Four venture capital firms are making groundbreaking moves to strengthen their investment yields. General Catalyst, Thrive Capital and Solo VC Elad Gil are getting closer to roll-up private equity exit strategies. Their strategy, called “roll-ups,” is to buy up dozens or even hundreds of small companies in the same industry to cut costs and boost profits.
General Catalyst has become the most successful funder in this space, with a hit on seven companies — making full use of this unique strategy — a notable success to date. The firm is marketing this approach as an entirely new asset class, hoping to attract investors eager to bet on the method’s ability to yield massive returns. The venture capital landscape is undoubtedly changing as firms begin to walk these nontraditional paths to growth.
Thrive Capital and Elad Gil are getting in on their own roll-up strategies. This decision is indicative of a larger trend among investors looking to enhance efficiency within their portfolios. These firms are able to exceed operational efficiencies and create value in several ways from their strategic acquisitions.
Long Lake has garnered quite a name for themselves in this realm. In under two years since starting up, the company is now valued at $670 million after raising their Series D. It focuses on acquiring homeowners’ associations to streamline community management, showcasing the potential of this roll-up model in niche markets.
Khosla Ventures is interested in pursuing new opportunities under this model. Led by General Partner Samir Kaul, they are being careful of what it could mean for the firm’s well-worn pedigree. Kaul emphasizes the importance of maintaining Khosla Ventures’ strong performance, stating, “My biggest stress in life is I’m managing other people’s money, and I want to make sure that I continue to be a good steward of it.” He figures the ones Khosla Ventures is looking at are “extremely unlikely to lose money.”
Khosla Ventures is committed to investing a significant amount through this strategy. If those first investments are hits, Kaul speculates that the firm will be better served to partner with a private equity-style firm for further acquisitions versus recruiting an internal team. This kind of collaborative approach would reduce risks and help tap necessary expertise in the acquisition process.
Marina Temkin, a venture capital and startups reporter at TechCrunch, notes that the increasing adoption of roll-up strategies by these firms reflects a shift in the investment landscape. Venture capitalists are hungry to find new and better ways of diversifying their portfolios. This transition represents the challenges and opportunities facing the intersection of VC and private equity.
