In the aftermath of Sequoia Capital’s big reveal earlier this week that its China- and India-based affiliates are turning into independent entities, we reached out to someone yesterday who we thought might have an opinion on the development. Erik Lassila is a former VC whose fund of funds business based in Silicon Valley, Capital of Peakviewwas – when we last spoke to him in 2016 – fully backed by a Chinese investment firm that wanted to park some of its money with risk managers in the US
Lassila looked into analyzing Sequoia’s decision, but let us know that eight-year-old Peakview closed its fourth fund in April with $150 million in capital commitments — none from mainland China — even though it has insisted that Washington’s increasingly strained relationship with the Chinese government is not why.
Even if we don’t entirely believe him, we’ve enjoyed reconnecting with Lassila, whose firm now has $600 million in assets under management and whose latest bets, according to a reliable source, include stakes in funds managed by Andreessen Horowitz and Lightspeed Capital Partners. Lassila declined to divulge any information about her portfolio managers during our conversation this week, but it’s worth noting that she told us years ago that Peakview also wired checks to Menlo Ventures, Institutional Venture Partners, and Foundation Capital.
More from that chat below:
TC: Last we spoke, you were funded entirely by a Chinese company who wanted you to invest in US venture funds on their behalf.
EL: Our investment strategy has remained the same since I founded the firm in 2015. We are primarily a fund of funds investing in a very small number of what we believe are the best performing VCs in the country. We also do some direct VC investments in fintech and other enterprise technology in Series B, C and D phase, although we do very few of these deals.
Which venture capital firms meet your criteria? Is there a threshold in terms of fund size?
We invest in more mature VCs typically who have a strong market presence and a highly experienced team and hopefully generational institutional knowledge. We seek to provide our investors with very high risk-adjusted returns, which means lower risk and lower volatility but a very high return, and we do this by focusing on a very small number of what we consider top VCs.
Including which ones?
Some of these companies are more sensitive than others about the use of their name and the appearance of their name, so we do not disclose them.
How many fund managers are in your portfolio?
About 10 in our previous fund. This will also be true for the fund we just closed. Our strategy is quite concentrated.
Many of the more “mature” funds in the industry have increased in size in recent years. They’re also back to their limited partners faster than ever. Have you felt pressured to keep getting back up?
We are very different from other people who do what we do in that we are venture capitalists by background; we know VCs as colleagues and friends and so I think we’re lucky to have a little more flexibility. So during boom times, honestly, we made a conscious effort to invest less during that time because I’ve seen this movie before – twice. And when funds are investing so much capital so fast, from a fund manager’s perspective, that’s a recipe for weak vintages, so we went light on 2020, 2021 era funds.
So it wasn’t about “Write a check or quit the club”?
It’s kind of like a dance, but generally no, we didn’t. These groups know we are long-term supporters and have had no difficulty raising capital; there was a lot of money being thrown at them. So we were able to relax a bit.
Let’s get back to who’s funding you. 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 specifically invested with Chinese capital. Starting in 2018, with our third fund, we have made a conscious effort to diversify our LP base. And partly that’s a factor, you don’t want to rely on just a single investor, but we also wanted to have more of a global LP foundation. So if you look at both our fund three and the fourth fund that we just raised, most of the capital comes from US investors, with a small portion coming from Hong Kong investors, some from backers in Europe.
And the Middle East? What about Saudi Arabia?
No, we don’t raise funds there.
You wanted to diversify, but you also must have been concerned about the growing geopolitical tensions between the US and China.
Politics comes and goes, so we didn’t make that decision based on the geopolitical environment. We wanted to diversify our customer base. We think that nowadays, having the world’s largest economies, such as the United States, China and others, cooperate and collaborate can and should be a good thing. For example, I am very concerned about the regulatory landscape related to AI. This is one technology you don’t want to fall into the hands of bad actors. And I believe this is the most critical time since perhaps World War II or the Cold War for world technology leaders to collaborate on regulatory solutions and standards, which will indeed require a multilateral effort, including dialogue between the United States and China.
Can you remind me how it happened that you were once fully supported by the Shengjing Group?
It is one of the largest Chinese fund-of-funds that focuses only on VCs. I had known the management; I knew they were looking to invest in the US and were unable to invest in what I would call the “leadership level” of the companies. In the meantime, I wanted to start Peakview right away and have a source of capital, and it’s been a good partnership and those funds have worked out really well.
Sometimes you make direct investments in companies. Do you invest or would you also like to invest in a handful of venture capital shares on the secondary market, or from another institution that seeks liquidity?
Groups like foundations and endowments and others rarely sell their positions. Occasionally, you’ll have a group that says, “Okay, we want to reduce our exposure to our enterprise.” So it can happen. But you don’t see much activity in high-quality funds. We I am getting so many emails every week like “Hey, are you shopping for something? Are you selling anything?” There is an active market out there and it will soon be even more active because people will want liquidity in their private holdings.
If at some point you decide to sell a portion of your venture holdings, should you receive buy-in from all of your fund managers?
No. We have the capability, but that’s not what we do. We’re in this kind of long-term business, plus, if you’re selling a share of LP, you should almost always be doing a discount to market value. So we think the best long-term results come from holding those positions.
Would you like some of the VCs who have raised their heaviest funds to consider returning some capital since the market has changed so dramatically?
The type of companies that we invest in, people have taken a very conservative approach to making new investments. And so certainly, the new investment cycles are getting longer. And the limited partnership agreements for these funds are always written to give VCs some flexibility to invest more slowly when market conditions make it a smarter approach. So I think these existing funds are going to take a lot longer to invest than people might have suspected when they were formed, and that’s okay with that. I don’t think in the companies that we invest in there won’t be a lot of pressure to downsize their funds.
Could you perhaps be less diplomatic?
[Laughs.] But it’s really true. They are just investing more slowly.