The AI services transformation may be harder than VCs think | TechCrunch

""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.""

"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."

"The improved cash flow then provides ammunition for acquiring additional companies at higher prices than traditional buyers can afford, creating what proponents see as a virtuous cycle. The game plan seems to be working. Take Titan MSP, one of General Catalyst's portfolio companies. The investment firm provided $74 million over two tranches to help the company develop AI tools for managed service providers, then it acquired RFA, a well-known IT services firm."

Venture capital firms are pursuing a roll-up strategy that acquires mature professional services companies, integrates AI to automate core tasks, and leverages improved cash flow to fund additional acquisitions. General Catalyst has committed $1.5 billion to a "creation" approach that incubates AI-native software in targeted verticals and uses those businesses to buy established firms and customer relationships. The focus spans multiple industries, with initial bets across seven sectors and plans to expand. Proponents cite a large services market ($16 trillion) versus software ($1 trillion) and estimate AI can automate substantial portions of service work, enabling higher margins and serial M&A.

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