The rollups are rolling
Plus my NYC Ranked Choice ballot
Yoni’s Note: I’m at my bachelor party right now! While the newsletter doesn’t take a Friday off, I sometimes do. So this week is a bit lighter on my writing and much heavier on some hot takes and stories from around the web.
Read to the end for my ranked choice ballot.
AI Roll-Up Deals Accelerate as Top VC Firms Edge Towards Private Equity - Madeline Renbarger
Long Excerpt followed by a take from me:
Large VC firms like General Catalyst, Thrive Capital, and 8VC are increasingly running the private equity playbook of buying legacy businesses and trying to improve their performance. The special sauce is AI, these investors believe, and half-a-dozen top-tier firms have now backed efforts to combine established companies in the same market and supercharge them with artificial intelligence [...]
Slow Ventures has backed three roll-ups still in stealth — one is buying private healthcare practices, another is rolling up system integrators, and a third is for medical billing, according to sources familiar with the deals. Slow on its website cites “the future of healthcare is private practice” as one of its signature theses, and its new deal in that sector has also landed checks from 8VC and Better Tomorrow Ventures.
I’m just honored we made the list as “notable” investors!
More skeptical investors pointed out that PE is a different business with much lower expected returns than traditional VC deals. It makes sense for the big funds to be branching out in this direction, but it will undoubtedly prove to have many challenges of its own.1
Now look, if you’ve followed me long enough you’ll know what my take is (long form deck). In short:
Software will eat the world but the best business model won’t always be SaaS. Sometimes it makes sense to buy and transform an asset yourself.
Buying companies is expensive (duh) but it’s also hard. Lots of soft costs in source, diligence, negotiate, finance, integrate, etc.
You need to focus first on value creation (product) before M&A. Let the main thing be the main thing and only buy if the product absolutely rips (generates tons of value). You wouldn’t hire a sales team before building a product and M&A is just a go to market motion here so build then buy.
And when you buy, you need to buy increasingly large assets vs an increasing number of small ones (unless, like Teamshares, the act of buying is core product/IP). If there are no medium and large assets to buy, the strategy risks topping out too soon.
Use debt. The point is to be maximally equity efficient on the belief that selling software is often inefficient. So don’t light equity on fire and undo that.
So will many of these plays ultimately look more like PE? Yes. And is that because funds are so big they need to find ways to deploy, even at low returns? Yes. But that’s not all or perhaps not even the majority.
There’s room for venture/risk capital in the early phases of these companies if you do them right. The first tranches of capital are (should be) relatively small, highly uncertain, with uncapped upside. That’s venture risk! And in that case/if you stick to this plan, we think the returns will be there in the long run.
Early rounds may be more dilutive than normal software venture rounds (you’re pulling forward capital) but what matters is terminal size and ownership. The later rounds here aren’t venture-y but neither are the later rounds into software and AI companies!
Read more on this topic:
The VC x PE Supercycle (since upgraded to a gigacycle)
My NYC Mayoral Ballot
NY has an election on Tuesday June 24 (early voting is already open!) and it’s ranked choice. Instead of picking one person, you can rank up to five in order.
Brad Lander: Brad Lander has been my #1 choice since he announced his candidacy for Mayor. He has the right ideas as a pragmatic progressive and has a track record of accomplishments as both Comptroller and on the City Council. He has the vision for how to improve the city on housing, safety, homelessness, etc. and the managerial ability to actually back it up. Lander is not a lightweight and as Comptroller has been extremely tight on technical matters of policy. He has the most ambitious plan for homelessness and among the most ambitious on housing and infrastructure. He has been a dedicated public servant for years and is well liked across government. Brad Lander is a man with a plan who can get things done for New York. FWIW he is also the top choice of the NYT and Abundance NY.
Zohran Mamdani: Polls have it very tight/a tossup and Cuomo is absolutely unfit for office (more on him later). So while I disagree with Zohran on many of his key policies, he strikes me as an energetic person of high character who, crucially, is open-minded and thoughtful on policy. He has changed his tune on crucial issues, telling the NYT that the role of the private sector in housing affordability is the biggest thing he was wrong about in the past. He’s also been a quick study on issues near and dear to me like government efficiency and supply side liberalism/abundance. My hope is that Zohran’s worst ideas would be constrained by political realities and his best qualities would be channeled through competent lieutenants (probably Lander as Deputy Mayor). Lander and Zohran have cross-endorsed and so have I (for what it’s worth).
Zellnor Myrie: Zellnor has BY FAR the most ambitious plan for housing and I love that. He wants to build 1 million new homes in ten years and it’s not just a number. He’s in the weeds on how to make that happen. The city needs more leadership like that. It’s a very long shot campaign but I hope he sticks around in city politics and continues to push NY to dream for more.
Whitney Tilson: look, he’s 4th for a reason. He has little to no personal appeal to me BUT I think he would do a reasonably good job on housing which is my #1 issue. Beyond that, Tilson would probably be fine. NYC deserves far more than fine but fine is also far better than awful.
Michael Blake: he was the only candidate to say that firing Thibs was the right call which tells me he’s not afraid of making hard, even unpopular decisions for the good of the city. That earns him my 5th and final spot ;)
Bottom line: whoever you rank, do not rank Andrew Cuomo. Even putting aside Cuomo’s sordid personal history of sex abuse AND his mishandling of the pandemic AND his criminal coverup of both his sex crimes and covid disaster, he is totally unfit for office.
But also don’t put those aside. They’re legitimately disqualifying!
Cuomo’s #1 claim is that he’s a competent, no-nonsense wrangler of government. But everyone in government hates him and his track record as a people manager and leader is atrocious. As governor, he pushed out all the best civil servants and let feuds get in the way of policy. If elected, Cuomo would use the mayoralty as a vehicle for retribution and animus, not improving the city. He is morally and managerially unfit to run the hugely complex bureaucracy of the city and lacks any ambitious plans for what to do if elected. Do not be fooled: political moderation is not the same thing as pragmatism. He has very little to say substantively on matters of policy, no meaningful plans for the city, and will have very little ability to execute.
I Read
They Asked an A.I. Chatbot Questions. The Answers Sent Them Spiraling. There is a ghost in the machine for those ill or susceptible enough to find it. I’m very receptive to the idea that “social media algos are unaligned AI.” Viewed through that lens, this looks pretty similar to some of the pernicious ratholes people fall down online - but worse.
Octopus Energy’s software platform is emerging from parent’s shadow. Really cool company that built an operating business in energy to validate a product before spinning out the software. Adjacent to some of the ideas I’ve been writing, thinking, talking about. Just fantastic execution of a super impressive approach.
Substack in Talks to Raise Financing as It Taps Into the Zeitgeist of Trump II Substack is doing much, much better than I would have thought. $450M of GMV with $45M of revenue. That’s not nothing! I still wish I could just pay them for hosting this rather than worrying they’ll boot me for abusing their generosity but it does feel like a smaller risk if they’re successful. I’ve been writing on substack nearly since the company’s beginning and am rooting for them.
I found an even longer list here: https://www.ai-rollup.fyi/companies