Case Study: Understanding The Impact Of U.S. Monetary Policy On Fundraising For Tech Startups With Omneky's Hikari Senju

Recent monetary actions by the Federal Reserve have major consequences for founders fundraising.

May 25, 2020

Author’s Note: My apologies for the delay in publishing this content for Monday. I’ve had a busier than expected Memorial Day weekend. I hope everyone is enjoying Memorial Day and is staying healthy! Enjoy the read.

Executive Summary:

The Problem: Post-2008 U.S. Monetary Policy Has Consequences For Tech Entrepreneurs

The U.S. Federal Reserve’s monetary efforts to maintain liquidity in the financial markets due to COVID-19 has implications for tech entrepreneurs. The low cost of capital due to its abundance makes it easier to fundraise, however, the dangers of raising too much too early only increase.
Action Item: First ask yourself, “Given an environment of cheap capital, what’s the minimum amount of money I need to reach key milestones?”, then design a capital strategy around fundraising, bootstrapping or other means to build your company.
The Solution: Use A Little Money To Establish Product-Market Fit, Then Use A Lot Of Money To Scale
Senju, from his prior experience as an entrepreneur, understood the risks associated with raising too much capital in a company’s earliest stages. He used the constraints of having little capital available to set him on the path to growing a profitable company from the start, leaving him in a much better position to fundraise in the future for scaling the startup.
Action Item: If you are going to fundraise, optimize for raising as little as possible to build your company to where you have positive unit economics, then scale from there.
The Takeaway: Capital Constraints Breed Creativity
Having less capital available to you can actually be one of your greatest advantages. They say that necessity is the mother of invention; the necessity to keep the lights on at your startup is a forcing function for you to leverage your creativity in creating a profitable company sooner rather than later.
Action Item: Be open to doing more with less; the lack of a key resource such as capital will force you to make every dollar stretch until you’re profitable.

Founder File:

Customer Outreach Call Guide And Book List By Hikari Senju

Hikari Senju (Harvard CS 2015) previously founded on-demand tutoring app Quickhelp which was acquired by Yup.com. As the Head of Growth at Yup, Hikari drove down acquisition costs 90% and helped the company pass $1m in annual recurring revenue. After a year and a half at Yup, Hikari founded Omneky whose investors include Richard Socher (Chief Scientist at Salesforce and co-author of seminal ImageNet and GloVe papers), and Village Global (whose LPs include Mark Zuckerberg, Jeff Bezos, and Bill Gates). Omneky is a FB Marketing partner, manages over $100m in ad spend, and has been profitably growing 3x month over month since launching in January 2020.

Hikari Senju, founder of Omneky.

The Problem: Recent U.S. Monetary Policy Has Consequences For Tech Entrepreneurs

Given the massive monetary intervention (Quantitative Easing) by the U.S. Federal Reserve due to COVID-19, what are the core issues raised now with starting tech companies?

Companies generally have two goals: 1) to grow and 2) to make profits. However, when government bonds have negative yields, this reduces pressure on companies to make a profit (because they no longer have to pay dividends to compete against the return on debt). Hence companies compete for growth, and capital accumulates to any company with high growth. Therefore, central bank actions have made it easier than ever for a tech company, either with high growth or with the promise of high growth, to raise capital.

Today, therefore, capital is cheap. Opportunities to wisely spend capital in a positive ROI way are scarce. Markets are generally efficient, and the easiest ways of making money have already been done. Thus, the challenge as a founder today is staying focused on actually creating value. The most reliable way of creating value is by building and distributing great products and services. And having too much capital can distract you from this. If money solved product-market-fit problems, Facebook would not be sitting on $50 billion in cash.

Describe the nature of the problem.

The problem is that too much capital can do more harm than good. As Notorious BIG famously said, "Mo Money Mo Problems."

A great business is a money-making machine: it returns two dollars for every dollar invested. For example, for every $1 Apple spends in making an iPhone, the company gets back roughly $2 in profit. Having too much capital can reduce the pressures in creating this money-making machine.

Let's say a startup is having an issue with its product: Churn is high. A startup with a lot of funding may not realize that there is an issue, and may even be able to raise additional financings and delay resolving this issue until much later. A startup without a lot of funding will immediately identify the root issue and fix the problem because the alternative is immediate death. Multiply this decision-making process over the years, and a capital-constrained business becomes a better business than a business that requires a lot of startup capital. Founders think that they can be disciplined with the money they've raised, but the reality is that almost all startups, no matter how much they've raised, tend to spend the entirety within a handful of years. This is because startups are hard, and it's always easier to solve a problem with money.

And once a company takes venture capital, it becomes high growth or death. VCs get preferred equity, which is different from common stock, which is what founders and employees get. Preferred equity means that investors get at least 1x their money back first if there is an exit. So if the company raises $100m in preferred equity, and the company sells for $120m, investors make back the $100m first, and then the $20m is then split amongst the common equity holders (and sometimes investors get a portion of that as well). This doesn't matter if the company is growing quickly, and the company can get a high valuation. But if the growth slows, the valuation will quickly come down, and it will squeeze the common stock first. And at some point, it will stop making sense for holders of common stock (particularly employees) to continue working.

Once a startup raises venture capital, the most significant pressure to keep growing won't be coming from the VCs; it will be coming from the employees (holders of common stock). The world has a fixed set of experienced employees who have previously helped grow and scale companies like Twitter and Dropbox. Founders raise growth capital from prominent investors to hire these talented individuals. But most talented employees in Silicon Valley that make Pinterest or Uber possible have high opportunity costs. Their 0.01% of stock options have to become very valuable very quickly for it to make sense for them to keep working on your startup. And if growth starts to slow and these employees start to leave, it creates this negative cycle of slower growth and more talent going. And without growth, a startup has little value for investors.

