From VC to Main Street: How AI Is Rewiring Service Businesses

Why AI's Biggest Prize Is Rebuilding Service Businesses

Cyrus Hessabi thinks the biggest AI opportunity in the traditional economy is rebuilding service businesses around AI from the start. Services are most of GDP and their cost is mostly labour, so an AI-native firm can beat incumbents on cost and outcomes. He calls the capital approach bridging, combining venture tolerance for J-curve returns and technology moats with private equity's cash-flow discipline. That is why he moved from venture to Shore Capital Partners, where the work is operational and the research is primary.

Takeaways

• Back what does not change. Hessabi's thesis, set out in a Substack piece called Investing in What Does It Change?, is to use AI to cement services that will always be needed. AI, geopolitics, demographics and climate are all shifting at once, but the traditional economy mostly does not change.
• AI-native services firms beat incumbents on cost. Hessabi defines AI-enabled services as businesses started from first principles with AI in the toolbox, rather than incumbents that bolt on AI software. Services are 60 to 70 percent of GDP, and an AI-native accounting firm can beat incumbents on cost structure and customer outcomes.
• Bridging pairs venture moats with PE discipline. Hessabi defines bridging as venture capital's tolerance for J-curve returns and technology moats combined with private equity's cash-flow discipline and its focus on industries outside venture's usual purview. Traditional economy businesses deliver value in the near term rather than on a J-curve.
• PE-backed businesses must repay debt from day one. Acquisitions are funded with debt that has to be repaid over time, so a PE-backed founder manages complex systems and delivers cash on a clock, while a venture-backed founder keeps a ship on course through chaos.
• Separating AI narrative from reality is hard. A healthcare staffing example shows how much adoption and integration with existing software matter. Klarna automated its call centers and then brought humans back. The usual question is which off-the-shelf AI solution to bring in, not whether AI changes the business.
• Moving from VC to PE requires operational depth. The key is understanding what drives a business and why its cost structure is what it is, which comes down to people, incentives, management teams and supplier relationships. Venture playbooks converge, but private equity and searcher businesses span unfamiliar industries, so he calls optometrists and other sources to find a sector's Mount Rushmore of people.

Where Hessabi Sees AI-Enabled Services

• Property management, IT managed services, accounting and tax, insurance workflows and legal are the sectors he hears about most. All are large markets that fit typical venture fund sizes.