A friend who is thinking about starting an internet company recently asked me what trends I’m seeing in internet startup investments. He wanted to know what sectors and business models are getting a lot of investment in order to think about companies that he could start to ride these trends.

My answer was that on-demand startups and fintech startups (mobile wallets, payments, lending, …) are hot areas that are getting a lot of investment.¬†However, I followed up my answer with an important note.

By definition, a trend is something that many people are aware of and doing. The Merriam-Webster dictionary defines a trend as “something that is currently popular or fashionable”. If something is popular, that also means that there is a lot of competition in that space. This is certainly the case for the on-demand and fintech startups that I highlighted.

And the more existing competition there is in a space, the less likely it becomes for each new entrant into the space to win. Chances are that a competitor who identified the trend before it became a trend, and who may even be responsible for creating the trend, is already so far ahead of you that you won’t be able to catch up.

If everyone knows that a sector or business model is trending, you probably want to stay away from it. Trends are a lagging indicator of opportunity. The spoils go to those who identify the leading indicators of opportunity which they use to build companies that create trends. It’s much more difficult to determine the leading indicators of opportunity (Chris Dixon believes that one example is what the smartest people currently do on the weekend), but that’s the question you need to answer.