Inside the White-Hot AI Rollup Trend

0:00Today on the AI Daily Brief, are AI rollups by PE firms, VCs, and startups, the hot new trend, or a bubble waiting to burst. Before that, in the headlines, Apple has apparently decided to just stop competing for AI altogether. The AI Daily Brief is a daily podcast and video about the most important news and discussions in AI.

0:23Hello, friends. Quick little announcements in credit section before we get into today's show. First of all, big thank you to today's sponsors. The show is presented today by KPMG, Blitzy.com, Vanta, and Agency. Also, to get an ad-free version of the show, go to patreon.com slash AI Daily Brief. We've just added a$3 ad-free tier, trying to keep it cost-effective for those of you for whom that is the only thing you're looking for. With that out of the way, let's get into today's topic, starting with whatever the heck is going on at Apple. Welcome back to the AI Daily Brief Headlines Edition, all the daily AI news you need in around five minutes.

0:57Apple continues its just honestly astounding dereliction of any sort of coherent AI strategy or philosophy in anything approaching the urgency of the moment. Indeed, the company appears to be taking a gap year on AI as they head into next week's Worldwide Developer Conference. Bloomberg's Mark Gurman, who is basically the most informed mainstream media reporter on Apple, reports that next week's Developer Conference will forego any major AI announcements. Instead, the headline reveals seems to be a new naming convention for their operating systems. The company will reportedly skip from iOS 19 to iOS 26 in order to align with the year of release.

1:35Last year's conference, of course, featured Apple finally wading into the AI game in some way. Of course, it being Apple, they had to give it a different name, Apple Intelligence. Since then, though, things have not gone well. In fact, it's been a steady stream of lackluster performance, missing features, not getting right the one obvious necessary thing, which is an overhaul of Siri. German writes, Apple needs a comeback, but that probably won't be happening at this year's WWDC. People within the company believe that the conference may be a letdown from an AI standpoint. Others familiar with the company's planned announcements worry they could make Apple's shortcomings even more obvious.

2:11German continued, in the months following WWDC last year, it was evident that features like writing tools, Genmoji, and priority notifications, while helpful, didn't match the innovations coming from Apple's competitors. And the new Siri voice assistant meant to sit at the center of Apple intelligence was delayed indefinitely after running into a series of engineering and testing snags. Now, if there is anything that anyone is sort of excited about, it's that it does appear that Apple plans on opening its AI models to developers. Gurman again writes, the iPhone maker is working on a software development kit and related frameworks that will let outsiders build AI features based on the LLMs that the company uses for Apple intelligence.

2:47Now, it's not like all the other big tech companies have had an easy go of it. In 2023 and early 2024, Google was really rocked back on its heels as well. For most of 2023, all any of us were talking about was how Google could possibly be losing the battle to open AI after being a leader in AI for so long. And then at the beginning of 2024, they had the rushed launch of Gemini, feeling like they clearly needed to catch up to open AI. And we had the overly woke, historically inaccurate image generation, i.e. Black Nazis. We also had the suggestion of putting glue on pizza. And yet in the years since, Google has come surging back.

3:22They are a major player again. They're constantly competing for the very top end of all the benchmarks. And there's genuine excitement around the ecosystem. And I think the difference that it shows is that while yes, Google was being out-competed for some period of time, they never didn't have a commitment to or a big vision for artificial intelligence. In fact, if anything, their AI approach was too sprawling, too distributed, and needed to be concentrated and organized and aligned around a coherent and specific vision rather than a whole bunch of them. Apple, meanwhile, it doesn't even seem like they've actually committed to this thing.

3:55Now look, ultimately, the company has a ton of goodwill. There are still a huge number of people who are incredibly loath to switch off Apple hardware. I'm one of them. I think there's a world in which they thought about this very intentionally and decided to sit the first couple of years out until they better understood what real consumer demand was going to look like for AI. The problem, in other words, is not just that they're not doing enough. It's that they don't have any vision of what they're supposed to be doing in the first place. Gurman concludes, the big question is how long Apple can last with a go-slow approach to AI.

4:26The company is aiming to show real progress next year, but the AI race only seems to be accelerating each month. It's clear Apple needs to move faster, make bigger beta, and release bolder features, or risk eventually being lapped by its rivals. Savitar Jagtiani summed up the feelings of many when they tweeted, damn, AI Lite or no AI sounds like a death sentence for Apple at this stage. Next up, Elon Musk's XAI is looking for another huge tranche of funding. The Financial Times reports that XAI is launching a$300 million share sale that would value the company at$113 billion. Now, this is a secondary offer, which is intended to allow staff to sell shares to new investors.

