Eric Woo, co-founder and CEO at Revere VC, talks about how Revere is pioneering ‘the Morningstar for venture capital’. Eric shares examples of how VC can become more transparent and more data driven, and gives advice on how to navigate a more complicated future VC world.
Eric Woo, co-founder and CEO at Revere VC, talks about how Revere is pioneering ‘the Morningstar for venture capital’. Eric shares examples of how VC can become more transparent and more data driven, and gives advice on how to navigate a more complicated future VC world.
In this episode, you’ll learn:
[**3:23**] The value of venture capital in the eyes of a limited partner
[**8:31**] How do you know you have good access to venture funds as an LP?
[**13:14**] Revere’s playbook for removing barriers to the free flow of capital from the LP side
[**22:41**] Looking past the down cycle into the future of VC
The non-profit organization that Eric is passionate about: NVCA Venture Forward
About Guest Speaker
Eric Woo is a co-founder and CEO at Revere VC, and is an acknowledged thought leader in the VC emerging managers ecosystem. At Revere, he leads product development and investment analysis & due diligence efforts. Previously, Eric was Head of Institutional Capital at AngelList, where he worked closely with investors to curate early-stage fund and deal opportunities, and developed systematic and data-driven strategies for institutional investors.
About Revere VC
Revere VC is a Silicon Valley-based venture capital firm that empowers investment advisors, wealth managers, and allocators with the tools to expand their venture capital programs. Revere is best known for creating the industry’s first standardized framework for evaluating fund managers.
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"What is unique about LPs and what is, I guess, difficult and a friction point for people trying to raise money from LPs, is everyone has a different decision making process. And if the decision making process is different and you have different personalities who are in the positions of making those decisions, you're left with a very unpredictable experience. And the psychology is important here because sometimes decisions are not based on specifically things like performance."
Gopi Rangan: You are listening to The Sure Shot Entrepreneur - a podcast for founders with ambitious ideas. Venture capital investors, and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Welcome to The Sure Shot Entrepreneur. I'm your host, Gopi Rangan. I'm here today to talk with Eric Woo. Eric is a good friend and the co-founder and CEO at Revere VC, based in the Silicon Valley. Revere is pioneering the Morningstar for VC model for fund managers. We're gonna ask him about that. We will learn more about how VC works, what's in store for the future, and how to navigate this complicated world. Eric has been an active investor. He is one of the most knowledgeable people in the venture capital industry.
Eric, welcome to The Sure Shot Entrepreneur.
Eric Woo: Hi, Gopi. It's great to be here and look forward to this conversation.
Gopi Rangan: Tell us about yourself, starting with where you grew up. You are a native San Francisco Bay Area resident, right?
Eric Woo: I am. I've been here pretty much my whole life, so whatever Kool-Aid is to be drunk around Silicon Valley, I've drank the well dry, so to speak.
Gopi Rangan: So you've seen it all over the years, the ups and downs that Silicon Valley has been through and how technology can have an impact in the world. It has become the hub of innovation in the world. So many companies have started here and created impact worldwide. Why is venture capital interesting to you?
Eric Woo: I think it embodies this human element of struggle. We all love a good narrative. We all love to root for the protagonist, and there's no greater storyline than a founder and an idea; and how that idea starts to germinate and how they develop a product/service; the struggles that go into that. And of course, we want to celebrate and highlight the success when they reach that unicorn status and they go public and they become successful. Many of these successful entrepreneurs end up becoming angel investors and they again replenish and guide, through capital advice, the next generation of entrepreneurs.
So for me, it's somewhat consistent with this romantic notion that we all love to be part of a story. Venture capital creates so many amazing storylines that we as venture capital investors get to be part of that.
Gopi Rangan: Everything starts with and revolves around the founders. Venture capital investors are among the earliest believers in a new company and the founders when they're starting at the earliest stages. The limited partners who support those venture capital investors are the backers of those VCs. I want to start with the high level picture of where all of this fits.
How do you see allocation of assets in the landscape from the eyes of a limited partner? Can you describe how you look at the world? Where does venture capital fit?
Eric Woo: Yeah, I think there's a very technical view which people put the label of asset allocation, which is to say anyone with a prudent strategy around how they grow and accumulate wealth, say, "well, look, you know, I've got to have some percentage in public equity, some percentage in fixed income, and some percentage in alternative assets. Typically alternative assets is defined as things that are generally illiquid in the private markets; of course in exchange for that illiquidity and potentially higher risk, there's higher returns.
