Khosla Ventures & AI Roll-Ups: Investing in Mature Companies

A Shift in Venture Capital Strategy

Traditionally, venture capitalists have concentrated their investments on companies utilizing technology to either revolutionize existing markets or establish completely novel business sectors.

However, a growing number of VCs are beginning to alter their investment approaches. Instead of solely funding startups, they are now focused on acquiring established businesses.

Acquiring and Optimizing Mature Businesses

These acquisitions include companies like call centers, accounting firms, and other professional service providers. The aim is to enhance their operations with artificial intelligence, enabling them to serve a wider customer base through increased automation.

This strategy, frequently compared to private equity roll-ups, is being implemented by firms such as General Catalyst, Thrive Capital, and individual VC Elad Gil.

General Catalyst's New Asset Class

General Catalyst has designated this approach as a new asset class and has already invested in seven companies following this model.

One example is Long Lake, a company that acquires homeowners associations with the goal of streamlining community management. Long Lake has reportedly raised $670 million in funding within its first two years, as per PitchBook data.

Growing Interest in the Investment Model

Although relatively new, several other venture capital firms have indicated to TechCrunch their consideration of adopting this investment strategy.

Among these is Khosla Ventures, a firm renowned for its early investments in high-risk, unproven technologies with extended development periods.

Khosla Ventures' Perspective

Samir Kaul, a general partner at Khosla Ventures, stated, “I think we’ll look at a few of these types of opportunities.”

Benefits for AI Startups

This private equity-influenced strategy could unexpectedly benefit the numerous AI startups currently backed by VCs.

By integrating established businesses with new technologies, AI startups seeking to serve these industries would gain immediate access to substantial, pre-existing client bases.

Addressing Customer Acquisition Challenges

According to Kaul, this access is particularly valuable given the difficulties new startups often face in securing customers independently.

The rapid evolution of AI, the influx of startups into the market, and the traditionally lengthy sales cycles associated with enterprise sales contribute to these challenges.

A Cautious Approach

Khosla Ventures intends to proceed cautiously. Kaul emphasized that the companies they are considering are “very unlikely to lose money.”

However, he also expressed a desire to avoid any strategy that could jeopardize the firm’s strong investment performance. “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.”

Testing the Waters

While Khosla Ventures is beginning to “dabble” in AI roll-up investments, Kaul explained that the firm plans to execute a few deals to evaluate their returns before potentially establishing a dedicated fund for this investment strategy.

Strategic Partnerships

If initial investments prove successful, Khosla would likely collaborate with a private equity-style firm for acquisitions, rather than building an internal acquisition team. “We wouldn’t do it alone, we don’t have that expertise,” he said.