Venture capital firms, notably General Catalyst, are deploying substantial capital into a strategy focused on acquiring traditional services firms and integrating artificial intelligence (AI) to enhance profitability and facilitate further acquisitions. General Catalyst has allocated $1.5 billion from its latest fund to this "creation strategy," aiming to establish AI-native software companies that act as acquisition vehicles for established firms.
Marc Bhargava, who leads General Catalyst's related efforts, stated in a TechCrunch interview that the services sector represents a $16 trillion global market, significantly larger than the $1 trillion software market. The strategy aims to achieve software-like margins by automating 30% to 50% of tasks within these service companies, potentially up to 70% in areas like call centers, according to Bhargava.
General Catalyst's portfolio company, Titan MSP, received $74 million to develop AI tools for managed service providers and subsequently acquired IT services firm RFA. Pilot programs reportedly demonstrated Titan's ability to automate 38% of typical Managed Service Provider tasks. Similarly, Eudia, focusing on in-house legal departments, has secured clients including Chevron and Southwest Airlines for fixed-fee AI-powered legal services and acquired Johnson Hanna, an alternative legal service provider. Bhargava indicated a goal to at least double the EBITDA margins of acquired companies.
Other firms, such as Mayfield, which has a $100 million "AI teammates" fund, are pursuing similar models. Mayfield's portfolio company Gruve acquired a security consulting firm and reportedly grew its revenue to $15 million within six months, achieving an 80% gross margin. However, a recent study by Stanford Social Media Lab and BetterUp Labs, surveying 1,150 full-time employees, reported that 40% experienced increased workload due to "workslop"—AI-generated content lacking substance. The study estimates this "invisible tax" at $186 per person per month, potentially leading to over $9 million annually in lost productivity for a 10,000-worker organization, according to a Harvard Business Review article.
Bhargava countered that difficulties in AI implementation validate General Catalyst's approach, emphasizing the complexity and the necessity of specialized AI engineering expertise for successful transformation. He noted that General Catalyst's "creation strategy" companies typically acquire businesses with existing cash flow, making them profitable—a divergence from traditional venture capital models. Bhargava anticipates continued expansion into more industries as AI technology progresses.
