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

Every few years, a sector gets so hot that it becomes impossible to ignore.

AI is the current darling. Before that it was crypto. Before that, cleantech. Before that, social media. The pattern is always the same. A breakthrough captures public attention. Investors flood in. Hundreds of startups launch. Valuations inflate. And eventually, most of those startups fail while a handful become enormous.

So the question for investors is not whether hyped sectors create winners. They obviously do. The question is how to invest in them without getting destroyed.

The Differentiation Problem

When a sector gets hot, you see an explosion of startups all chasing the same customers. They are all competing for attention, for market share, for survival.

This creates a customer acquisition war. And at the early stage, you need a massive war chest to compete in one of those. That is a terrible dynamic for companies with limited capital.

The first thing to evaluate is differentiation. Not "we are building the same thing but better." Real differentiation. A startup needs to provide a solution that is 10x different and 10x better than all alternatives. Not just direct competitors. All alternatives, including doing nothing.

If a company pitches you an AI chatbot, the question is not just "why would someone use this instead of ChatGPT?" It is also "why would someone use this instead of hiring a freelance writer?" Businesses have to acquire customers profitably to survive. In a hyped market where dozens of startups fight for the same buyers, that gets expensive fast.

The Timing Question

A lot of funds and investors love hype markets. But only when they can back companies that get there first.

Elizabeth Yin has pointed out that being in a greenfield sector or geography at the right time is one of the strongest drivers of market pull. Some of Hustle Fund's emerging market portfolio companies can literally sign up businesses through door-to-door sales because there is zero competition. That kind of dynamic simply does not exist when 500 companies are fighting over the same pool of buyers.

Once a market becomes saturated, customer acquisition costs go up and investors tend to shy away from the followers.

If you missed the early window, there are still ways in. Look for companies in an overlooked geography where the hype has not yet saturated the market. Or look for companies serving an overlooked audience that the main players are ignoring. The opportunity is in the niches the crowd has not found yet.

The Contrarian Angle

Here is something most investors miss: when everyone runs toward one hype cycle, they are simultaneously running away from the previous one.

Think about it. As capital flooded into AI, many investors sprinted away from crypto and web3. That created an interesting dynamic. Valuations in the out-of-favor sector dropped. The founders who stayed were the most committed and determined. Customer acquisition costs went down because fewer companies were competing.

Two things happen in an out-of-favor sector that benefit investors. First, you can get in at much lower valuations. Second, the only founders still building are the ones with real conviction, not tourists chasing trends.

The best time to invest in a sector is often when everyone else is looking the other way.

How to Evaluate a Startup Riding a Wave

When you are looking at a company in a hot sector, these are the questions that matter.

Can this company acquire customers profitably, or are they relying on hype-driven attention that will fade? What happens to their growth when the sector cools off and the free press dries up?

Does the founding team have genuine domain expertise, or did they pivot into this space because it is trending? Founders who have been working in a sector for years before it became hot have a massive advantage over the ones who showed up last month.

Is the business model sustainable without cheap capital? In every hype cycle, some companies are only viable because investors keep funding their losses. When the money tightens, those companies die.

Hyped sectors create real opportunities and expensive mistakes in roughly equal measure. The skill is telling the difference between startups building something durable and startups surfing a wave that is about to crash. If you want to develop that skill alongside a community of 2,500+ investors who evaluate deals together, Angel Squad gives you the frameworks built from Hustle Fund's 600+ investments. Learn more at Angel Squad.

Hype fades. Good businesses do not.