Why this investor abandoned setting up a startup fund in Chile after just 6 months

The next Skype, Facebook or MercadoLibre will have to come out of Chile, the Israeli investor and entrepreneur Arnon Kohavi declaredshortly after moving from Silicon Valley to Santiago to create a venture capital fund. Six months later, Kohavi and his fund Yarden VC have moved to Singapore.

So what happened?

According to Kohavi, its about timing. Chile has great potential and will be completely different in 10 years from now; but to put it mildly, its not quite there yet.

Kohavis departure and the declarations that followed are surely controversial, but reducing it to a story about one more investor who didnt manage to raise money for their fund would be missing the point.

Kohavi may only have spent six months in Chile, but he developed a deep understanding of the country, and the challenges facing it. We decided to ask him a few questions; while some may not share his conclusions, his point of view is well worth considering:

On departing after six months

AH: Why had you decided to move to Chile in the first place?

Arnon Kohavi: I first came to Chile to visit some good friends from business school. They introduced me to government representatives, and I saw a desire from people I met to! create a local startup ecosystem. They asked me if Id come, and I accepted to come for 6 months as a test.

My plan for these 6 months was to try to start a VC fund a real one, which understands entrepreneurs, not just a group of people with a finance or banking background. I also wanted the fund to be big US$40m to invest in a proper field of startups.

AH: So why did you leave after six months?

AK: I took off because it will take longer for Chile to reach the tipping point. Good will from the government and a few people isnt enough to re-create what places like Silicon Valley, Israel and Finland have.

The heart of the problem is Chiles dramatic generation gap, between young entrepreneurs and the old generation. The Chilean society is less dynamic than Asia or the US; a handful of monopolistic families control the country, and wont move.

Worse, these families dont care about anything (the young, the poor) besides their money. They dont have to: the countrys natural resources (copper, etc.) are a disadvantage here, because it means the rich dont need to work hard. The Asian model is better, because it focuses on exporting manufactured goods.

Chilean family offices may still give money to Endeavor, but for them its not about entrepreneurship its just a way to brush their ego, and they only do it because it is all conducted in Spanish.

I know people were disappointed when I left, and the Chilean government would have supported my fund, but I also wanted a commitment from the elite, and it didnt happen. Yet, Id be happy to come back and do business when the country is ready.

AH: What about Start-Up Chile?

AK: [Startup Chile's Executive Director] Jean Boudeguer is a great guy, and hes been doing! the rig ht thing. Start-Up Chile is good to bring Chiles isolation which is not only geographic, but also mental. Its crucial for the local startup community to get used to talking English and develop. Start-Up Chile does that by bringing foreigners to Chile, but its not enough to build an ecosystem.

Chilean entrepreneurs still have to move to Silicon Valley to make it big Zappedys founder [Francisco Larrain] was living in the US when his startup was acquired by Groupon [see our previous story]. Im convinced well see more Chilean entrepreneurs move elsewhere in the future. I dont think its a bad thing, and my own country, Israel, also went through this phase.

On education and Latin America

AH: How do you think things can change?

AK: Nothing will change without emphasis on science, and this is true all across Latin America actually, Chile is even in better shape than other Latin American countries. Do you know how many Brazilians have received a Nobel Prize? Zero. Compare that with Israel, and youll see the difference: education.

Though Israels model is easier to duplicate, the same is true of Silicon Valley. Both are based on education, which is the start of any tech ecosystem. Now think again of what happened in Chile this year, with massive student protests.

My concern isnt the young generation, which has true potential, but the bigoted establishment the Opus Dei, for instance, is big in Chile. More generally, theres a fear of failure and the Chilean conservative and ! traditio nal society doesnt encourage social ascension. Since the issue is cultural, theres no quick fix, and it could take a long time for things to change.

At the moment, Latin America still feels back in time. Many of the local websites I have tried to use were not updated, and the service was bad.This is a serious issue because entrepreneurship isnt formed in a vacuum; for startups to thrive,the whole country has to be tech-driven, and use the latest gadgets and online services.

On VCs in Latin America

AH: Have you heard of the recent controversy surrounding Chilean VCs? The investment fund Austral Capital has been recently accused of malpractice by the local startup community.

AK: I dont know the details of this case, so I wont comment directly on this; but what I can tell you is that the biggest complaints Ive heard from Chilean entrepreneurs are against VCs, not the government. Raising money is difficult in Chile, but its not just that. While most VCs in Silicon Valley truly believe in win-win,VCs in Chile are often asking too much when it comes to term sheets. They are effectively destroying the entrepreneurs motivation, which is very unfortunate.

Its also a mentality problem: to me, what is called VC is Chile is actually private equity bankers in suits with a finance background and very limited knowledge of entrepreneurship. This was very different from my own approach I was the only VC to go to meet-ups and get to know entrepreneurs closely. Like most investors in Silicon Valley, I wear T-shirts, and more importantly, I often give free advice. This is normal in Silicon Valley, but not yet in Chile.

AH: What about foreign VCs interested in Latin America, and 500 Startups plans in Brazil?

AK: Foreign VCs are not that ! interest ed in Chile, because its fairly small. As for the other countries, angel money is not enough to keep investing in following rounds.I also hate the words accelerator and incubator. If youre sitting on a rock, it wont work: you need an egg to begin with.

So the VCs I would bet on out of the Valley are the ones with capital and ground knowledge of the region. You need to live in a place to understand it. This is also the reason why I will spend at least a few months in Singapore, although Im not attached to a location.

In other words, my advice to Latin American entrepreneurs for now would be to either seek investment from VCs which work locally, or move to Silicon Valley. Again, thats OK; many Israeli startups did it.

On Chile and Asia

AH: What do you think of Singapores startup ecosystem? I heard you have plans to build bridges between Asia and Latin America?

AK: I only arrived in Singapore a couple weeks ago, so its too early for me to comment on Singapore or its creativity potential [see our previous post 'Wozniak Question Creativity in Singapore']. However, I see Singapore as a great base to look at South-East Asia as a whole. There are huge markets all around not only China, but also Indonesia and India.

My plan is to use it as a place to learn about the Asian market, invest in local companies and build bridges. I want to help Chilean companies to invest in Asia. Many in Chile dont realize the opportunities they could capture outside Latin America. Its just about paying attention, and the sale of the gaming company Atakama Labs to the Japanese company DeNA is a sign of it. This is an opportunity I want to take; at the end of the day, Im still a businessman who wants to make money!

I also think there are opportunities in the other direction, and I plan to help bring Asian stuff to Latin America. Chile is a good gateway to do so. Despite its problems, it has interesting assets little corruption, clean streets, good infrastructure, to name just a few.

As you may know, if youve read our previous articles about Chile, several local players are working on proving Kohavi wrong. From Start-Up Chile to Webprendedor, many are fostering the Chilean startup ecosystem, with the hope that things could change faster than Kohavi expects and that the next generation wont have to move to Silicon Valley. Still, his foreigners point of view brings some painful advice about the problems Chile has to overcome as a startup nation.