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• https://open.spotify.com/episode/47dtFkZZy1L2YOYT6rPNPP?si=j4lBwfhAQiWU9Ffd6FGCxA

Inside the White-Hot AI Rollup Trend

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[Topic 1: Apple’s Lackluster AI Strategy]

Narrator: Apple continues its astounding dereliction of any coherent AI strategy or philosophy, showing none of the urgency of the moment. 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 reports that next week’s conference will forgo any major AI announcements. Instead, the headline reveal seems to be a new naming convention for their operating systems, with the company reportedly skipping from iOS 19 to iOS 26 to align with the year of release.

Last year’s conference featured Apple finally wading into the AI game with “Apple Intelligence.” Since then, however, things have not gone well. It’s been a steady stream of lackluster performance and missing features, including the one obvious necessity: an overhaul of Siri.

Gurman writes that people within the company believe the conference may be a letdown from an AI standpoint, and some worry the announcements could make Apple’s shortcomings even more obvious. It was evident that last year’s features, like writing tools and Genmoji, didn’t match the innovations coming from competitors. The new Siri, meant to be the center of Apple Intelligence, was delayed indefinitely after running into engineering and testing snags.

The one thing anyone is excited about is that Apple apparently plans on opening its AI models to developers. The company is working on a software development kit that will let outsiders build AI features based on their LLMs.

It’s not like other tech companies have had an easy go of it. Google was rocked back on its heels in 2023, and at the beginning of 2024, they had the rushed launch of Gemini, which led to historically inaccurate image generation. Yet, in the time since, Google has come surging back. The difference is that while Google was being out-competed, they never lacked a commitment to or a big vision for AI. Apple, meanwhile, doesn’t even seem to have actually committed to this thing.

The problem 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… It’s clear Apple needs to move faster, make bigger bets, and release bolder features, or risk eventually being lapped by its rivals.”

[Topic 2: XAI’s Massive Funding Efforts]

Narrator: 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. This is a secondary offer intended to allow staff to sell shares to new investors.

If successful, it would validate the pricing that came during XAI’s all-stock acquisition of social media platform X back in March, which appeared to be negotiated between Elon Musk and himself.

The last fundraising news we had was in April when Bloomberg reported that XAI was in talks to raise 20 billion in a round that would value the company at 120 billion. If completed, it would be one of the largest venture rounds in history.

Shortly after 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 deal is reportedly being priced with double-digit interest rates.

For his part, Musk is back full-time in his entrepreneurial endeavors, posting: “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 launch next week, as we have critical technologies rolling out.”

[Topic 3: McKinsey’s AI Reaches Junior Employee Level]

Narrator: An update on 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 Lily, is now drafting proposals and preparing PowerPoint slides for the firm’s consultants.

Lily 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 basis.

Kate Smaje, the company’s global leader of technology and AI, said, “Do we need armies of business analysts creating PowerPoints? No, the technology could do that… 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 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. It’s yet another interesting story in the ongoing question of how AI will impact jobs.

[Topic 4: The AI Roll-up Trend]

Narrator: Today we are talking about a trend that is getting a lot of airtime: AI roll-ups. This is the idea of venture capitalists or private equity firms moving away from traditional venture-style investments to instead acquire boring, mature companies and give them an AI makeover.

This is a group of trends bundled into one. Roll-ups in private equity are nothing new. Historically, the strategy was to corner a market in a certain location or vertical, consolidate the companies, and benefit from scale and systemization—for example, buying up all the dentist offices in Phoenix and consolidating their back-office systems.

An interesting bet many are making is that AI changes the math in a way that’s much more dramatic than SaaS ever could.

[Topic 5: The Changing Venture Capital Landscape]

Narrator: We’ve also seen venture capital undergoing a transformation. The boundaries between a VC firm and a PE firm have gotten blurrier. Post-COVID, as interest rates started to climb, capital flooded out of the VC asset class. We’re only just starting to see the impact now, as firms find it much more difficult to raise their next fund. Liquidity is also extremely low, with no fertile IPO market and depressed M&A activity.

There is also a bottoms-up aspect to this trend, which is the way AI is changing the economics of entrepreneurship. AI is poised to make everyone more efficient, and we’re seeing the most extreme examples in startups. We have this glorious notion of the eventual one-person Unicorn. More practically, companies are showing how much they can grow with very few people.

Many companies are now asking if they really need traditional venture capital, leading to a phenomenon called “seeds-trapping”—raising a single round at the beginning and then using that to get to profitability and grow on their own terms.

[Topic 6: Key Players in the AI Roll-up Space]

Narrator: This is the landscape into which the AI roll-up strategy comes. Back in January, The Wall Street Journal wrote about General Catalyst, which had raised 1.5 billion for this strategy. One of their investments, Long Lake Management, had raised 600 million and acquired a dozen companies.

