Technical

Srinivasa Reddy Kandi: The AI-driven services play may be tougher than VCs expect

October, 01, 2025-04:12

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The AI-driven services play may be tougher than VCs expect:

Venture capitalists are betting big that artificial intelligence can transform professional services into businesses with software-like margins. The thesis: acquire established services firms, apply AI to automate routine tasks, and then reinvest the improved cash flow into rolling up more companies.

General Catalyst (GC) is leading the charge, earmarking $1.5 billion from its latest fund for what it calls a creation strategy. The approach involves incubating AI-native companies in targeted verticals and using them as acquisition platforms to buy mature firms — along with their customer bases. GC has already launched bets in seven sectors, ranging from legal services to IT management, with plans to expand into as many as 20 industries.

The prize is enormous. “Services is a $16 trillion global market compared to just $1 trillion for software,” said Marc Bhargava, who oversees the effort at GC. Software’s appeal has always been its scalability and margins, he noted, and if AI can automate 30–50% of services workflows — and up to 70% in areas like call centers — services could begin to look just as attractive.

Early experiments suggest promise. Titan MSP, a GC portfolio company, raised $74 million to build AI tools for managed service providers before acquiring RFA, a respected IT services firm. In pilots, Titan showed it could automate 38% of typical MSP tasks, boosting profitability and setting the stage for further acquisitions.

GC has taken a similar path with Eudia, an AI-native legal services firm catering to in-house counsel. Backed by Fortune 100 clients including Cargill, Del Monte, and Stripe, Eudia offers fixed-fee contracts rather than hourly billing and recently acquired Johnson Hana, an alternative legal services provider, to scale its model.

According to Bhargava, the goal is clear: double EBITDA margins at the firms GC acquires by embedding AI into their operations. Whether the strategy can sustain its momentum as it scales, however, remains an open question.

Author: Kandi Srinivasa Reddy, Srinivasa Reddy Kandi, #KandiSrinivasaReddy, #SrinivasaReddyKandi