Latin America PE/VC Report spoke with Luis Vera, Co-founder of Scopix Solutions. Founded in Chile in 2006, Scopix is a business intelligence company that has developed a technology that enables retailers to remotely monitor in-store operations and to generate metrics around customer service. The company’s core product, Store Operations Analytics™, consists of advanced digital cameras that are able to capture in-store conditions, and then send analyzed results to a retailer’s headquarters. Last year Scopix received a $2 million investment from Chilean-based venture capital firm Austral Capital. Luis Vera of Scopix and Gonzalo Mirando of Austral Capital will be featured panelists at the 2009 LAVCA Summit and Investor Roundtable on September 22 in New York.
LAVCA: How did you come up with the idea for the technology behind Scopix Solutions?
Vera: The idea that people excel at what they do when given timely feedback, and that a new type of feedback could be created from video is an idea that I discovered in Prospect, a company that I had previously founded in the 1990s. We were building cameras on tracks (enclosed in mirrored tube-like enclosures to conceal their position) for security purposes to Bog Box retailers in South America. Because the system was priced at over US$ 250,000 per store, we were hard-pressed to find additional value to justify to the retailers that an investment in our security equipment had a reasonable ROI. We ultimately learned that by using these track cameras to monitor procedures (on top of identifying shoplifters) and giving employees video feedback on their performance, we could actually drive performance levels to a surprisingly high level.
In founding SCOPIX, my founding partners Ariel Schilkrut, MIT PHD and former Bain consultant, and Manfred Paulmann, an experienced retailer, and I sought to apply this principle to customer service, where we knew that by improving employee performance we could directly and significantly impact sales numbers. With this argument we concluded we could interest the leading U.S. retailers to test and purchase our solution.
LAVCA: Why is your business model so compelling? Are you seeing any competitive pressures right now?
Vera: Our business model is so compelling because we are bringing previously unavailable performance data to the retailer, who has the daunting task of simultaneously managing hundreds of thousands of stores (the average top 100 retail chain in the U.S. has over 2000 stores). In terms of competition, we have seen a few companies working at trying to apply video technology to the industry, but we have yet to identify one that has our business model and approach.
LAVCA: Scopix Solutions began as very much a Chile-based operation. Recently you’ve been looking more at the U.S. market and moved your headquarters to San Diego. Can you talk about this strategic decision?
Vera: SCOPIX was founded with the U.S. Market as its primary objective market. It was clear from the beginning that the Chilean or even the Latin American market size was not adequately suited for a solution such as the one we were intending to bring to market. Nevertheless, the SCOPIX business model required certain data processing and analytical capabilities that, if operated from outside of the U.S., would provide an important competitive advantage in terms of cost. Having carefully weighed all the different options, we decided to set up back-office operations in Chile primarily because of the role that the Chilean Government, through its agency CORFO, has been playing to help the promotion and development of IT based technologies and off-shoring. To date SCOPIX has received considerable funding and incentives from CORFO.
In addition to this, we have found that the Chilean market, because of its reduced size and population, is an ideal testing ground for business models and technologies. Deploying our solutions, technologies, and business models first in Chile has been instrumental in refining our solutions to the point that our solutions were highly tuned by the time we piloted to our initial U.S. clients, which in hindsight tremendously improved our chances of success.
LAVCA: In your search for early stage financing, what resources were helpful to you in getting connected with investors? How were they helpful?
Vera: We initially received friends and family investment to get the company off the ground, later we received angel investment, after which we received grants from the Chilean government. In the last round we received funding from our first institutional investor: Austral Capital. In this process I would say that Endeavor and CORFO have been instrumental in getting SCOPIX off the ground.
Endeavor clearly has played a huge role in helping SCOPIX get early financing. First of all, Endeavor has helped create the appropriate environment for entrepreneurship in Chile by helping align both investors and entrepreneurs. Also, Endeavor’s network has helped me identify and seek people that are experienced in the art of raising capital. And finally, I have been referred or endorsed by Endeavor in one way or another to every investor I have had invest in SCOPIX or other past companies.
LAVCA: How did you weigh the option of taking on debt financing versus equity financing?
Vera: I believe that when searching for financing alternatives an entrepreneur must prioritize the sources of capital in the following order: first from clients, second from debt financing, and third from equity financing.
The first stage of influx of capital into SCOPIX occurred when a basic core product had to be developed to accomplish initial market test and validation of the product and the features of which would be critical to go to market. Having no clients and hence no possibilities to get debt financing we turned to angel investors and government grants.
In the second stage we turned to venture capital to consolidate a product developed in the previous stage and initiate U.S. market penetration by placing pilots in U.S. and Chilean retailers.
Moving forward and as we turn pilots into service contracts, we will be in good position to evaluate debt financing as an alternative to equity financing.
LAVCA: What role have equity investors taken in the management and operation of your company? Have you faced any challenges thus far in your relationship with equity investors?
Vera: From years of experience I have learned (often the hard way) that it is critical to clearly define the roles of equity investors in the corporate governance of a company. The danger is when equity investors start to micromanage the company’s management and execution. The way we have set up SCOPIX’s corporate governance is that we have a board of directors that convenes approximately every 45 days to discuss and make decisions on issues such as strategy and financial planning, which are then recommended to the CEO to execute on the agreed upon decision. The main challenge has been to get board members with different backgrounds to agree on strategies that, because of the novel nature of the business, must be built up from very few data points. The flip side of this is that the different visions, more often than not, produce new and exciting directions that would never have come about had it not been for the candid discussions that arose.
LAVCA: Will you need more financing as you continue to grow? When and how much? What will it be used for exactly? How is the search for financing going?
Vera: Experience has shown me how critical it is to build a business model that minimizes working capital. In this regard, we have created a low capital-intensive business model that leverages partners’ infrastructure to minimize the need for capital for piloting and roll out; our first infrastructure partner has been Cisco. Having a product that addresses a market need and that has little working capital requirements helps us focus our capital needs on consolidating our current first mover advantage by investing in market penetration in the U.S. and the UK, on one hand, and R&D on the other. We are currently preparing to raise US$ 5 million and we have had great initial feedback from the U.S. and Latin American venture community.
LAVCA: Retail companies are obviously having a hard time in today’s economic environment. How do you continue to grow your top line?
Vera: Even though the economic downturn has put clear challenges and obstacles to doing business with retail in 2009, I believe that in the mid-term, the economic downturn is a tremendous opportunity for SCOPIX. The primary reason being that for retail, the economic downturn has changed customers’ buying behavior by making them more mindful and selective of what and where they buy, a trend that is not likely to change in the near future. Retailers in this new environment must be especially sensitive to customer service issues and making the most out of every client that visits their stores. By generating previously non-existent metrics around customer service with the SCOPIX solution, a retailer will have a powerful tool to maximize the opportunities that get generated with each client visit.
LAVCA: What do you and your investors view as your biggest strategic challenge right now?
Vera: The biggest strategic challenge right now for SCOPIX is to determine at what pace the company should grow, taking into consideration the economic downturn and the solution’s sales cycles, while bearing in mind the fact that SCOPIX, being a first mover, has no other company to benchmark against.
LAVCA: Where do you see your company five years from now?
Vera: I see SCOPIX as a leader in the space we are creating: Store Operations Analytics space for retail. We expect to have had several tier 1 retailers roll out our solution in their chains. I also see SCOPIX addressing the European and Asian markets, as well as the Latin American and North American markets. In 5 years, I also envision the company applying this business model/technology to other industry verticals such as the Casino Industry, Health Care Industry, and Government.