BW Online | September 17, 2001 | Matrix Bets on Wireless
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SEPTEMBER 17, 2001
FINANCE
Matrix Bets on Wireless
In a weak economy, Managing Partner Paul Ferri's winning streak is on
the line
Since the great tech wreck of 2000, life for most venture
capitalists has been rough. They're making fewer
STORY TOOLS
investments, marking down the value of those they have,
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and facing headaches raising new cash. Not Paul J. Ferri,
however. In the past 12 months, the managing partner of
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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.
Table: Big Returns at Matrix
Matrix is a magnet for new money because it was one of
the nation's most profitable VC firms through the 1990s,
FINANCE
says Steven Lisson, who tracks venture funds at his Web
Hedge-Fund Follies
site, InsiderVC.com. The best performer among Ferri's
three funds returned 20 times its investors' money from its Matrix Bets on Wireless
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
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BW Online | September 17, 2001 | Matrix Bets on Wireless http://www.businessweek.com/magazine/content/01_38/b3749094.htm
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.
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