The expectation of a startup is typically that it will disrupt an existing industry or fail to do so. If it disrupts an existing industry, existing market participants will lose marketshare.
Knowing who the competitors are in a given space, and how they contribute to the overall market, allows the hedge fund to model what the long-term revenue streams of a startup could look like. More importantly, they model how much money competitors and contributors to the space will make or lose due to the market change. Having these expectations they can then acquire futures contracts (contracts that allow them to fix the price and date they pay or receive for a publicly traded security) opportunistically during normal market fluctuations.
If the hedge is working perfectly they will make money back regardless of whether the company succeeds or fails. Trains vs. Buses vs. Cars with inputs of fuel is a classic hedge model example (although rather simplistic).
Lately hedge funds (and other early investors) are building their hedges into the investment itself with liquidity preferences which are creating their own sets of problems. Basically, liquidity preferences can be thought of as a hedge on their investment but they lose a lot of hedge value when they don't know when the liquidity event will occur.
Sorry if that isn't ELI5 enough, hedges are a pretty complex animal and it's hard not to jump down every rabbit hole detail.