Tops-down, bottoms-up investors

I’ve been investing for about 2 years now, and I’ve noticed that investors fall roughly into two camps.  I call them tops-down and bottoms-up investors.

Tops-down investors

These are investors who want to be sold on the big vision — where is your company going?  What trends are you riding on to make this successful?  How big can this get?  Market size?

Bottoms-up investors

These are investors who want to be sold on your traction and progress.  Are your unit economics good?  How are you acquiring customers?  What steps are you doing today that can be scaled?

Using this to your advantage

Neither pitch angle is right or wrong, and all investors want to know both angles to a certain extent. However, I’ve found that investors tend to gravitate towards one type of pitch or the other.

For example, Dave McClure loves hearing about traction.  If you happen to run into him at an event and have only 30 seconds to pitch him, spend just 1, maybe 2, sentences on the high level vision and trend you’re on, but focus most of your time on KPIs and the progress you’re making.  Pitch something like this:

Hi Dave – can I tell you in 30 seconds about my company Hippos R Us?  Hippos R Us is an online store where you can buy hippos.  We are riding on changes in housing regulations and the growing trend of apartment buildings allowing large pets.  We have sold 100 hippos in the last month and have sold $200k topline in the last 6 months.   We have 50% margins. We are raising $250k to fuel our growth and pour more money into Facebook ads.  Does it make sense to chat more about this?

Note that this pitch mostly focuses on progress and what you are doing to move your business forward.  It is all about growth, growth, growth.  This is a good way to rise above the noise — there are so many entrepreneurs out there who are trying to sell a dream but haven’t done anything with their business.  By illuminating your traction, you can be amongst the top 10% of seed stage entrepreneurs who have actually made progress on their companies!  While this pitch doesn’t say anything about the market size, note that it does touch on riding a growing trend.

This is what your apartment building will soon look like… Originally posted by tinsoftware

In contrast, other investors prefer big vision pitches.  For this kind of investor, spend more time on why your company changes the world, what is causing this shift in the market, or why this is going to be super big, and spend just a couple of sentences on your progress.

For example:

Hi Ms. MoneyBags – can I tell you in 30 seconds about my company Hippos R Us?  The birth rate is declining in all industrialized nations.  People don’t want children anymore, but yet they need emotional satisfaction, and to fill this void, they have been buying pet hippos.  In fact, the pet hippo market has been growing 1000% year over year for the past 5 years, and apartment buildings now allow them as pets.  Hippos R Us aims to be THE PLATFORM for purchasing and managing pet hippos to provide people with emotional satisfaction.  This makes our total addressable market $5B.  Since we started 6 months ago, we now have more than 100 accounts under management.  Does it make sense to chat more about this?

Note how this pitch is largely about the trend (why now?) on which Hippos R Us is riding.  Also, this pitch sells a much bigger vision — this is a platform that ultimately helps people with their emotional needs; it’s not just about buying and selling hippos. Again, in order to rise above the noise of all the entrepreneurs who are just selling an idea and aren’t doing anything, you’ll want to mention a bit about what progress you’ve made to date.

Ultimately, you’ll want to craft your pitch to sell both the dream and your progress.  If you have some insight into who you’re pitching, you can cater your blurb or elevator pitch accordingly.  Often, I see a lot of entrepreneurs are really good at creating a pitch from one angle, but the best ones are able to incorporate key elements of both tops-down and bottoms-up pitches.  You don’t have time to dive into the weeds in just a few seconds, and so deciding which points are important is key.

Moving your company from the pre-seed to seed stage

I previously alluded to some of my goals for 2017 with an overarching goal of focusing time on pre-seed companies.  To be clear, 500 Startups is not making a shift in its priorities — these are merely my own personal views and activities (500 invests in all areas of the “seed spectrum” but with a big focus on post-seed).  I’ll talk more later about why I’m spending more time at pre-seed, but for the time being, I wanted to start sharing some more details about my plans.


The big activity that I’m working on this year is my side project Rejectionathon, which I experimented with last year.  It stems from the issues I had when I was first starting my company LaunchBit.  Namely, I was afraid of rejection, which meant that I was timid when it came to anything that could possibly end with a rejection — sales, fundraising, partnerships, etc.

