Venture capitalists have always focused on investing in companies that leverage technology to either disrupt established industries or create entirely new business categories.
But some VCs are starting to flip the script on their investing styles. Rather than funding startups, they are acquiring mature businesses — such as call centers, accounting firms, and other professional service firms —and optimizing them with artificial intelligence to serve more customers through automation.
This strategy, often likened to private equity roll-ups, is being employed by firms such as General Catalyst, Thrive Capital, and solo VC Elad Gil. General Catalyst, touting this as a new asset class, has already backed seven such companies, including Long Lake, a startup that scoops up homeowners associations in an effort to make the management of communities more streamlined. Since its founding less than two years ago, Long Lake has secured $670 million in funding, according to PitchBook data.
While the strategy is still new, a few other venture outfits have told TechCrunch that they are also considering trying out the investment model.
Among them is Khosla Ventures, a firm known for making early bets on risky, unproven technologies with long development timelines.
“I think we’ll look at a few of these types of opportunities,” Samir Kaul, general partner at Khosla Ventures, told TechCrunch.
Interestingly, this PE-flavored approach could be a surprising benefit to the multitudes of AI startups VCs are backing. If a VC marries old businesses with new technology, AI startups wanting to serve these industries would essentially gain instant access to large, established clients.
According to Kaul, such access would be helpful when new startups have difficulties securing customers on their own. With the rapid rate of change in AI, the number of startups pouring into the market, and the historically long sales cycles involved in selling to enterprises, such difficulties apply to many AI startups.
But Khosla Ventures wants to proceed with caution. “The companies we’re looking at are very unlikely to lose money,” Kaul said, but he doesn’t want the strategy to ruin the firm’s strong return track record. “My biggest stress in life is I’m managing other people’s money, and I want to make sure that I continue to be a good steward of it.”
While Khosla Ventures is starting to “dabble” in AI roll-up investments, Kaul explained that the firm wants to do a few deals to assess if such investments deliver strong returns for the firm before possibly raising money for some kind of vehicle specifically aimed at this investment strategy.
If early bets pan out, Khosla would likely partner with a PE-style firm to help it with acquisitions rather than hire a team. “We wouldn’t do it alone, we don’t have that expertise,” he said.