Thus, the challenge as a founder today is staying focused on actually creating value.

The Solution: Use A Little Money To Establish Product-Market Fit, Then Use A Lot Of Money To Scale

What is your general advice for founders on how to face the challenges related to starting a company in this macroeconomic environment?

My suggestion is to raise a small amount of money to get to product-market fit. Only once you've built a business that is working should you consider raising money to scale your business. Growth comes from having a great product. And capital, though it is a great way to scale a business that is working, doesn't create great products in and of itself. Venture capital is like doping. There are timing and dosage to take into account. If you've developed a business that is working, venture capital can rocket you past your competitors. However, raise too much capital too early, and it will kill you. Therefore I only suggest fundraising once you've found an ROI positive way to spend the money.

And once you have something working, especially in the "money-printer-goes-brrrr" world we live in today, there are now infinite ways to finance your business. Companies like Pipe and Clearbanc let startups borrow non-dilutive money against their predictable monthly recurring cash flow. Stripe Capital, Divvy, Square Capital, Brex Capital, and others have similar offerings.A startup with predictable cashflow can skip the equity selling phase and go straight to raising non-dilutive debt.

Startups should also think about distribution and growth early. Marketplaces and social networks are inherently viral, and their network effects (the more users, the more valuable the platform) make the businesses more defensible. Collaboration tools are also inherently viral. You have to invite others to use a product like Slack or Zoom.

Given the premium towards growth post-2008, entrepreneurs with a distribution advantage have an edge. In a world where everyone is competing for growth, entrepreneurs like Kylie Jenner and Kanye West can quickly break through the noise with their dominance in television and music, and achieve breakout growth for their products.

Consider advertising on Facebook. Bytedance and Uber spent their venture capital war chest to purchase growth from Facebook with success. Facebook made $70 billion in revenue last year because its advertising works. I've seen this firsthand at my company, Omneky.

Omneky generates ad creatives and manages FB ad accounts for a small monthly subscription. For a fraction of hiring an agency or full-time marketer ($800/month), we handle your FB ad accounts for you by generating the ad creative and optimizing the target audience. We are a Facebook Marketing Partner.

Along with generating personalized ads, we provide design analytics to help businesses understand their customers. Using computer vision and natural language processing, we tag the different image and text features of ads and provide analytics for what creative features were driving results. These analytical insights can help make better converting ads, as well as landing pages, emails, and other customer experiences. For some of our customers, our insights helped increase conversions 8x.

And capital, though it is a great way to scale a business that is working, doesn't create great products in and of itself.

The Takeaway: Capital Constraints Breed Creativity

I started my first company in 2013 as a Junior at Harvard with my college roommate, David Taitz. Our app, Balloon, let you see where your friends were and helped coordinate meetups instantaneously. We went through the DreamIt Venture Summer Incubator program, which was all about preparing to pitch VCs and get the traction necessary to entice them. Those that are successful fundraising would get to continue the dream. Companies that failed to raise money went home.

The second company I started as a senior in 2014 with Mazen Elfakhani. It was an on-demand tutoring company called Quickhelp. The company started as an app that instantaneously connected students to PhDs in their area who could tutor them on-demand. Because we were based in a city like Boston, with a lot of Ph.D. students, the app usage snowballed and we had 30,000 monthly active students on the app (mostly in Boston) within three months. However, because education is not a particularly sexy space for venture capital, we could not raise venture capital. The only market with large ed-tech players was in China. So I flew to China. In Beijing, I met Cindy, the founder of VIPKID, at a networking event, and there I pitched her on all the active tutors on our platform. Within a couple of days, we signed a partnership deal where we would supply tutors to VIPKID, which significantly increased Quickhelp's revenue.

Later I met Naguib Sawiris, the founder of Yup, a later stage on-demand tutoring app. Seeing the liquid market of tutors on our platform, he acquired Quickhelp and brought me onboard as Yup's Head of Growth. Had I been successful at raising VC, I probably would not have gone to China and would not have been able to sell the company to Naguib.

It was running growth at Yup, where I came upon the idea for Omneky. Naguib invested significantly into my education in growth, hiring half a dozen leading growth experts to teach me the best practice for every marketing channel. Managing marketing, I saw the truth in the old adage, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." A lot of marketing is throwing things at the wall and seeing what sticks. But given my background in computer science, it seemed possible to quantify what was previously intuitive and personalize the creative for every customer. Within a year, I was able to drive down the cost of acquiring a customer 90%.

After a year and a half at Yup, I left to start Omneky. The heart of our mission is to empower creators and SMB's with machine learning tools to communicate their product or service effectively. Our investors include Richard Socher, Chief Scientist at Salesforce and coauthor of seminal ImageNet and GloVe papers, and Village Global. We are managing $100m in ad spend, and have been fortunate to be profitably growing revenue 3x month/month since launching in January 2020.

I have intentionally kept Omneky capital-constrained because I believe more capital can be distracting. All great things start small. If Mark Zuckerberg had raised $2m in his Harvard dorm room, he might not have built Facebook because the market for student directories would have seemed too small. Same for Bill Gates and Paul Allen developing an interpreter for the Altair BASIC, and Steve Jobs and Steve Wozniak designing a circuit board for a hobbyist computer (which became the Apple 1).

Constraints drive creativity, and capitalism is all about creativity.

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