Case Study: Ecommerce Opportunities in Chile and Latin America

In late 2012, I met up with two ex startup chile friends over beers. Like most beery conversations between entrepreneurs, the conversation devolved into new business ideas. All three of us had seen ecommerce’s steady growth in Chile and were certain that it would continue to grow toward levels seen in other developed markets. After a few more beers, one of us said, “why don’t we just start a small ecommerce business, it’s the best way to learn about the market and see where the real opportunities are.”

That conversation led to more conversations and we got serious about launching a small ecommerce business to really get a handle on the market. But what product should we sell? And how would we validate the market to know if the product we wanted to sell made sense? And how would we do it without spending huge amounts of money?

I’m writing this post to shed light into our thought process and to show how we validated our ecommerce business without spending a single dime (peso in this case) for two reasons:

  1. To give an overview of Chilean (and Latin American) ecommerce opportunities
  2. To help other entrepreneurs think about how they can validate their own ideas without spending months and thousands of dollars buying inventory, developing software and wasting time on unimportant things.

By now, almost all entrepreneurs know about lean startup methodology and try to use it, but the how remains mysterious to a high percentage of entrepreneurs. I hope this post is useful.

Preview: tl;dr (Too Long Didn’t Read)

After much research, we launched La Condoneria, to sell condoms online in Chile. We validated the opportunity by spending less than $100 and didn’t build any technology. We learned a ton, reached $8000 monthly sales and 100k unique organic traffic using Jumpseller, a Latin American Shopify.

We tried to scale by creating our own product or taking representation, but because of regulatory issues based on the product, we decided the best we could do is a small business. We believe that the two best ways to make money in Latin American ecommerce are by having exclusive representation of a product, or creating your own product, a la Warby Parker. We believe there is a massive opportunity in full stack ecommerce startups in Latam.

Step 1. Research

We first wanted to see if countries adopt ecommerce in a predictable manner. We knew that ecommerce in Chile was growing at 30% per year, but the vast majority of people hadn’t ever bought anything online. We found a Forrester report that showed the phases of ecommerce adoption. It corroborated our hypothesis that new markets tended to follow similar paths:

phases of ecommerce

We firmly believed that Chile was nearing the end of phase 2, and the early adopters were already moving into phase three. Chile is young and social, people are comfortable online. LAN airline ticket offices and travel agents were going out of business because of online purchases. We saw early successes like Buscalibre and Clandescuento (acquired by Groupon) and large retailers were starting to sell online. One of our best friends, Tiago Matos, is the founder of Jumpseller, a Shopify of Latin America, and we saw his business taking off. It was clear to us that we were on the cusp of phase three and we decided to go after it.

Step 2. What should we sell? A product? Or pickaxes to the miners?

We made a map of the industry in Latin America and looked at the businesses that make money in ecommerce in the US. By late 2012, we saw seven opportunities in the ecommerce market in Latin America:

  1. Amazon clone (high volume, low margin)
  2. Niche products with amazing stories and customer service (Dollar Shave Club)
  3. Create your own brand (Warby Parker)
  4. Shopify – Sell the pickaxes to the miners and create the infrastructure
  5. Payment systems
  6. Logistics and delivery (dropshipping)
  7. Get the exclusive representation of a foreign brand (medium margin business, low competition)

We quickly discarded doing an amazon clone because we believed that the Amazon of Latin America will likely be Amazon or potentially Linio, from Rocket Internet, which had recently launched. We also saw Buscalibre potentially struggling and discarded that idea.

We discarded doing a Shopify clone because our friend Tiago was already working on it and having some success. We looked at payments, but although a massive problem, we didn’t think we could solve it. We decided that it was likely that someone like Stripe, Braintree, Paypal or Venmo would use VC funding from the US to attack the Latin American market. We looked at selling a commodity product with an amazing story, but decided that if you have a commodity product, in the medium term, your margin will go to zero.

That left us with three options:

  1. Getting the exclusive distribution rights to a product that didn’t exist in Chile
  2. Creating our own product from scratch Warby Parker style
  3. Starting with a commodity product, knowing that our margin would eventually go to zero, with the goal of adding an exclusive representation or our own product after we got clients.

We chose option three for two reasons:

  1. Creating our own brand was too expensive and time consuming
  2. Introduce a new brand that people didn’t trust into the equation would be difficult because the vast majority of our potential clients would be buying online for the first time.

Step 3. What product should we sell?

We made a list of 50+ products that we were interested in selling including:

  1. Diapers
  2. Condoms
  3. Brand Name Sunglasses
  4. Birth Control Pills/tampons
  5. White label Sunglasses
  6. Cosmetics
  7. Pet Supplies
  8. Eyeglasses
  9. Men’s personal grooming items
  10. Disposable shavers
  11. Perfume
  12. Women’s Shoes
  13. Jewelry/Accessories
  14. Custom Tshirts
  15. Bikes
  16. Purses/Wallets
  17. Wine, Beer
  18. Tea and Coffee
  19. Electronics Accessories (iphone cases etc)
  20. Headphones
  21. Watches
  22. Baby stuff
  23. Women’s underwear
  24. Artwork
  25. vitamins
  26. Soccer jerseys
  27. Kids Toys
  28. Home Furniture and Accessories
  29. Office Furniture
  30. Custom Shirts
  31. Backpacks

We created a list of criteria to find the perfect product for us to get start with. Our criteria was:

1. Easy to ship

Shipping in Latin America was (still is) expensive and unreliable for larger products. We needed a small, lightweight product. That quickly eliminated products like furniture, diapers, pet supplies, beer and wine.

2. High margins

We wanted to be in a high margin business, which eliminated all the low margin businesses.

3. Few Returns

Since shipping is a big problem we wanted a product with as few returns as possible.

4. Repeat orders

If we had to struggle to get our first client, and many of our clients would be buying online for the first time, we wanted them to be able to buy again. That knocked sunglasses, bikes, watches, backpacks and artwork off the list.

5. Try before you buy?

Chileans didn’t trust ecommerce, so we wanted a product that you didn’t have to try before you bought, which knocked a significant amount of products off the list.

6. Average cart size

We wanted an average cart size of around $30, which would allow us to give free shipping, but still allow people to buy online without taking too much risk that their expensive purchase wouldn’t arrive.

7. Average item price

We wanted a lowish average price of around $5 so that the buyer would buy multiple items to get to our average cart size, and so that people could buy one cheap item to make their first ecommerce transaction low risk.

8. Market penetration

We wanted a product that was popular, but that you couldn’t find on every corner.

9. Current available selection in Chile

We wanted there to be few choices in the market, so that our product was a commodity

10. Easy access to supply?

Was it easy for us to buy the product to resell? Was it available in Chile? Or did we have to import it?

