Inside the VC Roll-up Craze That Has Taken Silicon Valley by Storm
Details on unreported deals, key partners & more
Venture capitalists borrowed liberally from the private equity playbook this year, and nowhere was that more evident than in roll-up strategies built on the idea that AI tools can make old-school small businesses far more efficient.
We wrote back in June that the “AI roll-up had officially gone mainstream.” Since then, major firms including General Catalyst, Lightspeed, Thrive Capital, and 8VC have doubled down on the strategy, which generally involves acquiring multiple companies in a service sector like accounting, IT services, insurance, or law, and then remaking them with AI tools.
Some investors are pushing the idea even further with startups that are looking to acquire multiple businesses in unrelated industries, with the common denominator being their potential to be made more efficient with AI. One stealth company that’s working on this, called Sequence Holdings, was founded by alums of Scale, Cognition, and Lone Pine Capital, and raised a seed round from 8VC among other investors, according to a source familiar with the deal.
Similarly, Denis Aven, a former principal at 8VC, recently launched a holding company called Kodiak for rolling up SMBs and implementing AI tools within them.
General Catalyst remains a leader in AI roll-ups, having co-created at least ten startups that are buying up services companies. They run the gamut from Eudia in legal services to Titan in IT services to Long Lake for homeowners association management.
But several other megafunds have now jumped on the strategy too. At Lightspeed, partners Isaac Kim and Amish Desai have made roll-up plays in sectors including engineering services and healthcare. Some of the deals involve Lightspeed taking majority ownership of a startup that will then go out and acquire small businesses, though others hew to the more traditional venture capital strategy of backing a founding team.
We have the names of some previously unreported Lightspeed AI roll-ups in our list below.
Joshua Kushner’s Thrive is taking a big swing with a dedicated vehicle called Thrive Holdings (with more than $1 billion at its disposal) to focus on AI-driven services businesses. It also inked a partnership with OpenAI where the ChatGPT maker’s researchers will embed with Thrive Holdings engineers to build customized models and products for these services businesses and, in turn, gather insights on how models are being used in real world enterprises.
Thrive Holdings has built out a product and engineering team with veterans of startups including Harvey and Ramp to work directly with the acquired businesses.
Ex-Palantir CIO Jim Siders recently signed on as the CEO of Shield, which Thrive took a direct role in creating and is aimed at rolling up IT services businesses.
Smaller VCs are taking a different approach. Slow Ventures has funded several roll-up startups without putting up a lot of upfront capital. Instead, Slow looks to seed companies to build the AI tech needed for these roll-ups, but the founders then raise additional capital to fund these large-scale acquisitions.
Slow invested early in Teamshares, which buys up small businesses using a model that enables employees to gain an equity stake after the owners sell. Teamshares said in November that it plans to go public via SPAC. Slow was also an early investor in Metropolis, which raised a $1.6 billion equity and debt round this fall to roll-up parking lots and automate check-out with AI.
It’s still early to assess the performance of the roll-up investments as a category. We heard from multiple investors that both Crete and Long Lake have been gaining traction, though we don’t have details.
One question is whether the more PE-like strategy might yield more PE-like returns, i.e. 2X or 3X rather than the 10X or more that’s typically the goal for VCs. If the AI boosters are right, though, combining small companies to use the tech early and effectively could create some very big companies in short order — and perhaps some VC-style returns.
Here’s our list of key VCs leading roll-up plays, with some of their top investments.
Khosla Ventures
Notable Roll-ups:
R1 - Healthcare
Teamshares - SMBs
HiOctave - Customer experience
Key investors:
Vinod Khosla - Founder, Khosla Ventures
Hari Arul - Venture Partner, Khosla Ventures