Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

The startup cemetery got crowded in 2024. 966 companies shut down, up 25.6% from the year before. Most of them raised at frothy valuations in 2020 and 2021, burned through cash, and couldn't convince anyone to write them another check.

What makes this painful is that these weren't all bad companies. Many had real traction. Decent revenue. Smart founders. But they got funded at valuations they could never grow into, and that became their death sentence.

The Overvaluation Problem Isn't Over

AI startups raised $80.1 billion in Q1 2025 alone, representing 70% of all venture capital activity, while experts warn of an "order-of-magnitude overvaluation bubble." Does this sound familiar? It should. We saw this movie in 2021.

Elizabeth Yin, co-founder and General Partner at Hustle Fund, put it bluntly in a recent conversation: "If you are getting the feedback that you are in a competitive space or that your product is not differentiated enough, you need to change your game plan. Namely, model out a scenario where you can't raise at all."

That advice applies to investors too. When a company can't differentiate itself but somehow commands a massive valuation, something's wrong.

Red Flag #1: The Valuation Doesn't Match Reality

Do the math. If a company raises at $50 million post-money, they need to exit for $5 billion to give you a real return after dilution. Is that realistic?

Peter Walker, Carta's head of insights, notes that overvaluation leads to "an inability to continue fundraising" when startups can't hit milestones that justify their inflated valuations.

Hustle Fund sees this constantly. Founders raise at $12 million valuations with minimal traction. Eight months later, they're out of cash and can't show the growth investors expected. Now they need another round, but nobody wants to write a check at the same valuation. A down round signals problems. So the company dies.

"High valuations aren't always a good thing," Eric Bahn, co-founder and General Partner at Hustle Fund, has explained. "You need to give your company time to grow into its valuation."

Red Flag #2: They Raised Too Much, Too Fast

Companies that raised massive seed rounds in 2021 are shutting down now. The problem wasn't just the valuation. It was the mindset the money created.

Dori Yona, CEO of SimpleClosure, observed that rapid capital infusion in 2021 "encouraged high burn rates and growth-at-all-costs mentalities, leading to sustainability challenges as markets shifted post-pandemic."

Watch how a startup talks about spending. If they're planning to "invest aggressively" before finding product-market fit, that's a warning sign. Smart companies stay lean until they figure out what actually works.

Red Flag #3: The Revenue Multiple Is Insane

Many AI companies today trade at 30 to 50 times revenue multiples while posting negative margins. That works when capital is free and investors will fund anything. It doesn't work when markets cool down.

At Hustle Fund, we look for companies that can show a path to profitability. Not in five years. Soon. The best investments aren't the ones with the splashiest valuations. They're the ones building real businesses.

Red Flag #4: They Don't Know Their Unit Economics

Shiyan Koh, General Partner at Hustle Fund, tells founders to understand their numbers cold. Customer acquisition cost. Lifetime value. Churn rate. Payback period.

If a founder can't explain these metrics in simple terms, walk away. We once met a founder who couldn't tell us what percentage of revenue came from returning customers. He had traction, but he didn't understand his own business. That's fatal at any valuation.

Red Flag #5: The Story Changes Every Meeting

Companies pivot. That's normal. But there's a difference between iterating toward product-market fit and constantly chasing whatever's hot.

A company that was building SaaS tools last quarter and blockchain infrastructure this quarter probably doesn't have a real plan. They're looking for whatever story will get funded. That rarely ends well.

What Actually Works

91% of venture capitalists think unicorns are overvalued. They know it. They fund them anyway because FOMO is real and everyone's scared of missing the next big thing.

You don't have to play that game.

Look for companies that are capital efficient. Hustle Fund has backed plenty of startups that raised less than $500K in external funding and still built meaningful businesses. They stayed focused. Kept burn low. Found repeatable ways to acquire customers.

These companies might not become unicorns. But they're more likely to return your money than the overhyped startup burning $500K per month with no clear path to revenue.

The Bottom Line

Valuations in 2025 look a lot like valuations in 2021. Lots of AI hype. Big rounds. Companies raising before they're ready. We know how this story ends because we've seen it before.

Your job as an angel investor isn't to predict the future. It's to look at what's in front of you right now and ask hard questions. Can this company grow into its valuation? Do the unit economics work? Is the burn rate sustainable?

If the answers make you uncomfortable, trust your gut. There will always be another deal. The graveyard is full of companies that looked great on paper but couldn't survive their own success.

Want to get better at evaluating early-stage opportunities and learning from experienced investors? Join Angel Squad, where you can access dealflow, learn valuation strategies, and invest alongside people who've seen multiple market cycles.