In recent years, venture capitalists have primarily concentrated on investing in startups that utilize technology to disrupt established industries or forge entirely new business categories. However, a notable shift is occurring within the VC landscape. Some venture capital firms are now opting to acquire mature businesses instead of solely funding early-stage startups. This new strategy involves purchasing companies like call centers, accounting firms, and various professional service firms, with the intent to enhance their operations using artificial intelligence and automation, ultimately enabling them to serve a broader customer base.
This emerging strategy, reminiscent of private equity roll-ups, is gaining traction among firms such as General Catalyst, Thrive Capital, and solo VC Elad Gil. General Catalyst has been particularly proactive, referring to this approach as a new asset class. The firm has already invested in seven companies pursuing this model, including Long Lake. Long Lake specializes in acquiring homeowners associations, aiming to streamline community management processes.
Since its inception less than two years ago, Long Lake has impressively secured $670 million in funding, as reported by PitchBook data. This innovative investment model is still in its infancy, but several other venture capital firms have expressed interest in exploring similar opportunities, including Khosla Ventures. Known for its early-stage investments in risky, unproven technologies with extended development timelines, Khosla Ventures is cautiously considering this new investment model.
The private equity-inspired approach could offer considerable advantages for the numerous AI startups that VCs are currently backing. By merging traditional businesses with cutting-edge technology, AI startups could gain instant access to substantial, established client bases. Samir Kaul, a general partner at Khosla Ventures, highlighted that this access could be particularly beneficial for new startups struggling to attract customers independently.
Given the rapid evolution of artificial intelligence, the influx of startups entering the market, and the historically lengthy sales cycles associated with selling to enterprises, many AI startups face significant challenges. Khosla Ventures is committed to moving forward with caution. Kaul emphasized that the companies they are evaluating are highly unlikely to incur losses, but he remains vigilant about maintaining the firm’s strong track record of returns. “My biggest stress in life is I’m managing other people’s money, and I want to ensure that I continue to be a good steward of it,” he stated.
As Khosla Ventures begins to "dabble" in AI roll-up investments, Kaul explained that the firm intends to conduct a few initial deals to determine whether these investments yield strong returns. Should these early ventures prove successful, Khosla may consider partnering with a private equity-style firm to facilitate acquisitions rather than building an in-house team. “We wouldn’t do it alone; we don’t have that expertise,” he remarked.
In conclusion, the evolving landscape of venture capital, particularly the shift towards acquiring and optimizing mature businesses, presents an intriguing opportunity for both VCs and AI startups. This innovative strategy could not only enhance operational efficiencies but also foster growth in the AI sector by providing startups with critical access to established markets.
