this stage.

Then comes the “growth stage,” where amounts raised may reach within $5-10 million. These series require more backing and involvement from venture capital firms (both local or foreign), high net-worth investors, and family offices. The internationalization of the holding vehicle to Delaware or Cayman, or other jurisdiction requested by the lead investor, can be expected as well at this point.

The depth of the due diligence depends on the stage of development of the company and the risk profile of the investor. As such, the due diligence of an angel investor or accelerator may only consist of an analysis of the company's business plan, while a venture capital firm will typically undertake a more thorough legal, financial and operational due diligence.

4.  Success cases

Following the Latin American trend, the Fintech industry has been the vertical that raised the most capital during last few years in Chile. The low banking rate, which coexists with a high penetration of mobile applications and internet use, has boosted innovative business models that use disruptive technologies with great scalability potential.

A landmark fintech case is our client Fintual, who raised US$39 million from Sequoia Capital in 2021 to accelerate the expansion of the company in Mexico. Fintual was the first Chilean startup to be selected by YCombinator accelerator and counts with investments from well-known regional firms such as Kaszek Ventures and ALLVP.

Furthermore, other non-fintech noteworthy cases are the unicorns Cornershop and Notco.

Cornershop, the first supermarket delivery startup in Latin America, was acquired in 2021 by Uber through an operation worth more than $3.1 billion, being the biggest exit in the region in a deal also advised by DLA Piper. The acquisition positioned Uber as a leader in the region, as well as the only app that offers both delivery and ride-hailing services in LatAm.

The Not Company (NotCo), a foodtech company that utilizes plant ingredients to replicate various food tastes, textures and cooking behaviors, has raised a Series A of $30 million, a Series C of $85 million and a Series D1 for $70 million, during the last 5 years. In these financing rounds tickets were acquired by investors such as Kaszek Ventures, Bezos Expeditions, Future Positive, the investment vehicle of Fred Blackford and Biz Stone, and L Catterton, one of the largest and most global consumer-focused private equity firm.

5.  Challenges and Opportunities

Although venture capital investments in Chile reached the historical figure of US$1.025 billion in 2021, there is still a long way to go for the local industry. However, there are many reasons to predict a bright future and consistent growth in the following years.

Chile has welcomed foreign investment for many decades. The country has promoted business opportunities within its territory, offering a robust institutional framework and reasonable tax regimes, which have survived natural disasters and major political crisis. The decades long economic and political stability and its global outreach places Chile as an ideal place to start, test and grow a business, before going to other markets to scale it.

Further, Chile has been making significant strides in fostering innovation through a series of new regulations aimed at enhancing the financial ecosystem, making it more accessible and competitive.

In October 2022, the Fintech Law was approved, representing a significant step forward in promoting financial innovation and greater competition in the financial system, as well as the development of new financial products and services for consumers.

Also, the Chile’s Financial Market Commission has recently greenlighted “ScaleX”, launched in cooperation with the Santiago Stock Exchange and CORFO, which enables access to capital markets at lower costs to companies that would otherwise not meet the requirements for public listing.

Moreover, the country is reviewing its public-private model, to facilitate the entry of new players into the venture capital industry like institutional investors (pension funds or large foreign sovereign wealth funds).

These developments are expected to allow a qualitative leap forward that solidifies the country’s position as the main Latin America's hub for venture capital.