When you mix it all together, you get this asset allocation model that says: this is why you should have some portion of your investment portfolio into alternatives, and then of course, venture capital's part of that. For me personally, I think much more in simpler terms. It's the typical way of thinking where you say, "well, how would you explain this to your daughter or your son who's a five-year-old. The way I describe how venture fits and what it is as an asset class is to say, "well, what exposure are you getting by investing in venture that you may not get in other places? So if you think about these amazing innovation trends around AI, climate change and climate technology, life sciences, you have new drug discovery, you have synthetic biology, and of course you have all these amazing new consumer models. Social media, gaming, cryptocurrency, Bitcoin. When you put that all together, those are the types of technology that is very hard to gain access to in a concentrated fashion in the public markets.
So, if you look at venture as exposure concentration into technology that all of us will be using in the next five or 10 years, and to be able to participate in terms of the investment returns, that to me is really the storyline. That is what is powerful as an explainer of why people should be thinking about venture capital as an asset class.
Gopi Rangan: So you are optimistic and bullish on this asset class, and you also believe that this asset class should be open to all investors and that's why you started Revere. I'm also an early believer in an investor in Revere. What was the genesis of the story? Why did you start Revere?
Eric Woo: There's mission alignment in terms of generally more people should be participating in having access to these parts of the asset classes. Venture as an asset class, historically, has been part of the portfolios of university endowments. Yale or Harvard, or some large university like Stanford, they saw venture as a way to get these amazing returns - 40, 50, 60% compounded annual returns. It was because they had access points to venture capital funds that were generating the lion share of those returns, because they were here in Silicon Valley and if you were a founder, you had to go to a handful of these firms. So of course it was limited supply of capital, and that's what led to these great returns.
That story and that historical perspective made it very, very difficult for someone who wasn't here in Silicon Valley or who didn't have these access points to these great funds to part. Now the last five years, a lot of this has changed, right? If you think about, I have spent some time at brief stint at AngelList.
AngelList has been an amazing angel network platform to bring vetted deal flow through syndicate leads to accredited investors, and you can write small checks, 5,000, $10,000, and you can invest directly into some of these companies at the very early stages. So the platformization, the productization, the accessibility in terms of how you do the digital signing subscription documents, all of that has through software and technology, created the avenues for more people to participate, right?
So that foundation has all been built within the last five to 10 years and other platforms, you know, whether it's Forge or other things to participate in different ways, have unlocked venture, at least now it's much more mainstream as a concept of how to invest. And really what we're moving into, I would say, for the next five to 10 years is how do you get that to be sophisticated?
How do we bring data? How do we bring tools? How do we think about portfolio construction? How do we think about measurement of risk return? These are all very, very sophisticated tools that are commonplace in how other investors are investing in other asset classes. I think that's really where we're gonna see a lot of tremendous development.
Gopi Rangan: So, over the years, a lot has changed in the venture capital ecosystem. Previously, it was just institutional investors like endowments and foundations acting as limited partners investing in venture funds, just a handful of them, and they would invest in startups. But now there are many, many more startups and many, many more venture funds, and also many new types of limited partners.
People who didn't have access to this asset class are now beginning to get access to this asset class, and that's a good thing. And as a result, there's a need for education. There's a need for more transparency, and that's what you're bringing with Revere.
Eric Woo: It's a very, very critical step, and I think it's been born by the fact that, as you mentioned, there's so many more access points. If you look at this category of upstart fund managers where a 5 or 10-million-dollar-fund in a very specific or niche sector, that is a credible way to be investing. And you have thousands of these small funds out there. So, in that environment where the access points are now more visible to these LPs, the question in their mind is that access problem goes away, but then how do I know I have good access? How do I feel comfortable that when I write the check I'm writing it into a good investment? That's where the education becomes critically important in terms of converting that interest.
Gopi Rangan: So, LPs have many questions in their mind. The first is, how do I access good venture funds? And the second question is, how do I evaluate venture funds? And there are many more questions on their mind as well. How is Revere helping them? What is Revere doing?
Eric Woo: We're really trying to bring due diligence into a format that is consumable for a large range of LPs. As a former allocator practitioner who worked on the LP side for very large institutions, we were managing billions of dollars. We were privy and privileged to have tools. We had a team of analysts. We had our own data set. We had our own frameworks around writing investment memos. We had templates around how do you do reference calls.
