Venture capitalists have convinced themselves they’ve found the next big investing edge: using AI to wring software-like margins out of traditionally labor-intensive services businesses. The strategy involves acquiring mature professional services firms, implementing AI to automate tasks, then using the improved cash flow to roll up more companies.
Leading the charge is General Catalyst (GC), which has dedicated $1.5 billion of its latest fundraise to what it calls a “creation” strategy that’s focused on incubating AI-native software companies in specific verticals, then using those companies as acquisition vehicles to buy established firms — and their customers — in the same sectors. GC has placed bets across seven industries, from legal services to IT management, with plans to expand to up to 20 sectors altogether.
“Services globally is a $16 trillion revenue a year globally,” said Marc Bhargava, who leads GC’s related efforts, in a recent interview with TechCrunch. “In comparison, software is only $1 trillion globally,” he noted, adding that the allure of software investing has always been its higher margins. “As you get software to scale, there’s very little marginal cost and there’s a great deal of marginal revenue.”
