Venture capitalists have always focused on investing in companies that use technology to disrupt established industries or create whole new business categories.
However, some VCs are beginning to turn their scripts upside down in their investment style. Rather than funding startups, they acquire mature businesses such as call centres, accounting firms and other specialized services companies, optimizing them with artificial intelligence to serve more customers through automation.
Often compared to private equity rollups, this strategy has been adopted by companies such as General Catalyst, Thrive Capital and Solo VC Elad Gil. The general catalysts promoting this as a new asset class already support seven companies, including Long Lake, a startup that scooped up homeowners associations to streamline their community management. According to Pitchbook Data, since its establishment in less than two years, Long Lake has secured $670 million in funding.
The strategy remains new, but several other venture outfits tell TechCrunch that they are also considering trying out the investment model.
Among them is Khosla Ventures, where development timelines are known to bet early on risky, unproven technology.
“I think we're seeing some of these types of opportunities,” Samir Kaul, general partner at Khosla Ventures, told TechCrunch.
Interestingly, this Pe-Flovored approach can be an incredible advantage for many of the AI startups supported by VCs. If a VC marries old businesses and new technologies, AI startups who want to serve these industries have instant access to large, established clients, essentially.
According to Kaul, such access can be useful when new startups have difficulty protecting their customers on their own. Such difficulties apply to many AI startups as the rapid rate of change, the number of startups is poured into the market and historically long sales cycles are involved in sales to businesses.
However, Khosla Ventures wants to proceed with caution. “The companies we see are very unlikely to lose money,” Kaur said, but he doesn't want the strategy to ruin the company's strong return track record. “The biggest stress in my life is that I'm managing other people's money. I want to make sure that I'm still a good steward.”
Khosla Ventures is beginning to “get out the daggers” with AI rollup investments, but Kaul explained that before raising money for any vehicle intended for this investment strategy, he would like to do some trades to assess whether such an investment would provide a strong profit for the company.
If early betting pans out, Khosla could partner with a PE-style company to help with the acquisition rather than hire a team. “We don't do it alone. We don't have that expertise,” he said.