Last year, Rejectionathon took the form of an event where teams would run around undertaking challenges that would set themselves up for rejection.  This helped people build a thicker skin for that one day, but it wasn’t directly applicable to people’s businesses.

This year, we’re iterating on this concept and expanding it worldwide.  The next Rejectionathon on January 29, 2017 in Mountain View will be different.  You’ll still be challenged and will set yourself up for rejection, but there’ll be some major differences:

1. It will be directly applicable to your pre-seed startup and will help you advance your startup.

The challenges will no longer be all about borrowing money from strangers or serenading people on the street.  Most of the challenges will be focused on helping you move the needle on your business.  Challenges will involve pre-selling, doing fundraising pitches for your company, and getting feedback on your product.

2. It will be more focused.  The January event will be focused on hardware companies.

If you have a hardware company, the next event will be catered to you.  We’ll have challenges around customer development for hardware companies, pre-sales for physical products, and fundraising.

Even if you don’t have a hardware company or any company yet, you are still welcome to participate. Just know that the angle will be about hardware companies.

3. We are capping the event at 30 people.

Our past Rejectionathons have been larger events, but in order for attendees to receive personal attention, we’re capping this at just 30 people.

Rejectionathon is like a mini-hackathon for business people.  Bring your idea or existing company, and you’ll use the time to advance the business side of your startup while building a thicker skin.

I’d encourage you to sign up today with my special code of 50% off EYFRIENDS.  Early bird tickets end today.

Cover photo by Godwin Angeline Benjo on Unsplash


A primer on convertible notes, convertible securities, and equity

Originally posted by fyspringfield

If this is your first time raising money, the mechanics of how investors buy into your company can be very confusing.  Here’s a quick primer on how investments tend to work in startup companies at the seed stage.

Note: this is super basic, and there are a lot more details that will not be covered here.


Traditionally, investors have invested in companies to receive equity, or shares in a company.  This is the easiest method of investing to understand as well as the most common way of investing worldwide.  Simplistically, if I’m an investor who is interested in buying a percentage of your company, I’ll offer you money, and you’ll send me a certificate indicating how many shares — how much of your company — I own.

The number of shares that I’ll own is based on the price per share that we had mutually agreed upon.  Let’s say there are 1M shares in your company, and let’s say I’m interested in buying some of these shares and have $100k to invest.  We first mutually figure out a price per share, and let’s say that the price we decide is $1 per share.  This means that I will receive 100k shares for my purchase (which is 10% of your company).  The physical manifestation of this investment is a certificate that says that I now own 100k shares.  Later, if you sell the whole company to Google at say $5 per share, I will earn $500k for a net gain of $400k.

The concept of equity rounds (also called priced rounds) is very straightforward. Investors worldwide are familiar with and are used to investing in priced rounds.  And as you raise money at later stages, you will most likely be raising equity rounds.

Once you find investors who want to invest and agree on the price per share, everyone knows just how many shares they are getting, and everything is clear.

But, legally, equity rounds can be quite expensive to complete.  Lawyers can charge as much as $10k-$30k (in the US) to draft and execute the legal docs for an equity round, and traditionally, founders are responsible for paying for this as well as investors’ legal costs!  I personally think this is ludicrous, but this is still common practice.  So, in the aggregate, it is possible that you may be required to pay as much as $30k-$50k to get an equity round done.  Newer VC firms, though, typically do not pass their costs to their startups, which is much more progressive.

Additionally, the legal docs around equity rounds typically specify a threshold that must be met before the round is complete.  For example, if a startup is raising $1m in a priced round, this means that the startup must find enough investors to invest (in aggregate) $1m into your company at specified terms within a certain time period.  If the startup is only able to find enough investors to commit to investing $700k, the startup receives NO MONEY, and the round does not get completed.  The results are binary.  You either raise your full amount or nothing at all.  This means that if you are doing an equity round, you need to run your fundraising process very well to ensure that you raise the money you want; your timeframe for raising this round is limited.  It also means that the time between when your first investor commits to investing and when you get your money can be quite long — it can take months!