So we had tremendous ability because this is what we did every day, to evaluate holistically in an institutional fashion, pros and cons of a venture capital fund. What Revere is doing is simply taking that playbook, taking those frameworks, creating product and software around them, and bringing it to the open marketplace of LPs so that they also now have those tools to be able to evaluate the venture funds and the value proposition is very clear because unlike 20 years ago where you only had a handful of funds, it was just a matter of do you get access to those funds or not. Today is there's so many different funds. How do I shortlist that into something that represent the best fit for me as an individual lP from a risk return perspective? I need the tools. I need my version of the Morningstar report. I need my version of the Bloomberg terminal as if you're a trader. I need that tool and that toolkit to be able to make these informed decisions.
Gopi Rangan: Can you give an example of a fund, like how that process works for a venture fund, how you evaluate and what comes out of this process?
Eric Woo: It's honestly very very similar as if I were putting a check into the fund myself. Of course, there's more process automation. We think about ourselves at Revere as a data company. So as a data company where we're trying to capture as much data, diligence as many funds as possible, we have to scale. That scalability is through process automation and workflow automation. When we capture the data, the first step is really just getting the data room materials, making sure we have all the information. The second step is actually going through and doing the due diligence. We spend two hours with fund managers and we pepper them with questions as if we're writing the check. And then the third piece of it is drafting that report. This is the part that I think is more different than similar from where I came from. Where I came from, you had a big Word document, 30 pages with different sections - very granular and very technical. That was your investment memo.
What Revere is trying to do in terms of approachability is like us writing an investment memo, very technical, it would be very hard to consume, unless you're an expert and know how to interpret it. So in the drafting phase, we really take inspiration from how people read things like equity research reports or an industry report around autonomous vehicles. We really have to bring it down a few levels so people can appreciate and understand the conclusions we're trying to help them draw. So that third piece, the drafting phase of the report, really becomes a critical secret sauce for us in how we standardize that output is how we've been in business here for now almost two years and been successful in terms of getting the input from LPs and then buying from those LPs.
Gopi Rangan: You're really taking a lot of technical data, simplifying it, demystifying the process, making it easy for people who are intimately familiar with those details so that they can look at ratings, charts and graphs and your commentary on that to make it easy for them to understand what they're buying. This is very, very interesting.
You talk about the psychology of the investor as well. How do limited partners view this and how do GPS think about this process? Can you talk about the psychology beyond the data and the analytics?
Eric Woo: Yeah, it's a very, very intriguing question because the psychology for GPs is its own kind of separate conversation. And of course the psychology for LPs. Let's start with that because I think that's relevant in terms of this concept of demystification.
So, what is unique about LPs and what is, I guess, difficult and a friction point for people trying to raise money from LPs? Everyone has a different decision making process. If the decision making process is different and you have different personalities who are in the positions of making those decisions, you're left with a very unpredictable experience. The psychology is important here because sometimes it's not based on specifically things like performance. Like well, if I've got a top performing fund, that's where you should invest. A good example of this is if you're approaching a university endowment, and let's say you're a small fund, you're a $50 million fund, and you're looking for a $5-10 million check, if you approach a several billion dollar sized endowment, their minimum check might be $25m or $50m. That would be way too much for you as a small fund. So, you run against these barriers that are related to constructs of how they make decisions that are completely removed on whether you're a good manager, whether you can show good performance or not. That's what I mean by there's a human element of decision making, and there's also a psychological element that hinders a lot of the free flow of capital.
On the psychology side, it could be somebody who is the CIO of the family office that comes from a fixed income background. Somebody with a fixed income background to be able to tell them that, "you're a great venture fund because you know how to read people", they'd be like, "well, where's the data? Where can I see the back test of this and that?" It's just completely incongruent in terms of how they see the world and how they have historically made decisions. When you put this together, it's the psychology of who's making decisions. It's the construct and the process of how decisions are made - how they allocate capital.
These are really big barriers. Revere is helping to hopefully eliminate a lot of first and second calls and meetings where it's not a fit for some of those reasons. So, by consuming our report, we're getting opt in that says, "Hey, someone would only read a report on a small $50 million fund if they can actually invest in a small $50m fund. So that's kind of our job to surface these reports, surface what we do to a wide range of LPs, get them to opt in by them reading, engaging with us, and then now all of a sudden we have a qualified lead. I can come to you as a fund manager and say, "Hey, someone here needs to read your report and they're a fit because they write the right check size.