11. Access to supply outside of major cities

Did people outside of major cities have a problem finding the product?

12. Poor customer buying experience and customer service after sale

Could an online experience be a better than the current offline experience? How was the post sale experience?

13. Potential competition

What did the competition in Latin America look like?

14. Press potential

Could we get into the press with this product easily?

15. Success in the US?

Was it one of the first products that was successful in the early days of the US ecommerce?

16. Do we like it/will it be fun?

One of the most important criteria. It doesn’t make sense to work on something you don’t like, unless you have to.

We scored all of the products and quickly found that there was one product that was clearly better than the rest. It was small, lightweight, easy to ship, didn’t need to be tried on, had zero returns, cost about $3 per product, but could have an average cart size of around $30. It was also a terrible customer experience to buy offline for cultural reasons, had decent margins. We had a contact in the distributor who would help us buy our initial stock quickly and easily. What was the product? After our research, we’d decided to sell condoms online.

Since Chile is a very Catholic country where sex-ed is almost nonexistent, we knew there wouldn’t be much competition and it would be fairly easy to get press. We were also motivated to try to help solve a social problem by providing an online sex-ed resource where scared, young people could learn about one of the most important decisions in their lives. And most of all, it would be interesting and fun.

Step 4. Validating without spending any time or money

Now that we’d chosen condoms based on our research, it was time to validate that people would actually buy them online without us spending thousands of dollars on a website and initial stock. We mapped out a plan and started to execute.

First, we looked on Mercado Libre (Latin America’s Ebay) to see if people were selling condoms online. We quickly found that they were and googled to see if there were any other stores selling condoms online. There weren’t, so we decided to create our own Mercado Libre listings to see if we could get any buyers. We received numerous messages from potential buyers, but we always told them we were sold out, as we didn’t have any condoms to sell them. We’d found that there was a market.

Next, we put up new ads on Mercado Libre and actually made sales. When someone said they wanted to make a purchase, we walked to our local pharmacy, purchased the products and then met the buyer, usually in one of Santiago’s metro stations, to make the exchange. At this point, we didn’t allow online payment or shipping for two reasons:

  1. We wanted to make the barrier to purchase as low as possible
  2. We wanted to meet our clients to learn more about them.

We found that most of our clients were young, ignorant, uneducated, scared 15-21 year olds who were clearly going to have sex, many for the first time, and weren’t comfortable buying at the pharmacy.

After about a week and ~5 purchases, we allowed people to pay online with a free instant bank transfer to validate that people would pay online. They did. After another week, we added free shipping and the orders kept coming in. We kept filling them by walking to the pharmacy.

Walking to the pharmacy put us in the shoes of potential clients who we were trying to help: it shined the spotlight on the terrible process we were trying to fix, especially when we had to purchase large quantities of “climax control” condoms for premature ejaculation and XXL condoms at the counter in front of massive lines of people who can hear and see what you’re buying.

In Chile, condoms are high up, behind the counter. You must order in front of a long line for the condom you want.

In Chile, condoms are high up, behind the counter. You must order in front of a long line to get the condom you want.

Next, we had to validate that people would buy from a stand-alone website outside of the friendly confines of Mercado Libre, so we setup a landing page using Jumpseller with a 99designs logo and send some Facebook traffic to the site. We saw that people were adding products to their cart, trying to buy. We quickly added DineroMail, a Latin America payment processor that charges 7% fees and holds your money for 1-2 months and started to sell online, still filling orders at the pharmacy.

By this point, we’d spent a total of $300 on 99designs, Facebook ads, and postage filling orders. We’d validated that people wanted to buy condoms online, that they’d buy from a site they didn’t know, off Mercado Libre and that we were ready to try to scale the business.

5. Building the Foundation

We decided to spend another $500 for a custom Jumpseller design, purchased $400 of stock of Chile’s three best selling condoms (Lifestyles in case you were wondering), wrote 20 educational articles to get organic traffic and officially launched La Condoneria. We launched with the three most popular brands (Lifestyles, Trojan and Durex) and all 24 popular styles you could find at pharmacies even though we only purchased stock of three styles. We priced the other 21 styles we didn’t have in stock 50% higher than in the pharmacy so that we could see if people were price sensitive, and also because I was sick of walking to the pharmacy to buy condoms each day.

We saw that we had four distinct niche clients and created content and packs for each one:

  1. Young adults between 15-21 who didn’t know the first thing about sex and were scared to go to the pharmacy – “First time pack” that included a sex-ed pamphlet that helped people decide if they were ready for their first time and if they were, how to be safe their first time.
  2. Women who didn’t want to go to the pharmacy because of social stigma – Women’s pack, plus dozens of articles about female sex-ed.
  3. 24-25 year old men who bought 2-3 months worth of condoms at a time to stockup – Pack “heavy user“, a popular 30 pack.
  4. Professionals” who were looking for a good price – “Bulk Pack“, a 90 pack, that offered big discounts.

After four months, we’d now purchased all 24 styles and were growing quickly. Our content was incredibly popular, leading to 100k monthly organic traffic, a loyal following and lots of newspaper articles and radio appearances. Our clients loved us because we were really helping people. In a country where most people have incredible misconceptions about sex, abortion in any situation is illegal, getting the morning after pill is very difficult and young people don’t really have anyone to talk to about making this important life decision, we were clearly doing good.

Our live chat was incredibly important for two reasons:

  1. It became the place for people to go when they had questions about sex and many times we had to refer people to their local clinician or to a specialist to help them solve their problems.
  2. We could guide people to purchase our highest margin, best products. If we talked to someone on our chat, they converted at around 33%, whereas we had 1% conversion rates on the site.

By the sixth month in operation, we were selling about $5000 per month, but just breaking even. We were convinced that we had found a good niche, learned how to logistics well and know how to acquire clients cheaply, but we needed to explore other ways to up our margin. We knew that if we continued to sell imported commodity condoms, we’d never do better than a 10% final margin, even at scale.

6. New Opportunities for Scaling Revenue

After a few weeks of brainstorming we came up with this list and worked to validate each one:

  1. Take the exclusive representation of a well know, foreign condom brand and get 65% net margins, up from 10%.
  2. Create our own white label condom brand and get up to 95% net margins.
  3. Add high margin sex toys
  4. Convince local condom brands to advertise on the site

We first looked at taking the exclusive representation of a well know, high quality brand. We had multiple meetings in Santiago with an executive from one of the best condom companies in the world, but in the end, he decided to award representation to another, only offline, Chilean business. We talked to a fast growing, well know, US brand that had already launched in Latin America, but it quickly became clear that they didn’t understand the Chilean market.

