Rashmi Gopinath / November, 2017
What are the structural differences between a corporate VC and an institutional VC?
Rashmi Gopinath, Partner at Microsoft Ventures explains how a corporate venture capital firm is differently structured from a venture capital firm.
The difference between a corporate VC and a traditional VC is that overall the thesis is the same, it is to invest in highly disruptive, innovative companies. But the way the funds are structured is different. Traditional VCs, or institutional VCs as we call them, they typically manage funds anywhere from $25 million to $2 billion. They are typically funded by LPs or investors, or funds to funds, or pensions funds or endowment funds or wealthy family offices. They are run by GPS, and under the GPS the typical structure is that you have principals and associates. Whereas a corporate fund is typically funded out of the company’s balance sheet. The structure of the tier of the organization is kind of similar, you have partners, you have principles and associates. The way the fund is structured and operated is very different. In terms of the focus areas Corporate VCs typically have a strong alignment with the company’s overall strategy and the products that they are building.
At Microsoft for example, we have pretty strong alignment with investing in enterprise software. Areas of interest for us would be cloud, infrastructure, big data analytics, artificial intelligence, machine learning, IoT, and cybersecurity. These are areas where Microsoft has a good strong presence in. Whereas for a financial or an institutional VC, the focus area could just be based on whatever interest areas or background and experience that the GPs and the partners of the fund come with. There might some degree of influence from the LPs but that is very rare. In most cases, they would just focus based on the team that they have assimilated.
The third, in terms of the exit scenarios, I would say that corporate VCs are more patient investors. Most of us get compensated based on the financial return that we generate for the fund. But at the same time, the degree of risk and tolerance for institutional VCs is much lower. They do have to generate a 20% plus returns for their fund every 5 to 7 years. That is a bit relaxed for corporate VCs. I would say that these are the high-level key differences between corporate and institutional VCs.