📕 Startup term you should know

Ever heard of Net Revenue Retention (NRR) or Net Dollar Retention (NDR)?

NDR measures how much recurring revenue you keep from existing customers over a period, including expansions, contractions, and churn. Above 100% means your current customers are spending more than last year, even after some leave. Strong SaaS companies target 110% to 130%, and the best clear 120%.

My insider scoop: Bessemer Venture Partners data shows public SaaS companies above 120% NDR trade at big valuation premiums, because they grow even without adding new logos. Snowflake once posted 158% and Datadog 146%. For angels, NDR above 110% signals real product-market fit and room to expand inside the customer base.

📰 Today's topic: How Hustle Fund evaluates early-stage AI deals

Almost every deal we review nowadays is an AI deal. With so many founders building in the same space, it’s important to have a unique framework to analyze these deals and separate signal from noise. Here’s ours.

Problem + market + timing

You can only get so much from an AI pitch nowadays. Elizabeth Yin, co-founder of Hustle Fund, compares it to reading an internet pitch in 2005. There’s green space everywhere, so where you’re building and when matters as much, if not more, than what you’re building.

When we talk to AI founders, we’re interested in what problem the company solves, but also how many other companies are already chasing that same problem, and why the timing is right for us to invest now.

Hustle Fund primarily focuses on early-stage, and we view it a lot like surfing. If you catch the wave too early, there’s no market yet to prove out the idea. But if you wait too long to invest, dozens of other surfers are already riding the same wave. The goal is to find the right combination of product, market, and timing. In other words, an open wave that’s just about to crest.

Point in case: Gamma

To illustrate what we’re talking about, let’s use an example from the Hustle Fund portfolio

Gamma, an AI tool for building slides, documents, and websites, was a Hustle Fund investment made well before most investors were paying attention to the category. Today, the company is now valued at roughly $2.1 billion.

We viewed Gamma as a perfect combination of problem, market, and timing. They had built a tool that leveraged AI in a new and innovative way (for that time), were entering a market devoid of incumbents, and were looking to raise just as the AI wave was building

Anyone pitching a new AI tool for building websites or slide decks today is stepping into a market Gamma and a handful of others have already claimed.

Horizontal vs. vertical apps

Gamma is a horizontal AI tool, and it’s important to understand what that means as it relates to evaluating AI deals.

Horizontal AI tools serve almost anyone regardless of industry: writing assistants, productivity software, website builders, etc.

This category today, includes some of the biggest names in AI, so a new entrant needs something genuinely differentiated to earn a check.

On the flip side there’s vertical AI tools. These tools apply AI inside a specific industry or use case that’s been historically slow to modernize, such as healthcare or legal. At Hustle Fund, we believe a lot of the green space in the AI industry lies in vertical apps today, which is why we’ve taken a step back from the horizontal AI space. Vertical solutions simply fit the product + market + timing framework we use to filter AI deals.

Apply our framework to your next deal

Before writing a check into any AI business, start with what the tool is actually built for. Is it a horizontal solution or vertical? Each is a very different kind of bet with very different considerations.

In the midst of the AI gold rush, the question of market and timing often matter as much, if not more, than the technology itself. Keep that in mind, and don’t be afraid to ask the tough questions the next time you’re talking to an AI founder.

– Brian from Angel Squad

🍫 A snack for the road: Last Call! Applications are open for Cohort 7 of Hustle Fund’s Venture Fellowship

Hustle Fund's Venture Fellowship apps are open, exclusively for Angel Squad members. It's built for aspiring fund managers, emerging VCs, angels looking to level up, and anyone exploring a career in venture.

Fellows have gone on to start funds and syndicates, pivot into VC, and get sharper as angels.

Cohort runs Oct 12 to Dec 4, 3-4 hrs a week, and fellows work live pipeline deals with our investment team. Applications close today at 11:59pm PT.

Overheard in SF…probably

“Right now the metric we're optimizing for is momentum, which is technically a feeling.”