In the wake of Sequoia Capital’s big reveal earlier this week that its China and India-based affiliates are splitting into independent entities, yesterday we reached out to someone we thought might have an opinion on the development. Erik Lassila is a former VC whose Silicon Valley-based fund of fund activities, Peakview Capitalwas – when we last spoke to him in 2016 – fully supported by a Chinese investment firm that wanted to park part of its own money with venture managers in the US.
Lassila didn’t analyze Sequoia’s decision, but he informed us that the eight-year-old Peakview closed its fourth fund in April with $150 million in capital commitments — and none from mainland China — though he insisted Washington’s increasingly tense relationship with the Chinese government is not the reason why.
While we don’t quite believe him, we enjoyed catching up with Lassila, who today runs Peakview with two partners; whose company has sent checks to Menlo Ventures, Institutional Venture Partners and Foundation Capital (as he told us years ago); and whose newer holdings, according to a reliable source, include in funds managed by Andreessen Horowitz and Lightspeed Capital Partners. (Lassila, who says Peakview now has $600 million in assets under management, declined to discuss one of his portfolio managers during our conversation this week.)
More of that chat below:
TC: Last time we spoke, you were fully funded by a Chinese company that wanted you to invest in US venture capital funds on its behalf.
EL: Our investment strategy has been the same since I founded the company in 2015. We are primarily a fund of funds investing in a very small number of what we believe are the best performing venture capital funds in the country. We’re also doing some direct VC investments in fintech and other enterprise technology in the Series B, C and D phase, although we do very few of these deals.
Which venture companies meet your criteria? Is there a threshold for the size of the fund?
We typically invest in more mature VCs that have a strong market presence and a highly experienced team and hopefully generative institutional knowledge. We try to provide our investors with very high risk-adjusted returns, which means lower risk and lower volatility, but very strong returns, and we do that by focusing on a very small number of what we consider high-quality VCs.
Including which ones?
Some of these companies are more sensitive than others to using their names and having their names appear, so we don’t disclose them.
How many fund managers are in your portfolio?
About 10 in our previous fund. The same goes for the fund we just closed. Our strategy is quite concentrated.
Many of the industry’s most “mature” funds have exploded in recent years. They also got back to their limited partners faster than ever. Have you been pressured to keep re-upping?
We are very different from other people who do what we do because we are venture capitalists by nature; we know the VCs as colleagues and friends and so I think we should be glad to have a little more flexibility. So during the boom, we honestly made a conscious effort to invest less during that time because I’ve seen this movie before — twice. And when funds invest so much capital so quickly, from a finance manager’s point of view, that’s a recipe for weak vintages, so we went light on the 2020 and 2021 era funds.
So it wasn’t a “write a check or you’re out of the club” case?
It’s almost like a dance, but we generally didn’t. These groups know that we are long-term financiers and they had no trouble raising capital; a lot of money was thrown at them. So we could slow down a bit.
Let’s go back to who you’re funding. I was told that Shengjing Group is no longer your only LP.
In the beginning we had a single investor, so our very first funds were invested specifically with Chinese capital. Starting in 2018, we made a conscious effort to diversify our LP base with our third fund. And partly that’s a factor of, you don’t just want to rely on a single investor, but we also wanted to have a more global LP base. So if you look at both our fund three and the fourth fund that we just raised, most of the capital is coming from US investors, with a little bit coming from investors in Hong Kong and a little bit coming from lenders in Europe .
What about the Middle East? What about Saudi Arabia?
No, we do not collect there.
You wanted to diversify, but you must also have been concerned about rising geopolitical tensions between the US and China.
Politics ebbs and flows, so we didn’t make that decision based on the geopolitical environment. We wanted to diversify our customer base. We think that in this day and age, with the world’s major economies, such as the US and China and others, working together and working together can and should be a positive thing. For example, I am very concerned about the regulatory landscape surrounding AI. This is technology you don’t want to let fall into the hands of bad actors. And I believe this is the most critical time since maybe since World War II or the Cold War for the world’s technology leaders to work together on regulatory solutions and standards, which will really take a multilateral effort, including dialogue between the US and China .
Can you remind me how it came about that you were once fully supported by the Shengjing Group?
It is one of the largest Chinese funds of funds that only focuses on VC. I had gotten to know the management; I knew they were trying to invest in the US and they couldn’t invest in what I would call the “leadership layer” of companies. Meanwhile, I wanted to get Peakview up and running right away and have a source of capital and it’s been a good partnership and those funds have done really well.
You sometimes invest directly in companies. Are you, or would you, also invest in a tube of venture capital interests on the secondary market, that is, from another institution looking for some liquidity?
Groups such as foundations and endowments and others rarely sell their holdings. Every once in a while you have a group that says, “Okay, we want to reduce our exposure to our business.” So that that can happen. But in the high quality funds you don’t see much activity. We Are getting so many emails every week like, “Hey, are you buying something?” Are you selling anything?’ There is an active market there and it will become even more active soon as people want liquidity on their private property.
If at some point you decided to sell some of your venture holdings, would you need to receive a buy-in from all of your fund managers?
No. We have the ability, but it’s not what we do. We’re in this kind of business for the long haul, and really, if you’re selling an LP stake, you should almost always be taking a discount to market value. So we think the best long-term results come from holding those positions.
Do you wish that some of the VCs that have raised their biggest money would ever consider returning some capital given the market has changed so dramatically?
In the type of companies we invest in, people have taken a very cautious approach to making new investments. And so the new investment cycles are definitely stretching out. And the limited partnership agreements for these funds are always written to give the VCs some flexibility to invest more slowly, when market conditions make that a smarter approach. So I think it’s going to take a lot longer to invest these existing funds than people might have suspected when they were established, and we’re fine with that. I don’t think there won’t be a lot of pressure in the companies we invest in to reduce the size of the funds.
Could you be a little less diplomatic?
[Laughs.] But it’s true. They just invest more slowly.
