Shortly after launching Start-Up Chile, the state-backed accelerator program designed to spur the development of a startup ecosystem in Chile, the Chilean government realized they had a problem on their hands. The program was running smoothly, but a dearth of local investors was driving a good portion of its graduates to a premature death.

Five years later, Start-Up Chile has devised a solution to this problem — it will fund the startups itself, through a follow-on fund launching today called Start-Up Chile SCALE.

Start-Up Chile has graduated over 1000 startups from its accelerator program that offers entrepreneurs $40k in equity-free financing to temporarily relocate to Santiago, Chile. These companies have gone on to raise hundreds of millions in follow-on funding, generating a massive amount of press for the program and for Chile’s budding tech scene.

But the project has faced its fair share of challenges. You can relocate hundreds of international entrepreneurs to Chile, fly in dozens of experienced mentors, and hand out stacks of government money to everyone, but building a startup ecosystem from scratch takes time.

“That’s why we created the SCALE fund,” says Sebastian Vidal, director of Start-Up Chile. “85% of the funds that Start-Up Chile companies have raised — which is like 110 million so far — is capital from abroad, the majority from the States.”

For startups based in Chile, it’s difficult to find early stage capital to sustain a business that’s not yet profitable. Latin America is home to a different breed of venture investor than your typical Silicon Valley seed fund —these guys tend to expect an unrealistic demonstration of traction before they’ll place a bet on a young company. As a result, startups often jump ship after completing the program in Chile, resuming operations in the U.S. or Europe where obtaining more cash isn’t such a challenge.

Through the follow-on fund, Start-Up Chile will offer 60 million Chilean pesos (about $100k USD) in new financing to three graduates per batch of 30 upon completion of the three-month program. Just like the accelerator, the SCALE funding is equity-free.

Of course, there’s a catch — the money will be given through a co-financed grant, in which the $100k will account for 70% of the total funding and the recipient of the grant must put up the remaining 30%.

“The startups need to figure out a way of finding that capital, that 30%,” says Vidal. “The people in the industry that we’ve talked with are really comfortable with that model.”

And the second condition? The company must incorporate in Chile, and plan to stick around for a while.

“We never talk about Chile as a final market, because it’s not big enough,” says Vidal. “What we sell is that Chile is a great platform to start, to test, and to grow from. The political sphere is stable, the economy is stable, all of the legal things actually work, the regulations are friendly… so if you can set operations in Chile and grow from Chile, it will be easy for you to grow in the rest of Latin America or abroad.”

This is a model that a number of countries have sought to replicate. Start-Up Chile’s directors have worked with the organizers of Start-Up Brasil, Start-Up Perú, and Malaysia’s MaGIC, sharing a playbook they’ve created with any countries that are interested.

“Governments move in herds — they try to follow each other, they’re not risk takers,” says Torsten Kolind, CEO of YouNoodle, the startup competition platform that’s been running Start-Up Chile’s application process from day one. Start-Up Chile was the first of its kind back in 2010, but Kolind has seen a recent uptake in government-backed programs joining YouNoodle’s platform, aiming to replicate the success of the Chilean model.

“There’s a recent wave of government now that finally seems to get that a startup ecosystem may hold the key to long term national development,” says Kolind.

And this is arguably the strongest evidence of Start-Up Chile’s success — it’s still working out the kinks in Chile, but in the meantime it’s catalyzed a Startup Nation movement across the globe.

via Start-Up Chile Launches Follow-On Fund To Boost Local Growth | TechCrunch.