They wanted us to purchase a half container’s worth in our first order, and 2 containers worth by year two. Unfortunately, Chile’s entire market only uses about 8 containers per year, so we were being asked to purchase 5% of the condoms sold per year in our initial order and then close to 20% by year three. It just didn’t make sense. As an aside, Chile’s condom consumption isn’t low because Chileans are much less sexually active than their neighbors, they just use fewer condoms (under 1 per capita per year, compared to 5 in Uruguay, 4 in Peru and Argentina.)

Next, we looked at manufacturing our own brand and importing. This opportunity was extremely attractive because the unit cost delivered in Chile was about 2 cents, and the final sale price was about $1.20. Massive margins. But the minimums were high and Chile’s regulatory barriers were almost impossible to comply with. For example, we needed to give the government 10,000 units for testing before we could get the brand registered and we were told off the record that Chile wouldn’t approve a new brand that wasn’t approved in another developed country in the world.

We looked at adding high margin sex toys, but we didn’t think it would work for multiple reasons.

  1. Japi Jane, a highly successful online sex toy store, controlled the market.
  2. We weren’t sure that our clients would purchase many toys.

We did some tests using products we’d purchased on Amazon (I brought them to Chile in my luggage and got a letter saying TSA had opened my baggage for extra security checks), but we couldn’t make the numbers work.

We tried to convince local condom brands to pay us, but they all had traditional, conservative views and weren’t interested. The best we could do was to negotiate free samples that we could later sell, but it quickly became clear that this method wouldn’t work in the long run.

After a year in the business, we were selling $8000 per month with 100% free organic and social traffic, making about 10% net margins and it clearly wasn’t worthwhile to keep trying to expand. La Condoneria had turned into a nice small business that will continue to grow, but will never be a massive business.

But it served it’s purpose. We learned everything there is to know about Chilean ecommerce and the massive opportunities that entrepreneurs can attack. We decided to spin off La Condoneria to one of my partners who wanted to operate the business to continue to help Chileans buy condoms online.

The three of us are ready to launch our next ecommerce business taking everything we learned from our first La Condoneria to create a highly profitable business.

6. What we learned

If you’re not going to be Amazon or have millions of dollars of VC to attack payments or drop shipping we believe the opportunities are:

  1. Focus on creating your own product, a la Warby Parker
  2. Getting exclusive representation of a product, like our friend Stephen Stynes did with Pouchee.

Delivery, in Chile, for everything except large items is pretty much solved. Payments pretty much work. Infrastructure is well executed with Jumpseller and other competitors, plus Shopify will be moving into the rest of Latam shortly.

From our original list in 2012, many of the ideas have been launched:

  • Baby Tuto – $1m+ annual sales of baby products in chile. Have their own branded delivery for large items.
  • Obzes – makeup marketplace, closed in 2014, probably low margins
  • Briu – Coffee subscription club
  • Mangacorta – Custom tshirts, just raised $120k on Broota, a Chilean equity crowdfunding platform.
  • Pouchee – Purse organizers
  • Linio – Amazon clone from rocket internet
  • Dafiti – Zappos clone from rocket internet
  • Bike stores – Many
  • Dperfumes – Perfume
  • Adorate – Women’s underwear, closed in 2014, low margins, hard to sell online.
  • Depto 51 – Design marketplace

 

The VAT Trap: Why Is Chile’s VAT System So Poorly Setup?

Chile’s VAT system doesn’t make sense. Once you are in the system, the reporting system is world class and has been ranked in the top five in the world for ease of use. The Chilean IRS’ website works incredibly well, is fast, reliable and makes paying your taxes a breeze. It blows the US system out of the water and it’s not even close.

But getting legally approved by Servicio Impuesto Interno (the Chilean IRS) is a bureaucratic, capricious, time consuming process that doesn’t make any sense. After the long and complicated process to incorporate and get a bank account (that I’ve talked about before), you need to get your boletas (receipts) and facturas (official invoices) so that you can legally sell and pay your taxes.

The boleta process is straightforward and allows you to sell to individuals or companies that don’t want a tax refund. But if you want to sell to a business, you need to have a factura (official invoice) or nobody will buy from you and your business will fail. And that’s where the problems start.

Facturas are government issued documents that break out the VAT tax so that the buyer can get a VAT credit and get to keep the money if they’ve sold items subject to VAT. For example, if a business sells something for US$10.000 + VAT with a factura, they’ll have to pay US$1.900 of VAT. At the end of the month, they’ll have to go online and pay the government US$1.900 on the top notch SII website. But if they buy something for US$10.000 with a factura, they get a credit in their favor for US$1.596, which lowers their VAT liability.

It would seem that getting a factura should be simple, but its not. If you intend to sell product, in an ecommerce store for example, you need to go to the IRS with paperwork showing that you’ve purchased product that you will later sell. You need to take that purchase facturas to the IRS, wait in line, and ask for your factura. So if you want to start a business and sell legally, you need to take money out of your pocket and purchase product that you can’t legally sell. This makes small business owners dig into their startup capital just to be able to legally sell.

In my ecommerce business, I went to the IRS with my factura that showed that I purchased US$200 or product, waited in line for 30 minutes. When I finally got to present my factura, the bureaucrat laughed in my face. He told that one factura and US$200 of purchases wasn’t enough. I asked what the rule was: how many facturas and for how much money. The bureaucrat told me he couldn’t tell me, that there wasn’t a bright line rule, but that he knew that if he presented my factura it would be declined and that I wouldn’t be able to sell legally.

I came back a week later with another factura, this time for US$1000, in addition to my US$200. The same thing happened. I got fed up and hired an accountant to do the dirty work. It took the accountant three trips to the IRS to finally get it approved. She was sent home one time because the notarized copy of my company’s tax ID wasn’t sufficient, even though the plastic card vs. a notarized version are exactly the same in the eyes of the law. It took four months before I was finally able to start to sell legally. My $1200 was tied up the entire time and I couldn’t legally operate my business.

Entrepreneurs with less startup capital would have started to sell illegally, depriving the government of tax revenue and making the entrepreneur into a tax evader.

The whole process doesn’t make any sense. First, why does the government care if you’ve purchased goods to sell in order to have a factura? It’s ridiculous. Why put another barrier to successfully starting a business and paying the government tax revenue? A barrier that makes entrepreneurs have months of extra startup capital or incentivizes them to skirt (or break) the law?

What’s the worst that could happen? If an entrepreneur submits a factura for a sale that never happened, the entrepreneur would be paying 19% VAT tax at the end of the month. So the downside of making it easier for businesses to get started and sell legally is that the government will collect extra 19% VAT taxes?

Second, if the government insists on forcing entrepreneurs into purchasing goods before they can legally get the documents they need to sell them and pay their taxes, why doesn’t the government have a bright line rule? You must have four purchase orders that total at least $1000 and you’ll be approved? Why let capricious bureaucrats decide and make entrepreneurs lives that much more difficult? It just doesn’t make sense.