Another firm exploring this is Thrive. In April, The New York Times profiled its new division, Thrive Holdings, which was closing on about a billion dollars to develop and buy companies. Thrive Holdings is set up as a holding company that can own stakes in companies for a long time, even forever, differing from the traditional PE model of turning them around and selling them off.

Earlier this week, The Information reported that former Microsoft venture head Chris Young is also jumping on board the theme, planning a private equity fund focused on buying companies, combining them, and using AI to make their operations more efficient.

Khosla Ventures is also pursuing this strategy, but taking more of a “dip your toe in” approach. They plan to do a few deals to assess the returns before possibly raising a dedicated fund.

And finally, AI super-angel Elad Gill is also exploring this strategy. He said, “It just seems so obvious… If you can effectively transform some of these repetitive tasks into software, you can increase the margins dramatically… you can buy other companies at a higher price than anyone else because you have that increased cash flow.”

[Topic 7: The Skeptic’s View and Conclusion]

Narrator: 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 private equity. This is where the biggest skepticism on this theme lies.

On Twitter, one user who helped raise a $600 million fund for this strategy wrote, “I’m incredibly bearish… ask any veteran PE investor about operational improvements and internal transformations and they’ll tell you those founders will burn themselves out trying to transform the company from within.” A big theme in the comments was that the strongest entrepreneurs will always want to build their own companies from scratch.

Ultimately, whether the VC side of this is a bubble, it feels clear that the AI-ification of private equity is a key trend of the moment. I personally think this is not a question of if, but a question of who and how. Who are the right teams to transform companies from within? What is the process that actually gets that done?

From where I’m sitting, the genie is completely out of the bottle. The next great frontier in private equity is AI-related transformation. We’re going to see a Phase One where companies just look to be 30, 40, or 50% more efficient. But then, we’re going to see companies start to experiment with totally new types of growth opportunities. And that, I think, is where things will get really exciting.

Appendices

1. Terminology Glossary:
   • AI Roll-up: An investment strategy where a firm (PE or VC) acquires multiple smaller, often traditional or “boring,” companies in the same industry and then uses AI technology to modernize, streamline, and consolidate their operations to increase efficiency and profitability.
   • PE (Private Equity): An investment model where firms buy majority control of existing private companies, often with the goal of improving operations and selling them for a profit within a specific timeframe.
   • VC (Venture Capital): An investment model focused on providing capital to startups and small businesses with high growth potential in exchange for an equity stake.
   • WWDC (Worldwide Developer Conference): Apple’s annual conference where it showcases its new software and technologies for software developers.
   • Apple Intelligence: Apple’s branding for its suite of on-device and cloud-based artificial intelligence features.
   • Genmoji: A feature of Apple Intelligence that allows users to create custom emojis using generative AI.
   • XAI: Elon Musk’s artificial intelligence company.
   • Lily: The name of McKinsey & Company’s in-house generative AI tool, used by consultants to draft proposals and create presentations.
   • SaaS (Software as a Service): A software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.
   • ZIRP (Zero Interest-Rate Policy): An economic period where central banks maintain interest rates at or near 0% to stimulate the economy. The end of this era has significantly impacted VC funding.
   • Seeds-trapping: A hybrid funding model between traditional VC investment and bootstrapping, where a startup raises a single initial “seed” round to reach profitability and then grows without further external funding.
   • Holding Company: A company created to buy and own the shares of other companies, which it then controls. Unlike typical PE funds, holding companies can often hold assets indefinitely.
2. Topic Timeline:
   • 00:57 - 04:31: Headlines: Apple’s AI Strategy - Discussion of Apple’s perceived lack of a coherent AI strategy, the underwhelming “Apple Intelligence,” and the low expectations for major AI announcements at the upcoming WWDC.
   • 04:31 - 06:15: Headlines: XAI Funding - Details on Elon Musk’s XAI seeking new funding through a secondary share sale and a large debt package, highlighting the company’s high valuation.
   • 06:15 - 07:24: Headlines: McKinsey’s AI - Report on McKinsey’s internal AI, “Lily,” now capable of performing junior consultant tasks, and the context of the firm’s recent staff reductions.
   • 12:00 - 13:12: Main Episode: Introducing AI Roll-ups - The concept of “AI roll-ups” is defined and contextualized within the history of traditional private equity roll-up strategies.
   • 13:12 - 17:55: Main Episode: The Changing Investment Landscape - The discussion broadens to cover the shifting dynamics of Venture Capital post-ZIRP, the rise of alternative funding models like “seeds-trapping,” and how AI is changing the economics of entrepreneurship.
   • 17:55 - 23:14: Main Episode: Key Players in AI Roll-ups - A review of the major firms and investors (General Catalyst, Thrive, Chris Young, Khosla Ventures, Elad Gill) that are actively pursuing the AI roll-up strategy.
   • 23:14 - 26:10: Main Episode: The Skeptic’s View & Conclusion - The counter-arguments and challenges to the AI roll-up thesis are explored, particularly around change management and founder motivation. The host concludes that the trend is real and represents the next frontier for private equity.