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A Networked Matrix

Hi, {name} at {from} has sent you this article: Matrix Partners.com - A Networked Matrix January 26, 2000 by Om Malik, Forbes.com Interstate 495 has become a primary artery of the new networked economy. Huddled along this overcrowded highway, all the way from New Hampshire to the greater Boston area, are dozens of data networking startups, each trying to design the hot new Lambda router or come up with a new switch that might make phone calls cheaper. Chances are that the most promising of these thriving startups raised their early-stage funding from Matrix Partners, a Waltham, Mass.-based financier that has become a first stop for every local entrepreneur. The firm has achieved a near-mythical status among investors for always betting on the right horse. Its most recent bet was Chelmsford, Mass.-based Sycamore Networks (nasdaq: SCMR), a maker of optical networking gear that went public on Oct. 22. After pricing at $38 per share, Sycamore quickly climbed to $270 and now trades at $269 per share, up almost 608%, and enjoys a market capitalization of $20.7 billion. The quiet, publicity-shy firm is hitting more home runs than the hometown team, the Boston Red Sox. Among its recent hits are Copper Mountain Networks (nasdaq: CMTN), a San Diego, Calif.-based maker of digital subscriber line equipment; Wavespan, a Mountain View, Calif.-based maker of wireless local area networks; and Phone.com (nasdaq: OPWV), a wireless Internet enabler. While not all Matrix-backed companies have proved to be as successful as Sycamore or Copper Mountain, the scorecard has a substantial number of singles and doubles. Portfolio company NetCore Systems was sold to Tellabs (nasdaq: TLAB) for nearly $575 million. The quiet, publicity-shy firm is hitting more home runs than the hometown team, the Boston Red Sox. San Francisco-based research company Venture One estimates that Matrix Partners is one of the most active investors in connectivity, geekspeak for networking products. It all began 30 years ago when Paul Ferri invested in a modem maker called Codex, which was later acquired by Motorola (nyse: MOT). The 61-year-old founder and partner was one-half of a fund partnership called Hellman-Ferri Investment Associates, which later changed its name to Matrix Partners and started its first fund in 1982. The first two funds managed by the company, Matrix I and Matrix II (which also invested in medical technology companies and retail industries), had reasonable returns. With the Matrix III fund in the mid-1980s, the venture capital (VC) firm shifted its attention to purely information technology companies. Subsequent funds have focused on data networking and other related technologies—from semiconductors to server software or data networks themselves. The theme gained momentum when the company funded Cascade Communications in 1991. Over the years the firm has invested in companies such as Grand Junction Networks and PSINet (nasdaq: PSIX). In 1999 alone, Matrix invested $123 million million in 31 companies, according to data collected by Venture Economists/Thomson Financial, a New Jersey-based research firm that tracks VC dollars. “We like to get into early stage companies and take an active interest in the running of these ventures,” says Ferri. Many of the companies Matrix has funneled its dollars into are within a 50 mile radius of the company’s Waltham, Mass., and Menlo Park, Calif., offices. “We have relied on what we learned with the Cascade experience to build up a portfolio of networking companies,” says Ferri. How Matrix Grew ....................................................................................................................... Matrix I, 1982, $44.1 million ....................................................................................................................... Matrix II, 1985, $70.4 million ....................................................................................................................... Matrix III, 1990, $80 million ....................................................................................................................... Matrix IV, 1995, $125 million ....................................................................................................................... Matrix V, 1998, $150 million ....................................................................................................................... Matrix VI, 2000, $500 million* ....................................................................................................................... *Estimated; the fund has yet to close. Source: Venture One, Matrix Partners Matrix partners take a lot of pride in the company’s operational experience. General partner Andrew Marcuvitz started Apollo Computer, which was later acquired by Hewlett-Packard (nyse: HWP). Partner Andrew Verhalen comes from 3Com (nasdaq: COMS) and subsequently founded fast Ethernet pioneer Grand Junction Networks; partner David Schantz comes from Cadia Networks and Bay Networks, which is now part of Nortel Networks (nyse: NT). Ferri and his comrade-in-dollars, Tim Barrows, believe that an early start in network-related financing has helped the fund partners assemble a large cast of industry movers and shakers, whose expertise is only a phone call away. “Our contacts in the business help us find the new technology and new companies,” says 42-year-old Barrows, who quit his job as a banker for Merrill Lynch to become a venture capitalist. For instance, when Desh Deshpande, Sycamore cofounder and chairman, was looking for a new challenge after selling Cascade Communications to Ascend—which was later bought by Lucent Technologies (nyse: LU)—Matrix introduced him to Eric Swanson and Rick Barry, the two engineers who developed the technology that forms the core of Sycamore’s products. In Matrix’s favor, of course, is the fact that the greater Boston/New England region is home to a maximum number of networking startups, outdistancing Silicon Valley and Texas by a mile. “In Boston, we are a known entity and that helps,” says Ferri. “Matrix looks to build serious businesses. There is excess capital sloshing around these days.” “We have a very simple investment thesis: We either invest in the technology or in the management,” says Barrows, adding that profits and margins still count at this old-fashioned financier. Ironically, in this era of dot-com madness, Matrix manages to find one new company every month that it wants to invest in. The fund typically invests $12 million to $15 million in a company. “Matrix looks to build serious businesses,” says Ferri, taking a wide swipe at many of the newer funds that are simply throwing billions at money-guzzling Internet companies. “There is excess capital sloshing around these days,” he adds. Ferri believes that while Internet stocks remain in fashion, venture funds such as Softbank, CMGI (nasdaq: CMGI) and Internet Capital Group (nasdaq: ICGE) will do well. But he wonders what happens when the tide turns. Sour grapes? “I regret that we did not invest in a Yahoo! or an eBay, but I can tell you this: I would not have slept easy at night,” says Ferri, a veteran of more than 30 years. He can afford to be skeptical: Matrix has raised six funds so far and is now on its seventh. The $44.1 million Matrix I has become Matrix VII, which could easily top $500 million by the time it closes in a few weeks. The gradual increase in the size of Matrix funds is indicative of the success of its portfolio companies. Barrows is confident that 2000 will be an encore to 1999. Matrix companies such as Turnstone, Sonus Networks and Arrowpoint Communications are likely to tap the public markets soon. Also on the deck is the initial public offering of Bow Street Software, a Portsmouth, N.H.-based company that makes Internet infrastructure software. Bow Street Chairman and founder Frank Moss, a former Lotus and Tivoli executive, was named one of Forbes.com’s “Leaders of tomorrow.” But the hits will not stop here. Matrix’s next big focus is optical networking and wireless technologies. The companies in the stable to watch for 2000 and beyond include Tenor Networks, Appain Communications, Spring Tide and Photonics. Their success will ensure that Matrix hangs on to its status as the financier of the Internetworking revolution. http://matrixpartners.com/index.php/site/press_detail/a_networked_matrix/59/ This service is not intended to encourage spam. The details provided by your colleague have been used for the sole purpose of facilitating this email communication and have not been retained by Matrix Partners. Your personal details have not been added to any database or mailing list. If you would like to receive news articles delivered to your email address, please subscribe at http://www.matrixpartners.com/rss.

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