Now that you have your facturas, the government puts up another, bigger, barrier for small business owners. When you sell with a factura, you must pay your 19% VAT on the 12th of the next month. For example, if I sell US$10.000 + VAT in August, on September 12th, I must pay the government US$1.900. That wouldn’t be a problem if companies paid immediately, but in Chile companies pay net 60 and many times net 90 or even 120. And that’s if they pay on time at all! That means that I have to take $1.900 out of my pocket to pay my taxes and effectively finance the government and large businesses while I wait to get paid.

One of my portfolio companies in Magma just sold US$12.000 + VAT net 180. Without doing net 180, they wouldn’t have closed the sale. That means my portfolio company needs to pay $2.280 in VAT on August 12th and have the funds necessary to finance the government and their large client for six months!

Since most companies don’t pay for 60-120 days, a new business will pay 19% taxes on their sales two to five months before they even get a single cent in revenue. VAT taxes are the biggest barrier to actually starting a business and making it successful. The government and big businesses have teamed up to thwart new entrants to the market.

In Europe and the rest of the OECD, the vast majority of countries allow small businesses to pay their VAT taxes quarterly or even annually, which means that companies have at least 90 days to collect their sales so that they don’t need to pay their VAT out of pocket. Colombia, South America’s fastest growing economy, is Latin America’s only country that doesn’t charge monthly, thereby helping more companies start successfully.

vat regimes

http://www.ey.com/Publication/vwLUAssets/Worldwide-VAT-GST-and-sales-tax-guide-2014/$FILE/Worldwide-VAT-GST-and-sales-tax-guide-2014.pdf

Since VAT policy is an administrative issue, the government could make changes immediately to help small businesses. So why don’t they? If Chile moved to a quarterly regime for companies selling less than US$400.000 annually like Italy, the government would take a short term cash flow hit, but after four months, the government’s net revenue would be the same. And the government would have instantly helped thousands of entrepreneurs and existing small businesses survive.

Chile has spent money on Startup Chile, on creating an online business incorporation system, but it still hasn’t done the most basic of all fixes: allowing small business and new entrepreneurs to pay quarterly or biannually. I only see three three possibilities:

  1. The government doesn’t trust small entrepreneurs to be able to plan for four bigger payments per year
  2. The government and the elites in government don’t know this is a problem that kills entrepreneurship
  3. The rules were put in place by the elite to help thwart new entrants to the market

I always ask Chilean entrepreneurs which of the three reasons they think is the real reason. About 25% think its because they think the government doesn’t trust entrepreneurs to manage their finances, half thinks that the government is incompetent and the last 25% think its to thwart new entrants into the market.

My personal opinion is that it’s a mix of all three. The government must know it’s a problem, but probably doesn’t really understand how much of a problem it is. Most people in government are elites who have never run a business before. And those that have are mostly in the upper class and likely had enough money to survive the VAT trap.

Chile is like a country club, with massive classism (which is really just racism), that’s mostly controlled by the top 10%, so it wouldn’t surprise me if the VAT trap was put in place to thwart new entrants to the market.

ASECH, Chile’s entrepreneurs lobbying group, has been pushing for the buyer to have to pay the VAT tax on a monthly basis (Spanish). This change would work, as large companies would have to pay when they buy from small businesses, but its a much more radical and intrusive change for businesses. If you simply allow small businesses and entrepreneurs to report their VAT quarterly or semi annually, you solve the problem for the vast majority of businesses.

I’m not optimistic about the changes that Chile will change the VAT payments requirements from monthly to quarterly in the near future. I think the government doesn’t really trust its citizens, politicians with no knowledge of what it takes to run a business don’t really understand how big a problem the VAT trap is, and elites in power are either ignorant to the problem or like the barrier against new competition.

What do you think?

Full Stack Startups in Latin America are a Massive Opportunity

Latin America is the perfect market for full stack startups. I’m convinced of it after living and working in Latin America for the past four and a half years and am even more convinced after having met, worked with and reviewed over 600 startups in the past year and a half as managing partner of Magma Partners in Santiago, Chile.

So what is a full stack startup and why am I convinced that Latin American entrepreneurs should be exploring full stack startup business models?

First, lets start with a definition. Chis Dixon coined the term Full Stack Startup in a blog post in March 2014. He says that a full stack startup is a  “…complete, end-to-end product or service that bypasses existing companies.” It bypasses the old, existing hierarchy to be able to control the entire experience. According to Dixon:

Prominent examples of this “full stack” approach include Tesla, Warby Parker, Uber, Harry’s, Nest, Buzzfeed, and Netflix. Most of these companies had “partial stack” antecedents that either failed or ended up being relatively small businesses.

So why are companies following the full stack method instead of the old school method of partnering with large companies? Dixon explains:

The problems with the partial stack approach include:

    • Bad product experience. Nest is great because of deep, Apple-like integration between software, hardware, design, services, etc, something they couldn’t have achieved licensing to Honeywell etc.
    • Cultural resistance to new technologies. The media industry is notoriously slow to adopt new technologies, so Buzzfeed and Netflix are (mostly) bypassing them.
    • Unfavorable economics. Your slice of the stack might be quite valuable but without control of the end customer it’s very hard to get paid accordingly.

The full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide.

The three difficulties that Dixon explains are even harder to overcome in Latin America. Let’s unpack them one by one.

1. Bad Product Experience

Large Latin American companies generally have poor customer service and product experience because consumers don’t have many other options. Large companies are not generally motivated to improve their product, as they’re very confident in their market position. And if you are able to do a deal, you’ll be confronted with seemingly endless bureaucracy and conservative thinking that will water down the product to make it 10% as good as it could have been. What could have been a highly successful startup gets turned into a corporate innovation program that gets watered down and doesn’t succeed. I’ve seen it firsthand with three of my portfolio companies and heard the same story from countless Latin American entrepreneurs.

Why?

Latin America is an oligarchy. In some countries the best way to describe the business climate is that it’s a country club, if you’re in, you’re in, if you’re not, you’re in trouble. The general attitude of most powerful businesses is not to create value, but to extract as much value from whatever they can, whether its raw material from the earth, fruit from the land or money from people’s pockets.

Large, established, generally family owned, companies control huge swathes of the economy. In most countries, there are small number of cell phone companies that have more or less the same plans and prices. Latin American banks are the most profitable in the world (27.4% return on capital, compared to 14% in North America) and don’t really compete with each other. Most brands are sold by an exclusive distributor that sets the price and is nearly immune from direct competition.