They have invested in small emerging managers in the past, and a lot of that friction point, a lot of that frustration goes away in terms of this dating matchmaking process between GPs an LPs.
Gopi Rangan: So that matchmaking is quite complicated. You are streamlining it and making it standardized so that it becomes predictable for the limited partners.
Why is this important for the GPs?
Eric Woo: It's that age old phrase time is money. In an environment where a fund manager is trying to raise money, every moment, every month that they're spent fundraising is distraction. It doesn't really allow them to do what they do well, which is invest.
So, anytime you can go to a GP and say, I have a way for you to save time, and I have a way for you to spend the time that you do have to better qualify leads, it's instant reaction. For GPs, a lot of what we do, and this goes back to that psychology thing, is we want our process to be transparent. Every question that we ask is the same for one GP and the other. That standardization trains the market that this is the types of things that they should be prepared to answer, and the responses that we get and the range of those responses is really where this kind of scoring algorithm comes in that helps us qualify where are those answers clearly best in class.
What are those answers that are, let's just call it standard, and where are those that need more work? We flag this, we color code this, and we present it as part of our reports. Importantly, we give the reports and we give this feedback to the fund managers so they know exactly where they need to work on things, where do they stand out?
And that feedback loop is really important for building trust and credibility with them, because ultimately their buy-in, their sign off, you know, in terms of sharing their data, is really what's valuable to us that we ultimately sell to the LPs. Right. And that's the point where we charge the LPs. We don't charge the GPs for this report.
Gopi Rangan: Fundraising is often a distraction for CEOs of startups. They would rather focus on building the business Similarly, fundraising can become a huge distraction for VCs raising funds, although some of it is useful. Relationships with limited partners is valuable but spending too much time on fundraising or outshining in the fundraising area, not doing and really well on the investment side is not the mark of a good VC firm. So we want VCs and GPs to focus on investments, spend more time with founders in less time with limited partners than they do now, especially raising for the first fund, second fund, an emerging manager is extremely challenging, takes a long time. So that process can be simplified so that new emerging managers can come to market and they can spend more time with the founders instead of spending a lot of cycles with limited partners and not getting good feedback along the way.
Venture capital investors do many things. Fundraising is one part, but as limited partners, they want to evaluate VCs on what they can actually do for the founders. How do you find founders? How do you evaluate them, and ultimately how do you add value? These are all kind of qualitative ways to measure the effectiveness of a venture capital investor.
Can we pick one? Maybe we start with value add. How do you measure VC's ability to add value to a founder. As a limited partner, what's the process? What's the qualitative process? You can go through?
Eric Woo: Our scoring criteria has 20 different categories and it encompasses what you touched upon. There's the evaluation of the team, the track record, they're sourcing, value add, and firm management. As you hear those words come across, there's clearly, areas that are very quantitative in nature. And there are areas like value add that are subject to interpretation. Our job is really to bring much more of a quantifiable way to assess these different categories. So in particular, value add, we look at a few different things within the value add scoring, we look at the guidance on how are they coaching, mentoring, the founders that are in the portfolio, how are they helping those founders get to revenue - whether it's pilot customers, introductions, we look at how they're helping with growth levers. This is really the nitty gritty part of running the business. Hiring. So there's those growth levers that a fund manager would be expected to help with.
The final one, which I think is a very interesting one, is community. There are a lot of community-based fund managers that the value actually is the cream community that they create. And so when you look at those subcategories, clearly these are things that require things like case studies. So we always ask for case studies when we're doing the evaluation of the value add. Over time, as we now have done almost a hundred of these ratings, as we start to get these case studies, We are now mapping the case studies and the metrics from those case studies into something that looks like a distribution of what is considered a top of class score. So, let's pick something like the revenue generation subcategory. So how are you helping your companies get to customers? We have now collected enough responses and a range of different type of responses, mostly through case studies, to really start to segment, to say, " if you have helped your companies collectively aggregately get to $10 million of revenue through your customer introductions, then that clearly stands out. That is upper quartile, top quartile. That's one way we start to measure.
Another thing is just the number of connections. So again, you as an early stage seed investor, you can't guarantee anything. But what you can say is like, "I can make five qualified introductions to the right people within these organizations that would be potential customers."