5:02If successful, it would validate the pricing that came during XAI's all-stock acquisition of social media platform X back in March, which of course appeared to be negotiated between Elon Musk and himself. That deal attributed a$33 billion valuation to Twitter, an$11 billion drop from the price Musk paid in October 2022, and an$80 billion valuation to XAI, which was a 75 % markup from the Series C last December. Now the last fundraising news we had was back in April, when Bloomberg reported that XAI was in talks to raise$20 billion in a round that would have valued the company at$120 billion. If that is still in the works and if it's completed, it would be easily one of the largest venture rounds in history.

5:40Shortly following reports of the smaller tender offer, Bloomberg also broke the news that Morgan Stanley is shopping around a$5 billion debt package for XAI. The package was launched on Monday, according to sources, with proceeds going to general corporate purposes. The deal is reportedly being priced with double-digit interest rates, and commitments are due within two weeks. For Musk's part, he is back full-time in his entrepreneurial endeavors. After leaving the administration last week, he posted, back to spending 24-7 at work and sleeping in conference server factory rooms. I must be super focused on X, XAI, and Tesla, plus Starship launched next week, as we have critical technologies rolling out.

6:15Lastly today, an update on the idea of how AI is going to impact consulting, McKinsey's AI has apparently reached the point where it can do the work of junior employees. Bloomberg reports that McKinsey's in-house AI, called Lilly, has now reached the point where it's drafting proposals and preparing PowerPoint slides for the firm's consultants. Lilly has been trained to create PowerPoint slides from single prompts and can ensure reports are written according to the firm's corporate style guide. Over 75 % of the firm's employees are now using the tool on a monthly ongoing basis. Kate Smage, the company's global leader of technology and AI, said, Do we need armies of business analysts creating PowerPoints?

6:48No, the technology could do that. Is that a bad thing? No, that's a great thing. It's not necessarily that I'm going to have fewer of them, but they're going to be doing things that are more valuable to our clients. Bloomberg notes, however, that McKinsey does in fact have fewer of them, with the firm's headcount dropping by 10 % since the beginning of 2024. This was, in fact, the largest reduction in staff in the firm's history, with McKinsey insisting the reduction was due to increased attrition and a lack of replacement, rather than a gigantic wave of layoffs. Yet another interesting story in the ongoing question of how AI is going to impact jobs.

7:20However, for now, that is going to do it for today's AI Daily Brief Headlines edition. Next up, the main episode. Today's episode is brought to you by KPMG. In today's fiercely competitive market, unlocking AI's potential could help give you a competitive edge, foster growth, and drive new value. But here's the key. You don't need an AI strategy. You need to embed AI into your overall business strategy to truly power it up. KPMG can show you how to integrate AI and AI agents into your business strategy in a way that truly works and is built on trusted AI principles and platforms. Check out real stories from KPMG to hear how AI is driving success with its clients at www.kpmg.us.ai.

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11:50Shape the future of enterprise innovation. Visit agency.org to explore use cases now. That's A-G-N-T-C-Y dot org. Welcome back to the AI Daily Brief. Today we are talking about a trend which is getting a lot of airtime these days, which is this idea of AI roll-ups, or effectively, venture capitalists or PE firms moving away from traditional venture-style investments to instead acquire boring mature companies and give them an AI makeover. Now, this is in the ether in a huge way right now. We're going to go through about a half dozen examples of stories that have been written about this exact approach over just the last month or two.

12:30Growth VC Stahil Pawat writes, Wow, just a few weeks after launching this open database of AI-powered roll-ups, the number of companies in the list have doubled. Lots of activities in this space. And indeed, you can see on this list where these things are happening, what sector they're in, and so on and so forth. But the important thing to note here is that this is actually, I believe, a group of trends bundled into one. Roll-ups in private equity are nothing new. Historically, the private equity version of this was to corner the market in a certain location or within a certain vertical or both, and then consolidate all the companies to benefit from scale and systemization.

13:05Think, for example, buying up all the dentist offices in Phoenix and consolidating the accounting, bookkeeping, and data systems. Now, in previous generations, this tended to involve upgrading decades-old software to more modern SaaS offerings. And this started to become more of the subject of conversation among smaller investors and operators during and just following the pandemic. You saw people like finance influencer Cody Sanchez start to talk about buying boring businesses and arguing that potentially a better path to entrepreneurial success was to buy businesses that were already working and then upgrade and modernize them, reinvest the profits in similar operations, and so on and so forth.