In Chile, there are three large department stores that each sell to different target clients and don’t really compete on price. There are three large Chilean pharmacies that get caught price fixing every few years, pay a small fine, and go right back to it.

Most large Latin American companies aren’t focused on growing and innovating. They’re hoping to maintain their historical dominance and squeeze more money out of their clients. I’m not saying there’s no competition and that large companies are evil, but there’s much less competition than in the US or Europe. So when a startup tries to partner with an existing company, it usually doesn’t work because the large companies cannot or will not execute on the new opportunity.

2. Cultural Resistance to New Technologies

Large Latin American companies are almost always conservative. They’re not interested in new technology because they’re already profitable and confident in their market position. Most executives in large Latin American companies are not interested in trying new technologies. For example, if you pitched your product to an executive at a large US company and he passed on it and it would have solved a big problem for the company, he might get a bad performance review or even fired. He missed an opportunity to grow the business or streamline a process.

In Latin America, its the exact oposite. If you pitched your product to an executive at a large Latin American company and she passed on it and it would have been a huge success for the company, nothing happens. But if she had tried to implement a new technology and it didn’t work, she might get a bad performance review or even lose her job. There is a massive resistance to new technologies because companies put the fear of God into employees not to screw up. So they reject most new ideas out of hand.

3. Unfavorable Economics

If you don’t have control of the end consumer, you’re likely leaving money on the table. This is even more true in Latin America. Large companies are used to taking most of the value in a deal. If you’re a startup that creates $100 of value for a large company, the large company will want $99 and might agree to let you have $5 and think that they’re doing you a favor. (Unless you happen to already be in the upper class of a country (club), then you might get closer to $50. But that’s for another blog post).

Large companies don’t feel like they need to give you a fair deal because they know they are one of the only games in town. If I try to sell my product to a large retailer in the US and they try to take nearly all the value for them, I’ll go to their competitors, there’s hundreds of them. But in Latin America, there might be two or three per country. If you want to capture value, you may do much better if you’re a full stack startup.

Conclusion

If you are thinking of starting a business in Latin America or investing in a business in Latin America, I believe full stack startups should be your first choice. They represent a massive opportunity to disrupt undisrupted markets where the incumbents actively laugh in your face if you ask them about competition from startups. The market has been changing rapidly over the past two years, but I expect it to change even more quickly over the next five and large companies still don’t recognize the threat. I bet full stack startups will be the most successful startups in Latin America over the next five years.

What do you think? Do you have any examples of full stack startups in Latin America? I’d love to continue the discussion in the comments.

Some Examples

1. Cumplo

Cumplo is a peer to peer lending company like Lending Club. They could have partnered with a financial institution, but went out on their own and are finding massive success.

2. Propiedad Facil (portfolio company)

After running as a non full stack startup a year and a half Propiedad Facil became a full stack startup, bypassed the traditional players and went out on their own. They’re now growing 100% month over month.

3. Khipu

Khipu is a payments processing company in Chile. Others have tried to break into the market, but, unlike most other competitors, Khipu designed an end to end process that bypassed the Transbank monopoly and allows people to pay using their bank account and merchants to pay lower fees and get their money faster.

4. Deenty (portfolio company)

Deenty started as Yelp for dentists. But they found that they could make more money by starting referring patients to their own dentists and have found product market fit.

5. Lema21

The Warby Parker of Brazil. They recently merged with another Brazilian company and are growing steadily.

Chile Restaurant Guide: Best Restaurants in Chile

I’ve lived in Chile for four and a half years now and have had an ample chance to sample Chile’s many restaurants. Although Chile’s restaurant scene has made incredible strides since 2010, unlike places like New York City, San Francisco, Buenos Aires or Madison, Wisconsin, Chile isn’t a place where you can walk into a random restaurant and find a great meal.

The average Chilean restaurant isn’t that great. You’ll likely end up with some meat and potatoes with little flavor, low quality food or overpriced fare with little connection to value for money. I’ve created a list of the restaurants that I actually like and go to regularly. Please enjoy my favorite restaurants in Santiago and Chile.

I’m always looking for new restaurants to add, so please post any ideas or feedback in the comments!

Brunch

Ensaladeria Holm – Padre Mariano 125. Providencia. Huge Saturday and Sunday brunches. Fresh fruit and vegetable juices and smoothies. Salads and sandwiches during the week. $$$.

Casa Zucca – Presidente Riesco 3006. El Golf. Old house with a beautiful courtyard tucked away from busy El Golf. Small menu, but large portions and high quality food. Great for a relaxing Saturday brunch, closed on Sunday. $$.

Thai

Pad Thai – Manuel Montt 231. Providencia. Solid Thai Restaurant with a cool courtyard. The Pad Thai is great, other main dishes are decent. Appetizers and desserts are a bit lacking, but main dishes are really good. $$$.

Thai House – Manuel Montt 1020. Providencia. Authentic Thai food a bit farther down Manuel Montt than Pad Thai. The décor isn’t as cool as Pad Thai. Most dishes are better here except I prefer the Pad Thai and ambiance at Pad Thai. Try the green tea cake with melted white chocolate for dessert. $$$.

Indian

Rishtedar – Holanda 160. Providencia. Real authentic Indian food. Huge menu. Many vegetarian options. One of my favorite restaurants in Santiago. Try the mushroom appetizer, the authentic naan and spicy curry. If you want it spicy like Indian food should be, you have to ask for it, as Chileans don’t tolerate spice well. Delivery for $2.000. $$$.

New Horizon – Merced 565. Bellas Artes. Authentic Indian food. Small menu, small restaurant. I love the fish curry. Cheap lunch specials. Great value. $.

Vegetarian

El Naturista – Huerfanos 1046 & Moneda 846. Centro. Rosario Norte 532 Las Condes. Vegetarian restaurant with two locations close to Universidad de Chile metro. Great pebre (tomatoes, cilantro, onions, goes on bread) which goes really well with all of their dishes. My favorite is huevos rancheros with tons of pebre. $$.

El Huerto – Orrego Luco 54. Providencia. My favorite salads in Santiago. Their homemade whole wheat bread and their very vegetabley pebre are great. Meat eaters, try Nuevo Mexico, you’ll almost forget you’re not eating meat. $$$.

Quinoa – Luis Pasteur 5393. Vitacura. A vegetarian’s dream, reasonably priced, especially for the area, top-notch food in a cool location. They also have great brunch. $$$.

Shakti – Av Italia 1568. Barrio Italia. Vegan. Interesting food, even for meat eaters. The interpretation of ceviche but made with mushrooms instead of fish is really good. $$.

Rishtedar. See the Indian food section. Many vegetarian options.

