Investing in hype industries

How should we think about hyped up industries?

This was a question at last week's AMA with Elizabeth Yin and Haley Bryant about early-stage investing.

And it's one that's been ping-ponging around in my brain ever since.

Last month, a product called ChatGPT launched to the public.

This is an AI (artificial intelligence) chatbot that can do... well, a lot of different things.

It can write code, compose essays, tell jokes, and come up with recipes. It can compose tweets, create lectures, answer questions, and summarize articles.

The internet has gone a bit crazy over ChatGPT, and investors are taking notice.

Combine that interest with the drama around web3 and other markets... well let's just say that AI is pretty hot right now.

So, back to the question from last week: should investors lean in to hype sectors... or should we be more cautious about pouring our resources into these trending industries?

Let's dive in.

#1: Consider differentiation

We've talked about differentiation before, and we'll probably talk about it again.

The short version is: differentiation is critical. A startup needs to provide a solution than is 10x different and 10x better than all the other solutions out there.

And not just direct competitors. It has to be different and better than all other alternatives out there.


Because the cost to acquire companies could flatline a business.

Let's say a company comes to you with a chatbot product. You might ask: "Why would a customer use you instead of ChatGPT?"

But you should also ask: "Why would a customer use you instead of hiring a freelance writer?"

Remember: businesses have to be able to acquire customers profitably in order to thrive.

When you have a hyped up industry – like AI is right now – you see an explosion of startups in that space.

And they're all competing for the same customers.

What does this mean for a startup? Basically... it means an all-out customer acquisition war. Everyone is trying to win market share, and you have to have a massive war chest to compete.

#2: Consider Timing

A lot of funds and investors LOVE hype markets.

But only when they believe they can back companies that get to the hype market first.

That's because the cost to acquire customers will be more sustainable in a new market than in a crowded market.

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

🔥 Here's a hot tip: if you want to invest in a hype market, but you missed the early companies that will likely win the CAC wars... you could look for these:

1) hype companies in an overlooked geography

2) hype companies serving an overlooked audience

#3: Consider the opposite of hype

As many investors flock towards one hype industry (AI), they're also sprinting away from another hype market: web3.

Now, I'm not telling you where to invest your money... but it is an interesting time to look at web3 companies.

Two reasons why:

Reason #1

Investors are nervous about web3 companies right now, which means those companies are having trouble raising.

If you want to invest in web3 companies but missed the first hype wave, you might have the opportunity to get in at a lower valuation.

Reason #2

Because it's hard to get funding for web3 companies right now, fewer founders are starting web3 companies.

This means that a) customer acquisition costs are down, and b) the only founders who are brave enough to stay in the space are confident and passionate and determined to win.

The Takeaway

When it comes to hype industries... be cautious. Think critically about the company you're investing in, not just the industry as a whole.

And if you see investors fleeing from a previously popular sector, that might be a good time to stick around and see what happens in that industry.