13:46Now, the historic P.E. version of this strategy, while certainly popular with trillions in assets under management for this type of deal, there is also the perception of a lot of downfalls. Sometimes P.E. firms will load up companies with stifling amounts of debt. Another pitfall is installing managers with no experience. And sometimes in the past, firms have simply overestimated just how much profit could be gained by adding things like social media advertising. So this is the P.E. side of the background that AI comes into. And the interesting bet that many are making is that AI changes the math in a way that's much more dramatic than SaaS ever could.

14:21However, that's not the only side of this trend. We've also seen venture capital undergoing what is now a half-decade or longer transformation. First of all, the boundaries between what a VC firm is and a PE firm is have certainly gotten blurrier. You might remember all the way back in 2019, Andreessen Horowitz made a ton of news by becoming a registered investment advisor, allowing it to deploy capital in more nontraditional ways than just VC. Back at the time, TechCrunch pointed out that it was far from alone in this shift. SoftBank, Foundry Group, and General Catalyst were all traditional firms that they pointed to taking on some sort of version of this or some different type of flexibility in terms of their capital structure.

15:03Now, post-COVID, VC has been changing even more. This was an asset class that was completely awash in capital during the ZERP era generally post-GFC, but especially in the COVID period. As interest rates started to climb, capital flooded back out of the asset class, and because of the long-duration nature of the field, we're only just starting to see some of the impact now. One of the areas where you're seeing this take place is as venture firms get ready to raise their next fund, they are often finding it much more difficult to find willing LPs than they did before. And of course, it's not just that the broader capital markets have changed.

15:42It's also that liquidity is extremely low right now. We haven't had a fertile IPO market for some time. M &A has been depressed. And that's why you're seeing things like secondary markets where venture capitalists sell their illiquid stakes in companies before there's actually a liquidity event in order to have some money to reinvest or to return to investors have become a much bigger force in the industry over the last year or so. Now, if that's the PE side of the trend and some of the things going on in venture capital more broadly, there is, of course, another bottoms-up aspect of this, which is the way that AI is changing the economics of entrepreneurship in general.

16:19In short, in the same way that AI is poised to make everyone across all dimensions of business more efficient, entrepreneurs in small companies and startups are some of the areas where we're seeing the most extreme examples of that, or at least where we're seeing people experiment the most aggressively with just how far they can stretch AI and agentic systems as opposed to building out big teams. You have this big, glorious notion of the eventual one-person unicorn, which is something that Sam Altman has talked about. More practically right now, though, it's like every other week some company shows how much it's growing with how few people.

16:53Text-to-code app Lovable raced to nearly 10 ,000 subscribers and 4 million ARR in their first four weeks back in December of last year, and just a couple of days ago crossed 60 million ARR, with their growth rate increasing 50 % in just the week previous to that. Now, companies like Lovable are still raising big rounds because of the intensity of the competition in the space that they're competing in. But more broadly, there are a lot of companies that are asking themselves if they really need traditional venture capital. You might have heard of this phenomenon of seedstrapping. It's basically something between traditional Silicon Valley investment and bootstrapping, where founders design themselves to raise a single round at the beginning of the company and then use that to get to profitability and grow on their own terms without the pressures that come with venture capital.

17:39A few years ago, this might have been dismissed by VCs as only for companies that wouldn't really be applicable for their investment theses anyway. But increasingly, this is actually competing with venture capital as a strategy, even among some very desirable companies. So this is the landscape into which this AI roll-up strategy comes. And there are a lot of versions of this that are happening out there right now. Back in January, the Wall Street Journal published a piece about the trend called Now Wanted in Silicon Valley, Ho-Hum Businesses with Thin Profit Margins. One of the stories they focus on is that of General Catalyst, who had raised$1.5 billion for a version of this strategy.

18:17At the time of this article back in January, GC had invested in around seven startups that were pursuing some version of AI-enabled roll-ups. One of the companies they invested in was called Long Lake Management Holdings, a now 18-month-old startup that raised around$600 million and had acquired about a dozen companies collectively employing 1 ,400 workers. Another venture firm that's exploring this strategy is Thrive. In April of this year, the New York Times profiled its new division called Thrive Holdings, which was at the time closing about a billion dollars. With this sort of idea of developing and buying companies in mind, parent company Thrive Capital had backed both Long Lake, the company we were just talking about, and it also bought a more traditional accounting company called Crete as well.