Sandwiches

La Gloria – Huerfanos casi esquina Amunategui, Santiago Centro and Manuel Montt 1315, Providencia. Peruvian sandwich shop. Amazing service, top quality food. Might be my favorite sandwiches in Chile. Love the fish sandwich with the spicy sauce. $.

Fuente Alemana – Pedro de Valdivia 210 and Bernardo O’Higgins 58 (near Plaza Italia). The best lomitos in Santiago. Huge sandwiches. A completo comes with lettuce, tomato, sauerkraut, avocado, mayo. Add spicy mustard for extra kick. Kind of touristy, but worth it every once in awhile. $$.

Dominó – Multiple Locations. Not to be confused with the US pizza chain, Dominó is my go to fast food restaurant. It’s how fast food should be. Good ingredients, lots of choices, not expensive. They have surprisingly good salads as well. For a change of pace: get the vegetarian sandwich (avocado, tomato, cheese) with a “paila” of eggs. $.

Donde Guido – Bellas Artes. Peruvian sandwich shop with lots of interesting sauces. Fast, good, filling. Big sandwiches…you won’t go away hungry. $.

Hogs – Los Leones 40, Providencia. Merced, Lastarria. Handmade, quality sausages and hotdogs. A bit expensive compared to to a typical low quality Chilean hotdogs, but worth it. A real hotdog is worth the extra cost. $$

La Superior – Nueva de Lyon 105. Providencia. Upscale versions of Chilean classic sandwiches. One of the best beer lists in the city with 25+ Chilean brewed beers. Packed for lunch, but easy to get a table for dinner. $$$.

Metropol – Vitacura 8927. Vitacura. Filling sandwiches named after metro stops, good beer list. Quesadillas are worth trying too. $$.

Elkika – Multiple locations in Providencia. Big, tasty sandwiches, cheap beer. Always packed. A local favorite. $$.

Pizza

Tiramisu – Isidora Goyenechea 3141. El Golf. Great thin crust pizza. Reasonably priced for location, cool atmosphere and top-notch food. It’s always packed, no matter when you go. Expect to wait if you go during peak hours. Have a pisco sour while you wait at the bar. $$$.

Fabrica de Pizza – Bellavista. Lower quality, but good thin crust pizzas for US$6-9 and cheap beer. A place to sit outside on a nice sunny day or a warm night with a bunch of guys. Cheap and “interesting” people watching. $.

Caperucita – El Bosque Norte 083. El Golf. Thin crust pizza with interesting combinations. Also has delivery.

Korean

Sukine – Antonia Lopez de Bello 244. Patronato. One of my favorite restaurants in the city. Authentic Korean food with owners who barely speak Spanish. Really cheap, a great place to go with groups. Best for lunch or early dinner, as neighborhood can be sketchy at night. $$.

Vietnamese

Vietnam Discovery – Loreto 324. Patronato. One of the only Vietnamese restaurants in Santiago. Great food, sophisticated decoration. $$$.

Peruvian

Barandiaran – Manuel Montt 315. Providencia. Patio Bellavista and Nuñoa. Manuel Montt is my favorite location they converted a beautiful old house into the restaurant with a large courtyard. Great food, classic Peruvian. Really strong pisco sours. Great place for a special occasion. I love the corvina with mango sauce and shrimp and the filete a lo macho, along with the ceviche.  $$$$.

Las Hermanas de Trujillo – Av. Italia 1206. Barrio Italia. Small courtyard in Barrio Italia with great empanadas and Peruvian dishes. Great place for dessert and coffee. $$.

El Encuentro Peruano – Ismael Valdés de Vergara 790. Santiago Centro. A Peruvian restaurant that caters to Peruvians who are living in Chile. Affordable, big portions, strong pisco sours, good flavor, cool old building. My favorite affordable Peruvian restaurant. $$.

Astrid y Gastón – Antonio Bellet 201. Providencia. From world renown chef Gaston Acurio. Intricate, flavorful, Peruvian food. One of the most expensive restaurants in the city. Only for special occasions or if your parents are visiting (and paying!). $$$$$.

La Mar – Nueva Costanera 3922. Vitacura. Rivals Astrid y Gastón as the top Peruvian restaurant in the city. Better ambiance and outdoor seating, known for its seafood and ceviches. The only Peruvian with vegetarian menu, but you have to ask for it specially. For special occasions. $$$$$.

Japanese

Shoo-gun – Enrique Foster Norte 172. El Golf. Authentic Japanese restaurant with interesting Japanese dishes, other than sushi. Good sushi, but expensive. I love the katsundun, a rice, pork, egg and onion bowl. Lunch menu is a great value. $$$$.

Sushi

Kintaro – Monjitas 460. Bellas Artes. Fairly priced, great rolls, least use of cream cheese in their sushi in Santiago. Sashimi is good, but not spectacular. Try a sushi boat sample platter if you go with friends. $$$.

Senz – Cerro Plomo 5680 Las Condes and Costanera Center Tobalaba. Peruvian inspired sushi. Large sushi rolls with interesting Peruvian inspired sauces and fillings. I prefer the Las Condes location, as it’s quieter. Really busy for lunch. $$$.

Zabo – Dardignac 0191. Bellavista. A bit expensive for what you get, but really good, high quality sushi. Great sashimi. Good drink menu. $$$.

Bushido – Francisco Bilbao 399, Barrio Italia. Las Condes 9377. Las Condes. Great sushi with interesting combinations, but terrible Thai food. The contrast between the quality sushi and the garbage worthy Thai food is incredible. Go for the sushi. Don’t be tempted to try the Thai. Good delivery. $$$.

Chilean

Peumayen – Constitución 136. Bellavista. Peumayen’s tagline is “ancestral food” and is the first restaurant in Chile that’s honoring Chile’s rich indigenous food tradition. I foreigners here whenever they come to visit Chile, as it’s an experience. Start with a North to South bread sampler, an appetizer platter to share and a unique main dish, all in a beautifully restored Chilean house. Expensive, but worth it for a special occasion. $$$$.

Divertimento – Pedro de Valdivia Norte at Cerro San Cristóbal. High quality Chilean food. Expensive, but a great location surrounded by trees in the park at the foot of Cerro San Cristóbal. You may need a reservation at night or during lunch. $$$$.

La Casa de Don Benito – Camino Lonquen Norte Parcela 16. Lonquen. Located about 30 minutes from downtown Santiago, Don Benito serves classic Chilean food and claims to have the best empanadas in all of Chile. The no frills food is excellent and all of his restaurants are packed on weekends. $$.

La Piojera – Aillavilú 1030. Metro Cal y Canto. Santiago Centro. La Piojera is a bit like going back in time, before tv, before radio and electricity. It’s what I image our great great grandfathers did in their spare time after a hard day’s work. It’s a divey traditional place famous for their terremotos, which are drinks made of white wine, pineapple sorbet and some light liquor. The meat on the bone and the hot sauce is great, but the place is dirty and if you think too hard, its gross. A place to go for drinks and brave the food. Although it’s getting touristy, it’s still worth going at least once for the experience. Really cheap. Half a dollar sign.

