Matrix Bets on Wireless
Since the great tech wreck of 2000, life for most venture capitalists has been rough. They're making fewer investments, marking down the value of those they have, and facing headaches raising new cash. Not Paul J. Ferri, however. In the past 12 months, the managing partner of Matrix Partners of Waltham, Mass., has invested $101 million in 13 companies, mostly wireless communications startups. And in May, he raised $1 billion for his latest fund--more than double what he raised in the 1990s.
Matrix is a magnet for new money because it was one of the nation's most profitable VC firms through the 1990s, says Steven Lisson, who tracks venture funds at his Web site, InsiderVC.com. The best performer among Ferri's three funds returned 20 times its investors' money from its formation through Dec. 31, 2000, and his worst seven times the original investment (table). Matrix sold many of its big winners near the top of the market. For example, it paid 20 cents a share for optical networking company Sycamore Networks Inc. in 1998 and sold last year at $107 a share, for a 53,400% gain. Just six companies out of 60 that Matrix backed--including the only two dot-coms--were losers. "What's unique about Matrix is that most top firms do have an occasional weak fund," Lisson says, "but Matrix does not."
GROUND RULES. The Italian-born Ferri sidestepped the tech meltdown by following strong, even rigid, investing rules that he has developed over a 30-year career as a venture capitalist. For starters, he steers clear of fanciful theories--such as the idea that Webvan Group Inc., which filed for bankruptcy in July, would create a whole new business model for grocery distribution. Instead, Ferri focuses on technology equipment companies headed by top engineers able to build products that can produce revenues within two years. Most are referred by successful entrepreneurs that Matrix already has funded. Plus, Ferri insists that Matrix must always be the first-round--and lead--investor in a company because it gives him more influence on strategy. Another rule: One of its 11 partners, many of them experienced engineers and executives, must be on the board.
Now, despite the extensive overcapacity that's wreaking havoc on telecom startups and giants alike, Ferri is betting big on wireless technology. He doesn't consider the strategy to be all that risky, as the wireless business is still growing fast--at a nearly 30% clip, according to Merrill Lynch & Co. "All our startups are selling into markets where there is still demand for new products," Ferri says.
All the same, Matrix's new investments are focused on one of the most volatile sectors of the tech industry. But Ferri says he's much happier now than where he was in then 1980s. Back then, he diversified into tech, retail, and health care. The results were not spectacular, and the experience left him focused almost exclusively on tech equipment and software companies.
Winphoria Networks Inc. is typical of the companies currently being funded by Matrix. The Tewksbury (Mass.) startup was co-founded by Shamim Naqvi, a former top Lucent Technologies Inc. engineer. Next year, Naqvi says, Winphoria plans to release new wireless switching equipment at half the price but four to five times the capacity of today's switches--making it potentially a high-priority purchase by battered wireless carriers. "We're not a sexy company, but it won't be hard for our customers to justify the cost of buying our product," says Naqvi.
Ferri admits that near-term the weak economy could prevent many customers from buying the products Winphoria and others are developing. So he is prepared to wait three or four years--instead of one or two--to earn a return on his investments. And he is planning to invest more money in his companies--double or triple the $8 million to $10 million investments that he typically made over the past 10 years. "We know we'll never have the returns we had in the past," says Ferri.
No doubt Ferri's winning streak will be sorely tested in the next few years. Not only is the tech industry struggling, he has also got far more to invest than ever before. But Ferri's disciplined approach may see him through.
By Geoffrey Smith in Boston