How a little optics startup got bought out for almost $5 billion.

IN LATE 1997, Orni Petruschka and Rafi Gidron, the cofounders of Scorpio Communications, an ATM switching company sold to U.S. Robotics, conceive of a new optical switching company called Chromatis Networks.  At first there’s no need for seed money, because the founders have their own. After promoting the idea, these second-time entrepreneurs with big clout easily hook Scorpio’s early venture capital funders, Jerusalem Venture Partners (JVP).

The seed. Erel Margalit, the JVP partner on the deal, knows that bringing in top VCs will bring not only cachet, but also marketing and recruiting oomph to the deal.  He shops the company around the Valley.  Roland Van der Meer of ComVentures and Seth Neiman of Crosspoint Venture Partners like the management and product, and they bite. In early 1998, the three firms contribute equal amounts, totaling $7.1 million.

Chromatis immediately sets up shop in the United States to complement research and development in Israel.  To avoid paying big bucks for Silicon Valley engineers, it plants itself in Bethesda, Maryland, where there are a lot of switching engineers.  Steve Korn, former director of business development at 3Com, Chromatis’s new director of business development, becomes the U.S.liaison.  One of the two partners is always in the United States.

Just three months later,the company needs more cash - building a test product in optics is very expensive. Chromatis's three VCs bring in some additional, eager VCs, including Lucent Venture Partners. These new VCs invest $5 million.

THE ROLL-OUT

In late 1999, the company is finishing up the test set and getting ready to go to market.  But first it needs a serious infusion of cash to help complete the product and pay its 130 or so employees. Chromatis raises $40 million more from VC firms, including Soros Fund Management.

By early 2000, Mr.Van der Meer recalls, 'the business is humming.'  The company corrals major competitive local exchange carriers and backbone carriers as customers; optical switching is becoming a torrid item in the telecom marketplace.  Chromatis starts considering an IPO.  It hires Merrill Lynch as its investment bank.  As a bridge,the company tries to raise $100 million but winds up raising $20 million in a late-stage round.  Its strategic partners include Bell Atlantic and Qwest Communications. Meanwhile, Lucent Technologies, with a little help from Lucent Venture Partners, recognizes that it needs to get into the optical switching space.

THE SALE

In late May, Lucent Technologies announces that it is buying the Israeli startup for 78 million shares of Lucent stock,which at the time equals about $4.5 billion. That makes the acquisition the biggest in Israeli history.

JVP,which 'played deep' in the late round, owns 14 percent, which makes the firm $672 million on a roughly $9 million investment.  ComVentures, the next largest VC owner, with around 12 percent, makes roughly $575 million, a 7.5-fold return on the whole fund.  Crosspoint, with a slightly lower stake, makes almost as much.  The employees and management of Chromatis retain around 35 percent, ensuring that the cofounders 'future great, great, great-grandchildren will retire comfortably.'

—David Lipschultz