Venture Capital’s New AI Playbook: Buying Companies, Not Just Selling Tools
In a strategic shift reshaping the investment landscape, venture capital firms are increasingly bypassing the traditional software-as-a-service model to directly acquire and transform legacy companies with artificial intelligence. This “AI rollup” strategy, gaining traction in Silicon Valley, marks a decisive move from selling AI solutions to embedding AI at the core of established businesses. It positions venture capital firms on the offensive, while traditional private equity, having recently paid premium prices for enterprise software, finds itself on the defensive.
This innovative approach has recently made its debut in the public markets. Notable examples include General Catalyst and Trian’s $7.6 billion acquisition of Janus Henderson in December, and Long Lake Management’s $6.3 billion agreement in May to take American Express Global Business Travel private. These transactions underscore a fundamental change in how venture capital aims to capitalize on the AI revolution.
Madhu Namburi, a managing director at General Catalyst, aptly describes this strategy as “service as software.” This reinterpretation of the SaaS paradigm, which revolutionized software profitability by decoupling growth from escalating costs, is now being applied to service-oriented businesses. Venture firms have been quietly executing this playbook in the private markets since 2023. General Catalyst, a backer of Long Lake alongside Alpha Wave, has been instrumental in co-creating a dozen such rollup vehicles.
Thrive Capital, led by Joshua Kushner, employs a similar model through Thrive Holdings, backed by over $1 billion in capital. The firm has actively deployed these funds, recently supporting an AI rollup focused on regional accounting firms. Other prominent venture players like Lightspeed and Andreessen Horowitz are also exploring this avenue, albeit at an earlier stage. The common thread among these acquisition targets is their presence in industries where software adoption has historically lagged, including healthcare, accounting, insurance, customer service, property management, and construction.
This strategy also redefines the players capable of executing these deals. Unlike traditional private equity, which relies on financial engineering—leveraging fixed cash flows and optimizing margins—the AI rollup is centered on growth. By scaling customer-facing teams through AI and reinvesting generated capital into further acquisitions, these firms are essentially applying a venture-centric growth mindset to established companies. Long Lake, for instance, intends to hold its acquired companies permanently, a strategy reminiscent of Berkshire Hathaway’s long-term investment philosophy.
Long Lake stands as a prime illustration of effective AI deployment through acquisition. In its three years of operation, the company has acquired over 30 businesses spanning HOA management, construction, and corporate travel. Its proprietary AI platform, Nexus, is meticulously tailored to the specific workflows of each acquired industry, addressing needs that may not be immediately prioritized by frontier AI labs.
Alex Taubman, CEO of Long Lake, asserts that Nexus outperforms general-purpose models like Claude or ChatGPT by a factor of five in their internal evaluations. Beyond technological prowess, the core of the investment thesis lies in long-term ownership and the embedding of engineers within these companies to ensure durable change. A significant portion of Long Lake’s engineering talent originates from companies like Ramp and Palantir, where engineers are accustomed to working closely with clients on-site for extended periods.
This approach contrasts sharply with the strategy adopted by traditional private equity in the early 2020s. These firms focused on acquiring enterprise software companies at peak valuations, banking on the perceived defensiveness of recurring SaaS revenue. Significant deals during this period included Vista’s acquisition of Citrix, Thoma Bravo’s purchases of Anaplan and Coupa, and Silver Lake’s acquisition of Qualtrics. Ironically, these very companies now find themselves most susceptible to AI-driven disruption.
The recent collaborations between AI leaders like Anthropic and major investment firms such as Blackstone, Hellman & Friedman, and Goldman Sachs, alongside a parallel venture between OpenAI, Apollo, and General Atlantic, represent a response to this evolving landscape. These partnerships aim to integrate cutting-edge AI models into existing portfolios. However, this approach can be perceived as a more consultative effort, where external AI is applied to external companies by entities that do not fully own either.
The VC AI rollup model faces two primary potential hurdles: returns and execution. While operating companies typically yield returns of 100% to 200% over a long holding period, this may fall short of the 10x returns venture funds often target. Pension funds and endowments that have allocated capital for venture exposure might find themselves receiving returns more akin to those of private equity. Furthermore, execution presents a challenge. Firms like Vista and Thoma Bravo have spent decades building specialized operating teams to manage their portfolio companies. Venture capital firms, on the other hand, are more accustomed to investing in early-stage startups. Taubman counters this concern by stating, “Three years in AI is actually like three decades of pre-AI,” emphasizing the accelerated pace of technological advancement.
The next wave of take-private transactions is already emerging, and its focus is shifting away from software. Instead, it is targeting the foundational, often overlooked, non-tech companies that underpin the digital economy.
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