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Top venture capital companies borrow strategies from private equity playbooks to send money to tech startups and allow them to “roll up” their rivals to build conglomerates that dominate the sector.
Among those deploying the approach is Thrive Capital, a supporter of Openai and Stripe.
The investment values the New York-based group at $225 million, according to people with knowledge of the issue. The funding will acquire small advisory companies, hire individual advisors, and embed artificial intelligence into the group’s operations.
General Catalyst, one of Silicon Valley’s biggest VCs, has allocated about $750 million to pursue roll-ups in areas ranging from call centres to legal services and real estate rentals. Other venture capital groups are also looking for roll-ups, including Khosla Ventures, Bessemer Venture Partners and 8VC.
This approach reflects a long-running strategy by private equity investors who have built the giants into fragmented industries such as healthcare, waste management and building services by centralizing small businesses and operating costs.
It points to a new direction for VCS, which is traditionally targeting fast-growing technology startups in early industries. The roll-up strategy creates new means for VCS to generate liquidity from their portfolios when trading slows down with their initial public services.
If private corporations typically use heavy debt and slash costs in roll-ups, VCS argues that improvements in efficiency and margins come from injecting companies.
For example, Savvy uses AI to take on back-office tasks such as pulling half a dozen forms of data needed for a single transaction.
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Thrive’s partner Kareem Zaki said AI has enabled Savvy’s approach. AI “can handle much more complex tasks in a much more accurate and complex way. Old technology has struggled to provide a highly personalized service.”
Ritik Malhotra, founder and CEO of Savvy, said:
Backed by the general Catalyst, Dwelly has taken a similar approach to the UK real estate rental market, acquiring three letting institutions across the UK, and currently manages more than 2,000 properties. It plans to automate the matching process between tenants and landlords, property management and rent collection.
The rollup is the departure of VCs during a period where outside of hot sectors such as AI, they struggle to justify the high ratings established at the top of the market in 2021 and 2022.
“It’s the best PE and VC in both worlds. On the venture side, it’s a very exciting time to be in AI. On the PE side, there’s a lot of integration in these industries.”
Some venture fund investors are suspicious. “I am skeptical of any strategy that includes converting pre-AI businesses into AI-based businesses,” said the One US Foundation’s investment director.
“This is a classic case of the innovator dilemma because it requires a company equivalent to brain transplantation, and it reorganizes everything about how business is developed, sold and operated.