Usually, an equity round is kicked off by a “lead investor.”  Typically, this lead investor decides the terms of the round and also invests the majority of the money that will go into your company.  That lead investor will also usually help you fill out the remainder of your round with other investors.  For example, let’s say you find a lead investor for your $1m round.  He/she sets the valuation of your company and terms of the round.  He/she may then invest say $500k, and he/she may help you find other investors who will make up the remaining $500k.

In the 1990s, your first round of financing was typically a Series A round between $1m-$5m.  Expenses were a lot higher just to get a company off the ground, and so even the first round of financing was large.  These rounds were typically done as equity rounds and were led by VCs, since so much capital was required. In addition, the legal costs were just a small drop in the bucket compared to these round sizes.

Convertible Notes

In the 2000s, however, the cost to start a software company decreased dramatically.  No longer do you need to set up your own servers in your office.  No longer do you need to build a lot of tools – many B2B SaaS companies and infrastructure companies can now do all of this for you.  So, startups started raising seed rounds — rounds that took place before a series A.

A few years ago, these seed rounds were typically < $500k, and most teams only did one seed round with angel investors — independent rich individuals — before raising a series A round.

Because equity rounds are much more suited for bigger financing rounds and are a slow way of raising money, convertible notes are better suited for raising these smaller seed rounds.  It just didn’t make sense to spend 10% of your round on legal costs and have to wait for months before receiving the money when the angel investors writing the checks were open to moving equally as fast as the entrepreneur.

Raising money on a convertible note is fast — you get your money as soon as an investor signs.  It’s cheap (there are a lot of convertible note templates on the internet).  There is no minimum amount you need to raise in order to get your money.

A convertible note is a simple document that is effectively a loan.  People investing on convertible notes would invest money, and in return, receive an IOU for that amount plus some level of interest at the end of some agreed upon time period (typically 1-2 years).  In some sense, angels began to act like banks giving entrepreneurs loans.

However, unlike regular debt, convertible notes had a special kicker.  Convertible notes allow investors the option of converting the money into stock at the next priced round;  investors essentially have the option to get their money back + interest OR receive stock when the company did the next priced round.

Technically speaking, when the maturity date comes around and the startup has not yet raised an equity round, an investor could call the note, which means he/she could ask for his/her money back plus the accrued interest for the duration of the note.  What happens if your maturity date comes up and you don’t have the money to pay it back and are not raising an equity round?  You can discuss with your investors if they’d be willing to extend the maturity date by a year.  This is quite commonly done, so don’t be afraid to ask.

Most Silicon Valley investors won’t call your note when the maturity date arrives.  This is because, if you have the cash to pay the note, it must mean that your company is doing well, so an investor would prefer to have equity in your company instead of the debt repaid in cash.  If your company is not doing well, you wouldn’t have the money to pay off this debt AND if you do, removing the money could cripple the company. So, calling the note is detrimental in most cases.

Outside of Silicon Valley, there are a lot of investors who don’t care and may call your note on the maturity date.  Be careful in choosing your investors — especially if an investor has never invested via a convertible note before.

So let’s say a startup raises an equity round from a big VC after raising a convertible note round.  How does an angel investor convert his convertible note into equity?  The convertible note specifies the mechanics in which the investor receives shares.  Those conversion rules, however, are conditional — the price at which a convertible note converts into equity during a priced round is dependent on the valuation of the equity round.  So, when an investor puts money into the company on a convertible note round, he/she doesn’t know how many shares he/she will receive until later.  This ambiguity is sometimes a deterrent to investing on a convertible note, especially outside Silicon Valley.

Lastly, because convertible notes are technically debt (even though most investors convert their notes to equity later in priced rounds), it’s unclear what the tax implications are for both investors and companies. At the advice of some accountants, some companies issue 1099s to their investors on the accrued interest — even when they are not paying their investors this accrued interest.  Other companies don’t do this because they are not actually paying their investors any money. On the flipside, investors will often pay taxes on this “accrued interest” even though they are not receiving any cash.  This is another deterrent to investors investing on a convertible note.

Convertible Securities

As a happy medium, both YC and 500 Startups created Convertible Securities.  Convertible securities have properties that are akin to both equity and convertible notes.