I find it fascinating and I find it informative that we now are able to take something that has historically been very qualitative to something quantifiable. As you get those answers, you start to be able to see what is considered best in class, and that is how we start to score some of these interesting areas.
Gopi Rangan: Very interesting. You're getting into a lot of details here. You're converting something that is very, very subjective into something that can be measured, tracked, and perceived from the outside. Even if it's a new person looking at a VC firm and they have a benchmark comparing to many other VC firms, they can see what they're buying, how does it compare to rest of the market. This does bring a lot of transparency.
Eric Woo: And it helps the GP as well, because by us sharing with them the reason we scored what we scored, and examples of what does better look like, it makes them better investors. It forces them to evaluate, or at a minimum, just be able to track this. A lot of this stuff isn't even tracked. It's sort of like, "well, yeah, I can't think of how many introductions I've done, but I know I've done more than 10.". We'll measure it. That's what we're telling you. Spend the time, the tools, resources, whether it's CRM.. Go measure it, and that's only a good thing. Their measurability, their attentiveness to building this into the practice of them as a fund manager is only going to be net positive in terms of them generating returns.
Gopi Rangan: I'm very excited about where this is going, but the market today is a little wonky, especially in the past six to nine months. A lot of things have changed. Things have slowed down. What do you anticipate for Revere and the venture capital world in 2023?
Eric Woo: It's clearly a down cycle. If you think about where valuations have exploded over the last couple of years largely driven by that kind of zero interest rate policy and other fever pitch of capital looking for growth, we're clearly on the other side of that bubble. The question really now, operatively for 2023, it's where's the bottom? When is it safe for us to get back in the water? It's never a singular point in time. It's an ongoing assessment of the opportunity cost. So this kind of goes back to the initial part of our conversation when you look at that total asset allocation pie. A lot of the flight to quality, flight to cash, whatever it may be, was purely just knee jerk reaction. You know, I just need to know that I'm liquid and I can withdraw money. So, we've worked ourselves through a lot of that, and now people are looking at 2023. It's like, "okay, from a planning perspective, where do I tactically start to redeploy into things that are not liquid - Meaning kind of alternative assets and venture capital?" So the conversations for 2023 are moving away from, 'hey, the sky is falling. Let's just not do anything. We'll sit on our hands, be liquid' to, 'alright, now we're gonna start to get back in the water. Where do we go? Do we go to private credit because private credit still has a yield component? Do we start to go back into private equity and venture because we know valuations are down 30 to 40%; that's a much more rational market? And if we're comfortable holding those assets for five to ten years, then we're gonna have a better chance to generate those higher returns.'
So I think it's a holistic view of, you know, where can I deploy capital today and where do I think the right risk-adjusted decision makes sense? That's gonna be a very personal decision for most people.
Gopi Rangan: That feels optimistic. It's a great way to look at the future. I'm also optimistic. I think the next couple of years will be very interesting as a venture capital investor. Downturns are also times when many good companies are formed, so I'm looking forward to it. We're coming towards the end of our conversation. I want to ask you about your community involvement. Is there a nonprofit organization you are passionate about? Which one?
Eric Woo: Yeah, I spent some time with the National Venture Capital Association. In their early days, they're obviously trying to promote things like diversity and more participants from people who come from non-traditional backgrounds into the asset class. So, their Venture Forward program has, in my mind, been a great starting point to promote this conversation of how do we get more talent.
At the end of the day, we're in a talent business. There's precious new talent and diversity in that talent coming into decision making positions. I'm excited about their mission, their mandates, given that we spent a lot of time with emerging fund managers who happen to be very diverse in their backgrounds. That's one that I feel very passionate about and, and something that I look forward to being involved with in the coming years.
Gopi Rangan: I've benefited from the Venture Forward Program. I've learned a lot on how to build a firm for the long term through the educational materials that NVCA has shared. Thanks a lot for your encouragement over the years to many VCs like me. Thanks a lot for sharing specific examples of how you think the world of venture capital can become more transparent and more data driven.
I'm very excited. I share the optimism you have for the future. I look forward to sharing your nuggets of wisdom with the world. Thank you, Eric.
Eric Woo: Thank you, Gopi. That was great. I enjoyed the conversation and look forward to future conversations as well.
Gopi Rangan: Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to real-life stories about early believers supporting ambitious entrepreneurs. Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast. I look forward to catching you at the next episode.