Startup Valuations Created By Government Investments Aren’t Real and Can Hurt Startups

June 13, 2016

February 23, 2021

The Chilean government, via CORFO, has been seeding the entrepreneurial ecosystem to help build startups. They've done a great job, but there can always be room for improvement. I wrote a blog post about synthetic valuations created by government and government backed incubators and accelerators and how they can hurt startups. From the article:

The Chilean government, via CORFO, has tried to seed the Chilean startup ecosystem to get it to grow more quickly. There’s always room for improvement, but overall, they’ve done good work and the ecosystem has grown. The three main programs CORFO has to support startups are:
  • Startup Chile – $20m ($40-25k depending on exchange rates) equity free grants
  • SCALE – $60m (89k-120k) equity free follow on grants
  • SSAF – $20m, then $40m (89k-120 total) follow on either direct or via incubators for 7% option for up to three years
CORFO awards many SSAFs each year, most via incubators that use CORFO’s money to “invest” in startups. These startups pass a selection process, then get $10-20m upfront, and then if they make it through each incubator’s unique process, they can get the $40m follow on. The incubators put the startups through an acceleration process, which can either be helpful, neutral, or in some cases harmful to the startup, depending on the incubator’s skillset.Each incubator has slightly different terms, but most are a total of $60m in exchange for a 7% option for up to three years. Some take a percentage of the startups sales in addition or to replace this equity. Others have buyback terms where the startup can buy the option back for a bit more than the original “investment.” Many of these options last for 2-3 years.The incubators’ options bring up two questions I won’t address in this post:
  • Should incubators with little (or no) skin in the game get equity in startups they “invest in” or select?
  • Should these incubators get equity? And CORFO, and by extension the Chilean taxpayers whose money is being “invested”, get nothing?
And two issues that I will address:
  • Incubators give startups CLP$60m (between US$89k-120k, depending on exchange rate) for 7%, creating an implied post money valuation of CLP$857m (Between US$1.2-US$1.7m, depending on exchange rate).
  • Incubators’ options have 2-3 year terms and most don’t have private money triggers that force the incubator to convert to equity.

Read the full post about how government money valuations can hurt Latin American startups.