We’re living through another gold rush—this time, it’s generative AI. In the past 18 months, pitch decks across the U.S. have flooded investor inboxes with promises of "AI-powered this" and "GPT-enabled that." Even at Y Combinator’s Demo Days from San Francisco to Seattle, one can’t help but notice how nearly every entrepreneur mentions OpenAI, fine-tuning, or some flavor of “AI copilot.”
But if history (and your inbox) has taught you anything, it’s this: when everyone’s drilling in the same spot, only a few strike oil. Most flame out fast.
As an angel investor, your challenge isn’t spotting AI, it’s spotting durability. So, what separates the AI-focused companies that will weather the storm from those that will quietly fade away? Interestingly, the answer is clear: industry specialization.
The Commodity Problem of AI
Entrepreneurs love to pitch AI as a moat. However, here's the catch: the underlying models—GPT-4, Claude, and Gemini— are available to everyone. There's no defensibility in simply using AI anymore. It's like saying your app uses cloud computing or JavaScript.
What does that mean for you as an investor? It means you need to start thinking about AI like plumbing: useful, necessary, but not unique. The question isn’t who’s using AI. It’s who’s embedding it into deep, industry-specific workflows that can’t easily be copied.
Why Vertical Focus Builds Moats
Let’s take two hypothetical startups:
- Startup A is building an AI-powered writing assistant for students. It utilizes GPT-4 to assist in summarizing textbooks and checking grammar.
- Startup B is developing a contract review tool tailored for mid-sized logistics companies that handle freight compliance.
Both use similar foundational AI models. However, Startup B has spent six months integrating with legacy transportation management systems (TMS), hired a legal expert in freight regulation, and developed custom workflows tailored to specific industry pain points.
Guess which one will be harder to copy and more likely to generate recurring revenue? Startup B, of course!
That’s the power of vertical depth. When businesses delve deeply into a domain, whether it's healthcare claims processing, manufacturing defect detection, or pharmaceutical R&D, they become more than just “AI wrappers.” They become critical infrastructure for that vertical.
Microsoft, Y Combinator, and the Industry Thesis
Specialization isn’t just investor intuition; it’s also where big platforms are placing their bets. Microsoft for Startups, for example, is offering business leaders access to industry-leading AI services, cloud credits, and expert guidance specifically designed to help startups build resilient, enterprise-ready businesses. Their programs connect startups with Microsoft’s extensive enterprise customer base and provide mentorship from industry veterans, assisting entrepreneurs to navigate the unique challenges of selling into verticals such as healthcare, finance, and life sciences.
Y Combinator’s latest Demo Day also featured some of the most talked-about early-stage companies that are leveraging AI to address specific, high-value, enterprise-level problems across diverse sectors.
Why? Because enterprises aren’t swayed just by shiny demos. They buy when a tool solves a painful, often dull, but essential problem. One that generic AI apps simply don’t address.
From Hype to Revenue: What Investors Should Look For
So, how can you spot AI-focused businesses with a vertical focus?
Start by listening for language that reflects deep domain knowledge. Are they talking about solving "workflow inefficiencies in eldercare EHR systems"—or just "revolutionizing healthcare with AI"? One of those speaks to someone who knows their buyer.
Also, check for integrations: are they embedded in Salesforce, Epic, NetSuite, or other core systems used in their target industry? That kind of plumbing is challenging to install, but powerful once completed.
And finally, ask about their advisory board or early customers. If they’ve a former VP from a key industry player helping shape the roadmap, that’s not just fluff; it’s a strategic focus.
You can find more questions in our upcoming blog Investing With Confidence in The AI Gold Rush.
The Winners Will Be Quiet Specialists
Here’s the paradox: the next unicorns in AI probably won’t look like ChatGPT or Midjourney. They’ll look more like an assistant dedicated to solving only one problem very efficiently.
As an angel investor, your edge is not in chasing what’s trending, but in backing what’s going to weather market storms. And in this new AI-powered world, specialist models have a better chance of endurance over general models.
References
https://www.microsoft.com/en-us/startups
https://www.hoxtonmix.com/marketplace/microsoft-for-startups-offer/
https://techcrunch.com/2025/06/13/11-startups-from-yc-demo-day-that-investors-are-talking-about/