Convertible securities, in so many ways, act like convertible notes.  Like convertible notes, there is no minimum amount you need to raise to get your money; they are a cheap, free, and limited legal bill; and they can get signed quickly.

BUT, the biggest distinction is that there is no interest rate.  Convertible securities are not loans.  As a founder, you do not need to worry about investors asking for their money back because there is no maturity date, and investors do not have to pay taxes on any so-called accrued interest.

That said, convertible securities are still new and a lot of investors are unfamiliar with this format of investing. Also, there is still the ambiguity about the price per share at the time of signing, which may make some investors feel uneasy.

All in all, this is probably my favorite format of raising money at the seed stage.  More later on the details and nuances of some of this.

Dear elizy: I’m a solo founder…do VCs fund solo founders?

Dear elizy: I was wondering if you would mind giving some insights on startups with a small team (in my case, the sole founder) and are looking up to scale up the business? Would you recommend growing the team first and then consider fundraising?  Do you think VCs would be happy to fund a startup with a sole founder? Or would VCs think the startup is not capable of acquiring quality teammates?

– Flying Solo from Hong Kong

Dear Flying Solo: Great question!  Unfortunately, it really depends on the investor.  There are some investors who adamantly will not back solo founders because they think it is just too hard to start a company alone.  Then there are many others who do not care.

At 500 Startups, we don’t care whether you are a solo founder. Solo founders aren’t given a break – they are expected to achieve as much as companies with multiple founders, which inherently makes it harder to be solo.  That being said, we have backed a number of solo founders over the years who have gone on to do quite well.

Here are some examples of successful companies that have been started by solo founders. Techcrunch created a report suggesting that many VCs will back solo founders.

As far as raising money goes, every early stage VC is looking for “big ideas with big markets” (subjective) and strong teams.  So having a strong team – regardless of whether your teammates are co-founders or employees – will be important in raising money.  Unless you have a strong track record, it’ll be difficult to raise money with no teammates.

To attract such strong teammates, unless you have a great network, often you’ll need to show some execution progress on your idea to show that you are serious about your business and worth teaming up with.

Given where I think you are, I would recommend starting with whatever team you’ve got now (sounds like it is just you?) and work towards product/market fit.  In parallel, for skills that you are deficient in, I’d start looking for someone with that skillset and use your progress on your business as a way to demonstrate commitment.  This person may eventually evolve into a co-founder or may turn into an early employee.  In my mind, the only difference between a co-founder and an early employee is the level of equity and control on the company.  So whatever you do, don’t rush into teaming up with someone who has significant equity and control if you’re not 100% sure about him/her in terms of skillset-fit as well as compatibility-fit.

Good luck!

Why asking for advice when you want money is bullshit

Founder: And then that angel investor said, “This is definitely interesting.  Lemme intro you to these two people.” This has happened 3x in the last 2 days but none of these angels have written a check – is this bad signaling?

Me: Oh, not necessarily.  Angel investors are not professionals, so it’s not necessarily bad signaling since they may not do many investments.  Unless you’re talking about a really prolific angel.  Did you ask him to invest?

Founder:  I didn’t ask because I thought that if they actually wanted to invest, they would ask? We went with the strategy of asking all of the angels we were in touch with about “advice on fundraising” with the idea that the conversation would naturally transition to an investment if they were actually interested.


So here’s the old adage in its entirety: If you ask for money, you’ll get advice.  And if you ask for advice, you’ll get money.

The truth is, this adage sometimes works…but more often than not, it doesn’t.  If you are fundraising in America, you really should be asking for exactly what you want – ESPECIALLY WITH ANGEL INVESTORS.

Originally posted by dokyummm

Let’s dive into this more.  (And feel free to jump in the comments to tell me how wrong I am… 🙂 )

1. Angel investors don’t see themselves as investors

They really don’t.  And this becomes more and more true everyday.  Why?  Because now on sites such as AngelList, you can plop down $1k into a syndicate, and even if you do 10 deals a year, you’re still only investing $10k a year – just like you might into your 401k plan.  These angel investors are really just everyday upper middle-class people.  Mostly tech workers.

