Khosla Ventures Explores AI-Enhanced Acquisitions of Established Companies

Traditionally, venture capitalists (VCs) have focused on investing in companies that aim to disrupt established industries or create new business categories. However, some VCs are now exploring a different strategy: acquiring mature businesses like call centers, accounting firms, and other professional service firms, and optimizing them with artificial intelligence (AI) to increase efficiency and expand customer reach. This approach, reminiscent of private equity (PE) roll-ups, is gaining traction in the industry. Firms such as General Catalyst, Thrive Capital, and independent VC Elad Gil are at the forefront of this new trend. General Catalyst, in particular, has emphasized the potential of this investment model, calling it a new asset class. The firm has already backed seven companies that adopt this strategy, one of which is Long Lake. Long Lake, founded less than two years ago, focuses on managing homeowners associations more efficiently through automation. The company has already secured $670 million in funding, according to PitchBook data. While the concept is still in its infancy, other venture capital firms are showing interest. Khosla Ventures, known for its early-stage investments in high-risk, high-reward technologies, is also considering this strategy. “I think we’ll look at a few of these types of opportunities,” said Samir Kaul, a general partner at Khosla Ventures. This approach could offer a significant advantage for the numerous AI startups that VCs are supporting. By integrating AI into established businesses, startups can gain immediate access to a large client base, which can be challenging to secure otherwise. The rapid evolution of AI and the competitive landscape of the tech market mean that startups often struggle with lengthy sales cycles and customer acquisition. Integrating with mature businesses can alleviate these pressures, providing a stable platform for growth. However, Khosla Ventures is proceeding with caution. Kaul emphasized the importance of financial stability, noting that the companies they are considering "are very unlikely to lose money." He explained that the firm's primary responsibility is to manage other people's money prudently and maintain a 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.” Khosla Ventures is beginning to experiment with AI roll-up investments but will first need to evaluate their performance. The firm plans to conduct a few initial deals to see if this strategy delivers the expected returns. If successful, Khosla might partner with a private equity firm to handle the acquisitions, rather than building an expertise in-house. “We wouldn’t do it alone; we don’t have that expertise,” Kaul added. By leveraging the strengths of both VC and PE firms, this innovative investment model aims to blend traditional business acumen with cutting-edge technology, potentially opening new avenues for both mature companies and emerging AI startups. This careful, measured approach to adopting new strategies underscores the cautious optimism driving the venture capital community's exploration of AI-integrated roll-ups.