In a world of Big Oil, Big Banking, and Big Tech, small businesses have become criminally underrated. As America’s largest businesses are embroiled in public scandals and anti-trust fights, small businesses quietly make up 43.5% of U.S. GDP.
Last month I wrote about how AI is disproportionately benefiting small businesses, and how it could end up being a great equalizer for mom and pops who are competing with goliaths. The core of that thesis is that AI will help to democratize access to the best advice, insights, and processes, that were historically only reserved for the biggest companies.
I’m incredibly excited to announce our first core bet within this theme, as we announce our investment in OffDeal, which is building the world’s first AI-native investment bank for small businesses.
Historically, only the biggest businesses got access to the best M&A advisory services, as it was too costly for big investment banks to serve the long tail of entrepreneurs.
The endless grunt work needed to provide the best advisory services turned Investment Banking into a game of whale hunting, where you can only make the math work if you chase the biggest companies. This has meant that experienced advisors have ignored small businesses, leaving the vast majority of entrepreneurs to fend for themselves.
By leveraging modern AI, OffDeal has been able to streamline the endless hours of grunt work needed to find and analyze small businesses, so that their advisors can focus on the human elements of the advisory business: building relationships, deeply understanding your client’s needs, and providing tailored strategic advice.
Selling Work, Not SaaS
It’s worth emphasizing that OffDeal is explicitly NOT selling software, and is instead selling advisory services themselves. This is part of a new breed of AI company that is focused on selling “work” instead of just “SaaS”.
In the Cloud era, we saw many new Vertical SaaS apps born that helped to make us more productive, which would try to capture some amount of those productivity savings as revenue. As a result, these Vertical SaaS apps ended up representing fairly small addressable markets, as they could only capture a “percentage of a percentage” of an industry (hence why VC’s are endlessly obsessed with estimating TAM in these spaces).
But the global services industry is at least one order of magnitude larger than the global software industry. If this technology was so much better, why didn’t any of these technology companies try to capture the whole pie of selling the underlying work itself?
In short, it’s because services businesses are difficult to scale. This led to the word “services” becoming a dirty word in VC vernacular. If a founder mentioned it in a pitch, or it showed up in your financials in some way, VC’s would run for the hills. It became universally accepted that services businesses could never reach venture scale.
As venture capital requires companies to grow incredibly fast, this services revenue was seen as a quagmire that would distract founders, slow down growth, and ultimately kill businesses great businesses.
If we were to go one level deeper than trite VC idioms, services revenue was always challenging due to two underlying core issues:
The margins were much worse because you had to pay people salaries to do the work (unlike software, where the marginal cost is near zero).
This meant that you don’t benefit from the operating leverage of scale
Even if you were successful in generating massive demand, you couldn’t physically scale quick enough because you had to hire, train, and deploy people to do the work (in other words, there were literal laws of physics preventing you from onboarding hordes of new customers at once).
This meant that you could never grow fast enough to generate venture returns
What’s Different This Time
Our belief is that modern AI breakthroughs have solved both of these core issues. For an AI-native services business like OffDeal, improvements in LLMs have abstracted away much of the human capital labour needed to deliver world-class financial advisory services. Specifically:
Margins are software-like as you are just paying model inference to do the work (instead of paying salaries)
Without the need for grunt workers, you can scale in the face of massive demand without needing to hire armies of employees
With both of these core issues solved, our belief is that OffDeal can build a generational technology company that sells high quality advisory services, and can disrupt the $400B global investment banking industry.
If the company is as successful as we expect it to be, they can capture 5-10% of transaction value in a market that is expected to transact $10T of enterprise value over the next 15 years. That means you can capture software company unit economics, but at truly massive scale.
Why We Invested
As we developed our thesis around AI-native services companies, we quickly identified the investment banking space as one of the most interesting categories: it’s absolutely massive, full of endless inefficiencies, and ruled by sleepy incumbents who have little interest in innovating (I had the displeasure of working in the space for years).
It is also, however, incredibly complex, ruled by relationships, and so full of jargon that it’s practically impossible to be tackled by outsiders.
When we met Ori and Alston, however, we could immediately tell that they were better positioned than anyone to take it on. Ori’s years of experience working in investment banks and acquiring small businesses brought world-class insights to the pain points in the space. Alston’s experience selling to small businesses and building with bleeding edge AI tools in Big Tech brought the unique AI know-how that the space needed, and he had already built the industry’s leading technology platform to streamline the backend tasks that plague brokers today (screenshot of their matching product below).
At that point, it was really a no-brainer to invest in the both of them.
Today we are incredibly excited to announce that we are leading their Seed investment round, providing them with the capital to build the world’s first AI-native investment bank.
Despite being just a team of two today, the company has already built a proprietary database of 2M+ SMB’s, each meticulously cataloged using advanced NLP and embedding models to create an M&A matching algorithm trained on 25K+ past transactions - something human M&A advisors would spend days to weeks doing by hand or relying on their limited existing buy-side relationships.
This is the power of LLM’s in services! None of this wouldn’t been possible a few years ago.
What Comes Next
Whether you or someone you know is interesting in selling their business, buying a small business, or looking to join the company as an Advisor, I strongly recommend you visit OffDeal’s website and learn more about their services.
Selling a business is often the single most important event in a person or family’s career. Our belief is that decision is not something anyone is willing to outsource to an AI (so no, you will not just be redirected to a broken chat-bot if you reach out to them: they’re real people). This is a category in which there will always be a human-in-the-loop.
OffDeal focuses on the human-to-human relationships that are so critically important in these decisions. By leveraging AI on their backend, OffDeal’s Advisors can focus on providing the best services to their clients.
Much has been written about the incoming Silver Tsunami, in which hundreds of thousands of small businesses owners in North America are looking to retire in the coming decade without natural successors to take over their businesses. Historically, these business owners have faced a a decision of either sunsetting the business that they spent their entire career building, or trying to sell it (often to a private equity firm or PE-backed roll-up).
For years, Private Equity has taken advantage of this predicament and preyed on small business owners who do not have access to the best financial advice, often acquiring these businesses for far below their true value as business owners are selling a business for the first time in their career.
Our belief is that OffDeal’s AI-enabled advisors can help find the best buyers for each of these small businesses, manage efficient sale processes, and ultimately maximize value for entrepreneurs who have spent their lives building great businesses.
By leveraging modern AI, we believe that OffDeal can be one of the first modern services firms focused on protecting Main Street from Wall Street. If you’re at all interested in what they’re building, we’d love to chat with you about it.