19:01Now, one of the things that it seemed like Thrive was trying to do differently was to structure its holdings division so that it didn't need to just turn them around and sell them off in the way a traditional PE firm would. Wrote the New York Times, unlike roll-ups done by Wall Street mainstays like PE firms, the venture firms are targeting younger companies. Thrive Holdings also plans to focus heavily on the operations of the businesses it buys, in part by using a team of software engineers and Thrive's ties to AI companies like OpenAI. Thrive Holdings also differs from other venture firms via its setup as a so-called holding company that can own stakes in companies for a long time, even forever, according to one of the people with knowledge of the company.

19:37And this trend seems to be accelerating now. Earlier this week, the information reported that former Microsoft venture head Chris Young had jumped on board the theme, which they referred to as one of the most popular private investing strategies of the last year. They write, Chris Young, who led Microsoft's ventures and acquisitions team for five years, has told former colleagues he's planning a private equity fund focused on buying companies, combining them, and using AI to make their operations more efficient. Young's plans underscore investors' belief that AI will play a key role in transforming businesses by replacing or assisting employees with chatbots, or by speeding up recruiting processes with automated interviews and skills assessments.

20:12Now, interestingly, this piece from The Information calls out both sides of the trends here. On the one hand, the challenge of traditional markets, and on the other hand, the opportunity of AI. Obviously, the catalyst for all this activity is, on the one hand, the opportunity that AI represents to win new efficiencies and to create new paths for growth, but there is also the macro dimension here. They quote Mark Bhargava from General Catalyst, who says, if IPOs and markets are maybe locked, you want to control your own destiny. If you're a profitable company creating free cash flow, you do control your own destiny.

20:43Still another firm that's pursuing this strategy, which we've gotten news of in the last couple of weeks, is Khosla Ventures. Samir Kahl, a general partner at Khosla, told TechCrunch, I think we'll look at a few of these types of opportunities. And whereas some of these other firms seem to be going whole hog into this strategy, Khosla seems to be taking a bit more of a dip-your-toe-in approach. Call explained that the firm wants to do a few deals to assess if such investments deliver strong returns for the firm before possibly raising money for some kind of vehicle specifically aimed at this investment strategy.

21:11And interestingly, that piece brings in another dimension of this, and this is one which we're seeing all the time here at Super. Again, from TechCrunch, quote, this PE-flavored approach could be a surprising benefit to the multitudes of AI startups VCs are backing. If a VC marries old businesses with new technology, AI startups wanting to serve these industries would essentially gain instant access to large established clients. According to Call, such access would be helpful when new startups have difficulty securing customers of their own. With the rapid rate of change in AI, the number of startups pouring into the market, and the historically long sales cycle involved in selling to enterprises, such difficulties apply to many AI startups.

21:47One of the things that we see all the time is exactly this sort of three-player access between startups on the one hand who can provide services that transform businesses. On the other side, the businesses who are waiting to be transformed. And in the middle, a PE firm or now a VC or an investor playing the role of PE firm facilitating the interaction. One of the biggest buyers so far of custom AI design services from the big dev shops and other next generation of systems integrators are PE firms looking to roll this sort of change out across their portfolios. One more investor pursuing this strategy that's worth mentioning, because the story just came out a couple days ago, AI super angel Elad Gil is also exploring this AI roll-up strategy.

22:30Said Gil, it just seems so obvious. This type of generative AI is very good at understanding language, manipulating language, manipulating text, producing text. And that's audio, that's video, that includes coding, sales outreach, and different back-office processes. If you can effectively transform some of these repetitive tasks into software, you can increase the margins dramatically and create very different types of businesses. He added, the math is particularly compelling if one owns the businesses outright. If you own the asset, you can transform it much more rapidly than if you're just selling software as a vendor.

22:59And because you take the gross margin of a company from, say, 10 % to 40%, that's a huge lift. Suddenly, you can buy other companies at a higher price than anyone else because you have that increased cash flow per business. You have enormous leverage on the business on a relative basis, so you can do roll-ups in ways that others can't. Now, one thing that this piece points out is the question of who's the right type of actor to lead this. TC writes, part of the challenge with roll-ups is finding the right team composition, ideally including a strong technologist, along with someone who is very strong in PE, and as Gil noted, those things don't go hand in hand.

23:31Gil said that he had met a couple dozen of these teams so far and mostly hadn't invested because of the challenge of finding the right type of leadership. And if you go poke around Twitter at all, this is definitely where the biggest skepticism on this theme is. Perplexity's Special Projects Quack writes, As someone who did this for three years and helped raise a$600 million fund for it, I'm incredibly bearish. At face value, the thesis of AI plus existing company equaled multiple and profit margin expansion sounds genius to every VC investor. However, ask any veteran PE investor about operational improvements and internal transformations, and they'll tell you that those founders will burn themselves out trying to transform the company from within.