Salvador Cocina y Café – Bombero Ossa 1059. Santiago Centro. Hidden just off of Paseo Ahumada, this restaurant is about 3 blocks from the Universidad de Chile metro and has great homemade lunch. Much better quality for a similar price compared to many of the small restaurants in the center. Try the iced tea. $$.

Liguria – Three locations Pedro de Valdiva, Manuel Montt, Tobalaba. Providencia. Bar and sandwich shop that serves good Chilean food, sandwiches and decent drinks. Food is good, specials are great. Drinks can be expensive for what you get, but it’s one of the only bars that serves food after about 12am in Providencia. $$$.

Juan y Medio – Barrio Brasil, Rancagua and Vitacura. Originally a truck stop about an hour south of Santiago that served massive portions of hearty, classic Chilean food. Now Juan y Medio has up locations in Santiago. It’s hit and miss: sometimes its really tasty, other times not great. $$$.

Galindo – Dardignac 098, Bellavista. Cheap Chilean food. Good place for beers and chorrillana with friends or Sunday lunch with a group or traditional chilean food after work during the week. $$.

J Cruz – Condell 1466. Valpariaso. The original chorrillana: Artery cloggin’ french fries, grilled onions and meat. Accompanied by a beer. The location oozes history and is down a dark alley. But it’s worth it if you’ve made the trip to Valparaiso. $.

Las Cabras – Luis Thayer Ojeda 0116, Providencia. High quality Chilean classics at an updated version of a Chilean “fuente de soda” or soda fountain. Smallish portions but very high quality food. $$.

Bar Nacional. Centro, El Golf. Huge menu of Chilean classics. Good value for money. Packed at lunch, good place for after work drinks. $$.

Seafood

Portofino – Bellamar 301, Cerro Esperanza, Valparaiso. Top-notch seafood on the coast. The incredible views alone are probably worth the price of the meal. Good wine list, great service. $$$$.

Punta Mai – Avenida del Mar 1366, Maitencillo. Located about two hours north of Santiago, Punta Mai has great seafood in an upscale atmosphere. A bit expensive, but if you’re already on the coast, its worth it. $$$$.

Mercado Central – Metro Cal y Canto. Mercado Central is a bit of a tourist trap, but it really does have great seafood. Don’t order the crabs, they’re insanely expensive. The best tip here might be to purchase fresh seafood and cook it at your house. It’s way cheaper and more fun to look at all the interesting fish and shellfish that you probably haven’t seen before.  $$-$$$$.

See: Peruvian restaurants – They usually have great seafood.

Meat

Las Vacas Gordas – Cienfuegos 280. Barrio Brasil. A traditional Chilean parrillada and meat restaurant. Huge, open grill that you can see right as you walk in. Great pisco sours and desserts. A great place for Saturday lunch, but expect to wait a bit. $$.

Ox – Nueva Costanera 3960.Vitacura. Some of the best meat in Santiago. Expensive, good wine list, great appetizers, but worth it for a special occasion. $$$$$.

Happening – Av. Apoquindo 3090. El Golf. Rivals Ox in quality, but a little less expensive. Good value for money on the meat, but sides and wine can be expensive. $$$$.

Gringo

California Cantina – Las Urbinas 56. Providencia. Gringo bar with burgers, texmex food and moderately priced drinks. Decent, not great, but if you’re craving a US atmosphere, go here. Great place to watch US or European sports on tv. $$$.

Italian

Golfo di Napoli -Dublé Almeyda 2435. Ñuñoa.  The best value for money Italian restaurant in Santiago. It’s cheap, has huge portions and has the feel as if you’ve been transported right over to Europe. The gnocchi melts in your mouth. House wine in US$4 for a half liter. There will likely be a wait on weekends. $$.

Da Noi – Av. Italia 1791. Barrio Italia. Reasonably priced Italian food in Barrio Italia. Waiters bring warm bread with meatsauce when you arrive. Try the lasagna. $$$.

Fusion

Varanasi – Manuel Montt 983. Providencia. An interesting mix of Indian “soul food.” A bit expensive for what you get, but interesting dishes and nice atmosphere. $$$.

Lusitano – Condell 1414. Barrio Italia. Good food, great tiramisu for dessert. One of the best outdoor terraces in Santiago. Great place for a relaxing lunch or a nice night out with friends or a date.

Étnico – Constitución 172, Bellavista. A loungy type bar/restaurant with great seafood and a top wine list. The food is a bit expensive, but the wine and drinks are fairly priced. Great place to relax with some friends or to take a date. $$$.

Ky – Peru 631. Recoleta. One of my favorite places in the city. Located in an old house filled with old furniture, this is another great place to take a date. Interesting Asian/Chilean dishes, great seafood and a drink menu that’s 3x longer than the actual menu. A rare place with character in Santiago. Make sure to make a reservation on weekends. $$$.

Casa Luz - Av. Italia 805. Barrio Italia. Beautifully restored old house with one of the best courtyards in Santiago. High quality food, but a bit expensive for what you get. $$$$.

Burgers

La Burguesía – Santa Magdalena 99. Providencia. Burger restaurant with interesting mixes of meat and non-traditional toppings. Only outdoor seating. $$$.

Unlce Fletch – Dardignac 0192. Bellavista. The best burgers in Santiago. Brioche bun, high quality meat, crispy bacon, top notch beer list. $$$.

Ice Cream & Desserts

Emporio la Rosa – Parque Forestal and various locations. The best ice cream in the city. Thick, creamy, delicious. My favorite flavor is chocolate avellana (hazelnut). They also have cakes and coffee. The Parque Forestal is the classic location. Grab an ice cream and eat in the park.  $$.

Freddo – Costanera Center, 5th floor, Providencia. Parque Arauco, Las Condes. Argentina’s favorite ice cream chain comes to Chile. A little piece of Argentina in Chile. $$.

Pastelería Laura R – Manuel Montt 747 and other locations, Providencia, Vitacura. Traditional Chilean cakes, cookies and pastries. Incredible cheesecake. $.

El Bombón Oriental – Merced 353. Bellas Artes. Traditional Chilean cakes, Turkish coffee. Really nice waitstaff. Has a patio where you can sit outside and enjoy your snack. $.

Le Flaubert – Orrego Luco 125 Providencia. They have delicious small sandwiches, interesting cakes and cookies. Great place for tea and a snack. $$.

Dulceria Las Palmas – El Bosque Sur 42 and various locations. Try to the bite sized cake assortment. $$$.