First and foremost, angel investors see themselves as whatever their profession is.  So, let’s say you ask for advice from a UX designer who is doing, say, 5 deals a year; you’re going to get advice about your design.  He/she isn’t going to think of it necessarily from a fundraising perspective.  This is especially true if you’re talking with other entrepreneurs who happen to be angel investors.  Flip the situation around: if someone thought you were rich and came up to you asking for advice, you’d think they wanted advice, right?  You wouldn’t just start throwing money around.  It’s really no different as you climb the entrepreneurial success ladder.

For VCs, it’s their job to invest money.  They can’t take the fund money and use it towards non-investments.  But angels – it’s their money.  They are not necessarily going to use it towards investment-related activities.  They could buy a boat.  Or a car.  Or redo their backyards.

Even if someone presents an exciting opportunity in front of them, they may not even be thinking about investing their money.   You need to be clear about what you’re looking for so that an angel investor doesn’t have to try to infer the situation.

2. Many angel investors write small checks and are not going to initiate a conversation about your round

As a follow-up to #1, many angel investors write small checks, and so they are not thinking about starting your round.  It doesn’t mean that they would be averse to writing a check earlier in your round, per se, but they don’t really want to negotiate terms with you.  They also would prefer that there are other people in your round so that you have enough capital to achieve your milestones.

Unless you dive into the weeds around your fundraising – i.e. explicitly talk about your round and who is in and all that jazz – angels would just rather avoid the headache.

3. Angel investors don’t want to have an awkward conversation with you

Which leads me to my next point.  VCs already beat around the bush and hate saying uncomfortable truths because they don’t want to ruin potential financial opportunities down the road with you.  But angels are even worse. They are not used to delivering tough news or feedback, since it’s not their job.  They want to be your friend.  Heck, in many cases, angels may be your friend or your friend’s friend.  It’s just awkward to talk about fundraising.  Here are some awkward things about fundraising that they may want to avoid thinking about:

  • You may not want them in your round since you didn’t ask, and so they won’t ask you about your round
  • You may have too high of a cap, and they don’t want to express interest in your round only to back out
  • You may not have enough traction (either fundraising traction or revenue traction), and it’s awkward to ask about traction if you’re not a professional investor
Originally posted by wifflegif

All in all, I would just come out and be explicit with what you’re looking for.  Now, I know that it can be awkward to ask for money or ask someone to look at your round, so here are a couple of phrases that might help you out:

  • Hey – since I know you do some angel investing, I wanted to get your thoughts on our round…
  • I’m curious if this is the type of angel deal you might be interested in?

Would love to know what other people’s thoughts are on this topic. Feel free to comment below.

What I’ve learned from seeing 20k company pitches

I just passed my two year mark at 500 Startups.  The other day, my colleague asked me how many company pitches I’ve personally seen.  When we were calculating it out, it came out to about 20k!

To be fair, this number includes pitch emails like this (including a response from my former colleague, Sean Percival).


(In fact, the vast majority of pitches I’ve seen probably fall under this category, and these only take a few seconds to read and archive. This is how you get to see 20k pitches!)

That being said, it’s been quite a ride to see so many pitches in just two years.  Here are some learnings and what I immediately think about when I see a pitch:

1. Ideas are a dime a dozen…and it’s important to stand out.

As an entrepreneur, you think your idea is unique.  If you’re still in the early stages of your entrepreneur-education/journey, you may even think you need to protect your idea and not share it with anyone.  Even if you’re in the later stages of being an entrepreneur, you still feel like your idea is unique or at least maybe there’s only one or two other companies out there like you because that’s what you read about in TechCrunch.

It turns out everyone has the same ideas.

This isn’t a bad thing, but it means that you need to go in with the mindset of figuring out how to stand out.  The good news is that if you’re making progress on your business, you can show that you’re executing.  Most entrepreneurs overpitch their ideas but underpitch how they’ve been executing (revenue, traction, setting up infrastructure, etc.). This can set you apart because the vast majority of businesses I see at the seed stage are just ideas with no action.

