VC Funds

The fear of losing money is holding back Chilean VC, says Cornershop co-founder

Oskar Hjertonsson originally posted this thread on Twitter to describe his experience trying to raise funding in Chile and thoughts on the startup ecosystem in Latin America. To read his previous article, click here.

First of all, it is important to remember that raising funding for a startup is not a human right. In general, if no one wants to invest in X Chilean startup, it’s not because the founders are pitching to Chilean investors. It’s because they are pitching X startup idea.

Second of all, I want to clarify that Cornershop is not a great starting place to criticize Chilean VC. We did not really search for funds in Chile and many VCs would not have been able to invest because of their support from CORFO (for example, convertible notes, the structure of societies, a crazy local stock market, etc).

Therefore, my criticisms and those of my co-founders about Chilean VC do not come from our experience at Cornershop, but rather from other experiences we have shared. I will explain this issue from my perspective. Partners do not necessarily agree about everything.

In the case of the binary discussion between the chicken and egg, I take the side of the egg. What is missing is capital with balls. If there were more, and bette, VCs, there would be more successful startups.

It’s easy to say that good businesses eventually find their way. But we shouldn’t trick ourselves into thinking that if there were no capital in Silicon Valley, the whole world would be the same and you would still be seeing this Tweet…on a smartphone. Good Chilean startups die, or just never come to life, because of a lack of capital.

In my opinion, the root of the problem with Chilean VC is that their biggest fear is losing money. The biggest fear should be missing out on the first Chilean startup valued at US$5B. US VCs have this mindset. They are terrified of losing the next Google. That mindset changes everything.

The fear of losing money brings things like funds supported by CORFO and this support can bring non-VC money which generates strange incentives and restrictions on capital that should really come from VCs.

The fear of losing money also pushes people to focus more on the probability of failure than on the probability that something becomes huge if it doesn’t fail. This obviously changes how one analyzes an opportunity.

The fear of losing money can also cause people to ask for huge percentages and save only a small percent for options and legal rights that can become toxic in the long term. This situation and demotivated key employees and founders and can impede future rounds.

The fear of losing money creates a perceived need to control the startup too much, which confuses the role of the VC and the role of the founders. If the founders of an early-stage startup don’t know how to do it…just let it go. It isn’t worth trying to fix it.

The fear of losing money brings results such as an investment committee which makes the VC not work like a VC and the LP not work like an LP and everything is slow and strange. For the structure between LPs, VCs, and funds we should clone the “gringos'” system because it is clearly working better for them.

The fear of losing money also means that VCs don’t invest enough in a product before it generates revenue, so they can’t operate with large losses while they grow quickly. These and 1000 more examples can force a startup to enter Zombieland forever.

The fear of losing money also means funds are small. This would not be such a big problem if there were other large funds. But there is also a need for follow-on capital for bigger rounds.

The fear of losing money means that investments are offered in baby steps. I will give you .2X and .8X more in Y amount of time…if you accomplish A, B, and C. This looks like a misaligned relationship and a startup can’t execute its plan of investing X, which is certainly what it pitched.

The fear of losing money can cause a VC to reject an opportunity to invest in a startup with a high valuation…forgetting that growing X 100 times generates the same returns as growing Y 100 times.

And it goes on…for the venture capital industry, the biggest fear has to be not taking the risk at the right time. The fear of not catching on to what is happening and having to watch from the outside as the first US$5B Chilean software company grows (which will definitely happen one day).

I understand the fear. There are few exits in Chile. Capital does get lost. I was an angel for many Chilean startups and even until today it’s not going extremely well…and I stopped because I had a fear of failing. That is what made me a bad angel investor…so it’s a good thing that investing is not my main job.

From here on out… let’s look at the amazing things that we DO HAVE!

Chile has almost 20 million potential clients, who generally have an open mind for trying new things, they recommend good services, and often forgive errors. A stable, modern, and large local market for taking your first steps.

Chile has large companies that often offer relatively bad services. Obviously this is the case in many countries…but it is a little bit more true here than in other places. Small companies can use this as a competitive advantage.

Chile offers, politically and culturally, a great potential to connect with all the large markets in the world, for market expansion as well as for seeking capital.

Chile has pisco sour, bread with pebre (pico de gallo), and crab cakes. It’s not 100% clear what those things have to do with this topic, but it wouldn’t be 100% possible to write a list of the advantages of working in Chile without mentioning them.

Update: We did have one Chilean VC, Seahorce (Nazca). Seahorse was a failure (mostly mine and the CEOs). My friends have suggested that I clarify (and I see why) that I am the one responsible for the fact that Chilean VCs lost out. I am guilty of this and other failures, and from these failures I have learned tremendously.


Read the original Tweet storm in Spanish here.

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