Uruguayan

La Parrilla Uruguaya – Condell 566. Providencia. Second location in Ñuñoa. Amazing meat, feels like you’re in Montevideo or Buenos Aires. Cheap beer, wine and drinks. Split a parrillada that comes with a chicken breast stuff with sausage and choose, multiple types of sausage and steak. As a bonus, it’s a good place to watch a soccer game. $$.

Sandwicheria La Rambla – Tabancura 1344. Vitacura. Uruguyan sandwiches, specializing in chivitos. $$.

Spanish

De la Ostia – Orrego Luco 065. Providencia. Spanish tapas bar. Solid food. Tasty sangria. Always packed, which sometimes leads to slow service. Good place for a drink with friends. $$$.

French

Le Bistrot – Santa Magdalena 80. Providencia. Traditional French restaurant with French owners and waiters. Loved the beef bourguignon. Most of the time you’ll need a reservation. $$$.

Normandie – Providencia 1234. Providencia. Tasty, well prepared French food. Good wine list. Serves pâté and butter with warm bread when you arrive. Cool interior that look like a Paris cafe. $$$.

Boulevard Lavaud (Peluquería Francesa) – Compañía de Jesús 2789. Barrio Brasil. Solid french menu in an old house turned into a restaurant. Still has a functioning old style barber shop in the building in the front. Good food, great place for a date. Really cool décor.  $$$.

Impunity and Vautrin’s Law in Chile and the US

I’ve noticed an interesting phenomenon as I’ve worked in Chile more deeply over the past two years building companies. Many, if not most, Chileans believe they don’t have much influence on events in their lives and in their country.

I see it all the time in multiple contexts: business, politics, customer service and corporate bureaucracy. I’m very familiar with this feeling in politics, as I feel the same way about non-local US politics, but at first I didn’t understand it in the other contexts.

For example, in business, if Chileans get screwed over, they are less likely to take to social media or write a blog post detailing their experience than people in the US are. When there was an issue with a Chilean business incubator, it festered for months before a foreign entrepreneur shared his experience and only then did nearly a dozen Chileans corroborate their experiences. I asked some of the Chilean entrepreneurs why they hand’t said anything before, and they all said that they didn’t think they could do anything to fix the situation and that they didn’t want to rock the boat.

Large Chilean companies pay suppliers using 90 day payment terms and then only really pay a half year later, entrepreneurs can’t and don’t do anything about it. When large companies lie to your face and treat you poorly, the typical Chilean reaction is to say “yeah, they’re screwing me over, but there’s nothing I can do about it!”

When the vast majority of landlords take your security deposit when you move out, regardless of damage, Chileans hate it. But the vast majority don’t do anything about it and resort to extralegal methods, like not paying the last month’s rent, to avoid getting screwed.

In the legal realm, the son of a powerful politician got drunk, drove, hit a guy and left him for dead. The man later died and the politician’s son lied to police. The son of the politician didn’t get punished. More ridiculously, his passengers were the only ones punished, each getting $150 fines for lying to police. There was some twitter outrage, but no serious calls for change, no mass protests. People were resigned to the fact that the rich and powerful have different rules than the rest of us.

When the President’s daughter in law got a sweetheart loan deal for $10m to purchase a property and sell it quickly, netting $5m, it didn’t lead to criminal charges or real change in the system. When Chilean politicians give themselves raises to bring their yearly salaries to $260,000 in a country where the average salary is $9,000 per year, and members of the US House of Representatives only earn $175,000, people complain, but don’t do anything about it.

When bad things happen, most Chileans are momentarily outraged, then don’t try to do anything about it, because they believe nothing will change. And they’re probably right.

Couple this impunity with the fact that only 15% of Chilean households earn $1350 in monthly income and 50% earn less than $800, compared to $6250 average household income in the wealthy areas of Santiago, and lack real possibilities to get into the top 15%, you have a recipe for social tension and potentially worse.

When elites and large companies act with impunity and the rest of society has a lack of opportunity, it creates a toxic brew that corrodes civil society and democracy.

Two heuristics have been helping me think about opportunity and impunity in society.

1. Impunity Index – The index is high and society is in trouble when elites do whatever they want without any consequences and the weak either think they cannot or really cannot do anything about it.

2. Vautrin’s law – Society is in trouble when it’s better to marry someone rich or commit crime that to better yourself via hard work and education. This law comes from Vautrin from Balzac’s Le Pere Goriot as cited by Thomas Piketty in Capital in the 21st Century.

Chilean elites and large businesses have acted with high degrees of impunity ever since the Spanish first arrived. And Vautrin’s law is clearly in force. For at least 85% of the population, its an economically sound decision to try to marry someone wealthy or to look for extralegal ways to make money than it is to work hard, take out a loan to get an education and try to work your way up. Because even if you work hard, most people will top out around $1350 in family income if they are smart, hard working and lucky. And to make matters worse, because of severe classism (really just racism), most of the people in the bottom 85% can never marry up anyway, so that avenue is closed off to them.

Put yourself in the shoes of someone in the bottom 85%. You probably can’t marry up, basic elementary education only works for a lucky few, universities require borrowing large sums of money and when stealing an iPhone is the same as two weeks salary, stealing a Toyota Yaris is the same as six months salary, you can see why people would be attracted to crime or are resigned to their fates. You can also see why taxi drivers try to screw over passengers for $2-$10 if they have the chance. When people see elites and large businesses acting with impunity, it takes another excuse away and pushes people into a destructive path.

As the internet has permitted people to know about cases of impunity that previously would have been swept under the rug and have magnified wealth differences, the elite is faced with a choice: allow the bad apples who act with impunity and continue to get away with their behavior in all of the elite’s name and continue to stifle opportunity for the 85% or decide enough is enough and strongly condemn bad behavior when it happens and begin to loosen it’s grip on society.

If the elites continue down the business as usual path, they risk consequences from increased crime and political instability to potentially a populist leftist leader who can undo the real progress Chile has experienced that has set it apart from its neighbors over the past 50+ years, or even worse.

I believe the US is going down a similar path and is taking big risks by not addressing the situation now. As the US elites continue to amass wealth on a scale reminiscent of the years just before the Great Depression and continue to move toward Chilean levels and you see things like affluenza being used as a successful defense for drunkenly killing people and large corporations paying nominal fines and nearly zero taxes while normal people are punished severely for similar or lesser transgressions.

I think solving these issues and putting the impunity index and Vautrin’s Law back into balance requires buy-in from government, politicians and most of all the elites that are currently benefiting from these conditions. I don’t believe that these conditions can last forever without some sort of reaction, whether its an economic reaction like the financial crisis or the election of a populist leader who will implement already disproven ideas that will punish the elites, but not raise the standard of the rest.