2. Speed matters.

Not only is it important to show what you’ve done, but if you’ve been executing on a fast time scale, then that’s even more impressive.  At the seed stage, there are companies who have been around for 5 months and others for 5 years. You are not only being benchmarked on hitting milestones but also on your pace.

Originally posted by gameraboy

This is one of my favorite startup presentations of all time on going fast by Mike Cassidy.  Demonstrate that you can pull the trigger on things quickly — whether it is getting customers, hiring and firing employees, or product development.  Convey this in your pitch.

3. If you are in a super competitive space, it’s important to address competition upfront.

If you are in a super competitive space — areas like cleaning or food delivery, for example — it’s going to be harder for you than you can ever imagine, even if you are making progress quickly.  In these areas, investors are not just seeing a handful of companies doing the same thing but hundreds or thousands.

To give yourself the best shot at getting noticed, you need to do 2 things:

  1. Demonstrate immediately — not at the end of your pitch — that you are aware that there are other businesses like yours.  This shows that you have thought about the competitive landscape, and despite knowing that it’s competitive, you believe there is an opportunity for you to outcompete all other companies.
    Being in a competitive space isn’t a bad thing — Google was like the 8th search engine to enter the scene, and they turned out OK — but you need to address the landscape.
  2. Address where you fit into this landscape.  This is about really understanding how you are different from the other players out there.

For example, I was talking last week with a company that is a new type of job board.  They showed me their problem slide which said something to the effect of, “There are so many people who are unemployed and so many employers who cannot find good talent…blah blah blah.”  Online job boards have been around for a couple of decades and even today is an incredibly competitive space!  Everyone understands this problem.  So, this is not the correct problem to outline in this pitch.  The right way to outline this problem is to tell me why existing job board solutions suck or are ineffective and to be super insightful into the nuances of why this is the case.  After that, present a differentiated solution that doesn’t have these same nuanced issues.  In some sense, if you are in a crowded space, your job is to say, “The problem is that Companies A, B, and C suck, and here’s why.”

If you can do this, this will help you at least get attention on your pitch.

3. I treat referrals and cold-emails the same (for the most part).

In the beginning, I thought referrals from others would be much higher quality than companies emailing in cold.  Sometimes this is true.  Often it’s not.  It depends a lot on who is giving the referrals.  It would turn out that “famous” investors referring companies don’t necessarily refer better companies, and founders don’t necessarily refer great companies either. A lot of founders are doing favors for their friends by putting in a good word. On the flip side, there are some people whom you wouldn’t have heard of whose referrals I value the most.

So, in the end, it’s a bit of a wash, and this is why I think you, as an entrepreneur, can now write cold emails effectively to capture the attention of investors.

4. How people present themselves in pitch emails tell me if I should NOT take a meeting

I use pitch emails as a good proxy for finding the most on-point, sharp founders.  Really, I can’t tell immediately who is on-point and sharp, but I can tell who is not.  Meandering email copy is not a good sign.  Bad spelling and lack of punctuation = also not a good sign.  Bad grammar is excusable if you are a non-native English speaker, but if you are a native English speaker, that’s inexcusable.  Use a company domain name as opposed to a Gmail, Yahoo, Hotmail, or AOL email address.  Otherwise, your business doesn’t seem serious enough yet.

These all seem obvious and not worth addressing, but you’d be surprised just how many pitches have basic mechanical issues.  If you are not good at paying attention to detail, ask a friend who is good at that to help you proofread.  Getting in the door with your best foot forward is so important because it’s easy for your email to get ignored or lost.

Use bullet points when possible rather than paragraphs.  They are easier to read.  Bullet the key awesome things about your business.  Here are some example bullets:

  • Revenue: now at $15k MRR, growing 30% MoM
  • Monthly churn is < 1%
  • LTV to date is $700; CAC via blended paid channels is $250
  • Pilot customers include Samsung, MSFT, and Oracle
  • CEO previously founded a marketing tech company and sold it to Marketo; CTO previously worked as a software engineer at Google X; have worked together for 2 years

If you are sending a deck, refer to this post, “The ideal email deck.” Your email is just to pique interest in getting a meeting, not to get an investment.

There are a ton of other learnings from having done this job for the last two years, but these are the things that come to mind when I see pitches.