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
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