Ridgewood: Feet First Into The Tech Meltdown

This VC firm is throwing huge sums at high-tech startups

Tech stocks may be down, but Robert L. Gold, chief executive of Ridgewood Capital, a private equity firm, is far from out. In fact, he has only just begun a tech buying spree, which makes him stand out in a market that has other venture capitalists running scared. With the AMEX Internet Index's 66% drop through Oct. 18, says Ken Andersen, managing editor of the newsletter VentureWire, "the venture capitalists are cutting their losses."

Not Gold's firm. It is moving full-throttle into the riskiest of risky investments: the first-round financing of startups still operating out of bedrooms and basements with little more than a big idea. Why? Because the tech downdraft means the pickings are better--and cheaper--than ever.

Buying at rock-bottom prices, though, doesn't guarantee success. "You're kidding yourself if you think you're not going to have problems," says Gold, 42. He expects half the Ridgewood (N.J.) firm's bets to lose money and only a few to break even. It's the one or two that hit the jackpot that make it worthwhile. Other VCs are leery of such odds. "Now they just want to make investors comfortable and have nothing but easy success stories," he says.

Trailblazing wasn't always Ridgewood's way. Founded on Wall Street in 1982, the firm mostly took private equity stakes in Old Economy projects such as desalination and power plants. In 1998, it opened a Silicon Valley office and has since launched two venture funds: Ridgewood Capital Venture Fund I and II are chock-full of B2B health-care companies, such as medibuy.com; an Internet search engine called GroupFire; and iTrackClaims, which processes insurance claims.

Its bold approach has worked, so far. Its first $53 million fund boasts an annualized 72% return and has more than doubled in value, to $109 million. Of course, like all venture funds, value is based on internal estimates and returns aren't realized until the assets are sold. A second $165 million fund, launched last November, also chose radical technology investments and just closed, while a third $400 million fund kicks off this month. The fund's $250,000 minimum is reserved for high-net-worth investors, who must have $5 million in investment assets to qualify. Ridgewood's clients are mostly entrepreneurs who are used to taking big risks. Says Gold: "They want us to be aggressive."

WAITING GAME. The goal is to nurture companies until institutional investors want a slice of the action. Case in point: A $4.95 million bet on Feedroom Inc., a broadband-news video service, led to a $30 million second-round financing from heavyweight investors led by Warburg, Pincus Equity Partners, Tribune Ventures, and NBC. Ridgewood plans to hang on to this and other investments until an initial public offering or private sale.

One of Ridgewood's 32 companies is Myrio, an outfit that promises to deliver digital-quality videos on demand, as well as high-speed Internet access, broadcast and cable television, all over old-school copper wiring. "This has been the Holy Grail for the telephone companies for a long time; it's huge," says Gold. So are the risks. Myrio has installed its system in Livingston, Tex., and aims to replace ISPs, Blockbuster Video, and local cable companies nationwide. "This could be worth an unseemly amount of money, in the tens of billions," Gold says. "But we don't know that these guys are going to win."

Another big bet is on a Lucent Technologies spin-off called savaJe technologies. The company is creating a Java operating system for wireless handheld devices, such as Web phones and Palm Pilots. While savaJe's model could replicate the Microsoft Windows OS market stronghold, Microsoft and VA Linux Systems are working on identical technology, with deeper pockets.

The tech downturn opened the doors for upstart Ridgeway to get into such deals. Paradoxically, though, Ridgeway investors will need a strong recovery in tech stocks to capture the monster gains they hope to see.

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