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Venture capital

A few months ago, in response to comments, we said we would cover “the little guy.”

That includes little VCs, right?

Yesterday, we reported about a big-name venture capital firm, Redpoint Ventures, and how it hasn’t performed that well, and yet keeps getting capital for new investments. We concluded by linking to an explanatory piece written by venture capitalist Peter Rip, which argues small venture capital firms might be one way to fix what he calls the broken model of VC.

Take, for example, San Francisco venture firm Geneva Venture Partners. The firm has two partners, Igor Sill and Robert Troy. We know neither of them. We made no calls, did no reference checks. But we did manage a peak at their books, audited as of December 30, 2005.

Their scrubbed average results, that is after fees, expenses and carry are taken out — known as “net internal rate of return” — show roughly 15 percent. In other words, they returned about 15 percent annually to investors every year since 1998.

No, this is not a stellar result by historical standards (Update, we’re getting pushback on this; see below). But Geneva is a small no-name fund that has had its nose to the grindstone, and it has produced results far superior to the market benchmark, the S&P, over the same timeframe (which has grown to 1,287 from 975, a pretty dismal performance).

Geneva was the only venture fund to invest in the first round raised by Salesforce.com, and they invested in San Francisco’s Callixa, which was acquired by software giant SAP. Callixa gave them a 137 percent return, but might give Geneva more when they can sell some shares they still have locked up in SAP.

Geneva has several other companies in their portfolio that could still return solid profits. The point is, for a tiny VC fund such as this one — total of $23.7 million — you don’t need that many profitable investments to do well. You roll up your sleeves, as Rip suggests, and focus. And it seems to be working.

Please let us know if there are any other “small guy” (or “small gal!”) stories out there that we have missed. Send us a tip via email, even anonymous if it must be.

P.S. If you’re interested in this big VC versus small VC/angel/advisor theme, there’s lots being talked about right now:

Stowe Boyd, who thinks entrepreneurs should to move from VCs to advisors
Fred Wilson, who disagrees, and warns entrepreneurs against giving equity to advisors in return for no cash
Jeff Jarvis, who always has something to say, and this time sides with Boyd.
–We don’t think there is any right or wrong answer here. Each situation is different. But if you give equity to employees in exchange for no cash, don’t see any reason you can’t give a hard-working advisor equity in exchange for no cash. But it is pretty obvious, in cases where you can get an angel who will give you cash, that you’d prefer that option.

Update: Perhaps we are being too conservative by saying Geneva’s results aren’t stellar. Here’s an email we just got from a venture capitalist we know:

The post on Geneva is pretty interesting. You suggest that 15% IRR for the period isn’t stellar, but it is. The S&P grew 4% compounded (your numbers) for the period. On average venture capital should outperform the S&P by 5% (500 basis points), that is considered a good average VC rate of return. My guess is that outperforming by 11% is way into the top quartile for the period. The really amazing thing is that they haven’t ballooned up the fund in response to LPs who (presumably) want them to take more cash.

On the last point, to be clear, we don’t know what they’re up to on their latest fund-raising plans.

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