Elad Gil Invests in AI-Powered Rollups

Elad Gil's Strategic Shift Towards AI-Driven Business Reinvention

Elad Gil began investing in artificial intelligence well before widespread recognition of its potential. By the time the implications of ChatGPT became apparent to investors, Gil had already made initial investments in companies such as Perplexity, Character.AI, and Harvey. Currently, with the leading companies in the AI sector becoming more defined, this prominent “solo” venture capitalist is increasingly concentrating on a new avenue: leveraging AI to modernize established businesses and expand their reach through roll-ups.

The Roll-Up Strategy Explained

The core concept involves identifying opportunities to acquire established, labor-intensive businesses – including legal practices and other professional service providers – and enhancing their scalability through the implementation of AI. Improved profit margins would then facilitate the acquisition of additional enterprises, repeating the cycle. Gil has been actively pursuing this strategy for the past three years.

“The opportunity appears remarkably clear,” Gil stated during a recent Zoom interview. “This generation of generative AI excels at comprehending and manipulating language, including text, audio, and video. Its applications extend to coding, sales communication, and various administrative functions.”

Margin Improvement and Acquisition Leverage

He explained that transforming repetitive tasks into automated software processes can significantly boost margins and fundamentally alter business models. The financial benefits are particularly substantial when the business is wholly owned.

“Owning the asset allows for quicker transformation compared to simply selling software as a vendor,” Gil noted. “Increasing a company’s gross margin from, for instance, 10% to 40% represents a substantial improvement. This increased cash flow enables acquisitions at higher prices and provides significant leverage for roll-up strategies.”

Current Investments and Notable Companies

To date, Gil has invested in two companies pursuing this approach. One, Enam Co., a company focused on enhancing worker productivity, is reportedly valued at over $300 million, with backing from Andreessen Horowitz and OpenAI’s Startup Fund, according to The Information.

While refraining from disclosing specifics of private deals, Gil suggests this strategy represents a novel approach. “Previous technology-enabled roll-ups often lacked substantial technological integration,” he observed. “AI, however, has the potential to radically alter the cost structure of these businesses.”

A Proven Track Record

The success of this plan remains to be seen, but Gil has a history of successful investments. He has backed prominent companies like Airbnb and Coinbase, both now publicly traded, and Stripe, currently valued at approximately $91.5 billion.

Challenges and Considerations

Gil highlighted the importance of assembling the right team, ideally combining a strong technologist with someone experienced in private equity. He has evaluated “perhaps two dozen” teams but largely passed, not due to a lack of talent, but because “they still need to refine certain aspects.”

Another potential challenge is competition. Given his extensive network in Silicon Valley, Gil anticipates facing rivals, such as Khosla Ventures, as they also explore AI-driven roll-ups.

Driven by Passion and Progress

Gil emphasized that his motivation extends beyond financial gain. “I am passionate about technology, progress, and engaging with both the individuals developing innovative solutions and the technology itself.”

Early Adoption and Trend Identification

For example, Gil was already experimenting with the precursor to GPT-3 when it was released. “The leap from GPT-2 to GPT-3 was significant, allowing for extrapolation of the technology’s trajectory. The scaling laws were evident, suggesting transformative potential.”

Hands-On Evaluation and Emerging Winners

This hands-on approach continues with a small team conducting rigorous evaluations of AI companies. “We run scripts, analyze performance, and assess tooling,” Gil explained.

After a period of uncertainty, Gil believes clear winners are emerging in the AI market. “Six months ago, my understanding of AI felt inversely proportional to the market’s dynamism. However, in the last two quarters, a subset of markets has become more defined.”

Specific Sectors Showing Promise

“In the legal field, we are likely identifying the one or two leading companies. This is also true in healthcare, customer success, and support,” Gil stated, referencing companies within his portfolio.

Portfolio Companies at the Forefront

These investments include Harvey, developing large language models for legal professionals and reportedly seeking funding at a $5 billion valuation; Abridge, an AI healthcare company focused on improving clinical documentation; and Sierra AI, co-founded by Bret Taylor, specializing in AI agents for customer service.

A Solidified Landscape, Not a Finished Game

Gil cautioned against assuming the market is fully settled. “While there were initially dozens of promising companies, the field has narrowed to perhaps three or four per vertical. The landscape of likely winners is becoming clearer.”

A Period of Excitement and Transformation

Gil views this moment as more than just another investment cycle. “It’s a remarkably exciting time, with so much change happening and so much work to be done.”

He finds it particularly stimulating to be at the intersection of two transformations: the advancement of AI and its potential to reshape all other industries.

Further insights from this conversation with Gil, including discussions on safety measures, access control, and effective technology integration, will be featured in the upcoming episode of the StrictlyVC Download podcast, scheduled for release on Tuesday.