Why a high cost of capital still weighs on Chile and Colombia
Latin America’s tech ecosystem moves fast. This installment looks at Chile and Colombia, which sit at different points on the risk spectrum. Photo by John Angelillo/UPI | License Photo
Part of a series on capital flows and political risk in Latin America
Latin America’s tech ecosystem moves fast. Startups chase big markets, iterate quickly, and push new business models into daily life. Yet the main bottleneck is not always product design or talent. In my work evaluating valuations, risk, and capital structures across regional startups and scale-ups, I keep encountering the same structural barrier: a high weighted average cost of capital (WACC). Put simply, WACC is the minimum return a company must earn to create value for shareholders.
This installment looks at Chile and Colombia, two markets that sit at different points on the risk spectrum. Together, they show why the financing hurdle remains high across Latin American tech, even as ecosystems mature and notable companies scale. The discussion draws on country risk estimates compiled by Aswath Damodaran in January 2026.
Why WACC bites harder in tech
WACC is a hurdle rate. If the business cannot clear it, growth can still destroy value. That matters in tech, where expansion often requires continuous reinvestment.
Early-stage technology firms usually rely on equity because debt is limited, expensive, or unavailable. That makes the cost of equity the key driver. In standard models, the cost of equity is based on a risk-free rate and an equity risk premium adjusted by beta, a measure of how volatile an investment is relative to the broader market. In emerging markets, it also includes a country risk premium, since investors seek compensation for sovereign risk and macro volatility.
Tech adds another layer. Many technology companies have high betas, often above 1.5, because the sector is volatile. Competitive pressure is intense, business models change quickly, and failure rates are high. Beta measures sensitivity to broader market swings. A beta of 1.5 suggests the asset tends to move by about 50% more than the market.
Then there is illiquidity. Private stakes cannot be sold easily, so investors demand an additional return. In practice, this combination pushes effective WACC to levels that slow scaling, lengthen fundraising cycles, and increase dilution for founders.
Chile: strong institutions, but tech still pays a premium
Chile is often viewed as one of the region’s more stable markets. It has long-standing macro credibility and comparatively strong institutions.
Damodaran’s January 2026 update places Chile’s country risk premium at roughly 1.10% and its equity risk premium at about 5.33%, which reflects a mature-market premium plus Chile’s incremental risk.
That relatively low country premium helps. It sets a lower baseline than many regional peers. Still, it does not remove the structural challenge for tech. With a beta above 1.5, the cost of equity rises quickly. Add an illiquidity premium that venture investors price into early-stage rounds, and the effective hurdle rate can still land in the 9% to 10% range.
NotCo offers a useful illustration. The Chilean food-tech company uses AI to develop plant-based alternatives to animal products. It has reportedly raised substantial capital and reached a unicorn valuation in private markets. Yet investor expectations for that journey were driven less by Chile’s relative stability and more by the volatility premium associated with high-beta, illiquid assets.
Each round required more than product-market fit. It required convincing investors that returns could clear a high hurdle rate in a market where exits are still limited. That has practical consequences. Expansion plans, hiring decisions, and international growth initiatives must clear a demanding return threshold. Many startups respond by raising more frequently, scaling more cautiously, or accepting higher dilution.
Chile has made real progress in building an ecosystem. The lesson is that institutional strength, while valuable, does not automatically translate into low financing costs for tech. Sector risk still dominates.
Colombia: higher country risk raises the floor
Colombia begins from a higher financing baseline. In Damodaran’s January 2026 update, Colombia’s country risk premium is approximately 2.85% and its equity risk premium is around 7.08%. That incremental risk raises the cost of equity before company-specific risk is even added.
Layer in tech volatility and illiquidity, and the effective hurdle rate can approach 11% to 12%. That difference matters. It changes how investors evaluate growth. They demand faster payback, clearer unit economics, and a more visible path to profitability.
Rappi, Colombia’s best-known tech success, shows how these constraints appear at scale. After a major SoftBank-led round in 2019, widely reported at about $1 billion, the on-demand delivery platform faced the familiar pressure to prove profitability across complex multi-country operations. With a higher country risk premium in the background, each new geography or new product line must generate stronger expected returns to justify the capital required.
When WACC is high, margin pressure becomes more dangerous. Expansion looks riskier. Growth options are judged more harshly, and investors push for discipline earlier than founders might prefer. In that environment, even strong companies can find themselves constrained by the cost of money.
A lesson from Nubank: liquidity changes the equation
Despite these headwinds, Latin America has shown that the cost-of-capital barrier can be eased. Nubank is a useful case because it faced the common early-stage mix: high beta, meaningful country risk, and heavy reliance on equity financing.
What changed was liquidity. Nubank’s IPO on the New York Stock Exchange in December 2021 broadened its investor base and improved price discovery. The company moved from a private-market environment that often applies steep illiquidity discounts to a public-market context with deeper pools of capital. As perceived risk falls, the cost of capital can decline, expanding what the company can fund and how quickly it can scale.
The point here is not that every startup should rush to list, but that ecosystems with more credible exit paths tend to attract cheaper capital. Liquidity reduces the illiquidity discount that weighs on early funding rounds and, in doing so, lowers the cost of growth for everyone in the market.
How to lower the barrier
If high WACC is a structural brake on Latin America’s tech ecosystem, reducing it requires progress on several fronts.
Deepen venture and growth capital markets. More domestic and regional capital reduces dependence on a narrow set of cross-border funds. Governments can help by supporting co-investment vehicles, improving tax treatment for long-term risk capital, and creating frameworks that allow institutional investors to participate with clear guardrails.
Improve predictability at the company level. Founders cannot change country risk overnight, but they can reduce perceived volatility. Strong governance, credible reporting, and clear performance metrics matter. Revenue diversification can help as well. Partnerships with stable corporate players can also reduce the perception that the business is a pure volatility bet.
Expand routes to liquidity. IPOs, strategic acquisitions, and credible late-stage funding rounds create exits. Exits reduce illiquidity discounts and recycle capital into the ecosystem. Without them, even strong markets struggle to bring down financing costs.
Bottom line
A high cost of capital in Chile and Colombia is not a technical detail. It is one of the largest constraints on innovation at scale. It raises hurdle rates, stretches fundraising cycles, and increases dilution. Latin America has the talent and market opportunity to build globally competitive technology companies. Many will still hit the cost-of-capital wall early.
Bringing that wall down requires deeper venture markets, policies that widen financing options, and more successful exits that normalize liquidity. The payoff is not only more startups. It is more regional champions that can compete on a global stage.
César Addario Soljancic is an economist specializing in public finance, with decades of experience advising governments and institutions across Latin America and the Caribbean. Over his career, he has led 69 capital-market issuances across 13 countries, totaling nearly $49 billion. The views expressed are solely those of the author.
