Since meanwhile no one is denying the report of Lucent's acquisition of Chromatis for $5.7 billion, and since Chromatis's competitor was acquired by Cisco for $6.9 billion, it can be assumed that such negotiations exist and that the price is near the quoted figure.
We would not be writing this story, however, solely because of the price or the negotiations. We are writing it as proof that the technology revolution is far from over.
In any event, the story of Chromatis, which we related here a year ago, begins and ends with people. When we wrote about Chromatis, Ascend Communications general manager Mory Ejabat had joined the board of the company, which operates out of Maryland and the Petah Tikva industrial zone.
This talented, successful man didn't join an Israeli start-up in order to serve as window-dressing. He served the company as a senior manager, designing the young company's strategy, leadership, and vision. The announcement of Ejabat's involvement made waves in the US, because Ejabat, 43, a US Muslim of Iranian extraction, is considered one of the leading managers of the technology revolution in the US.
In addition to the very promising products that it manufactures, on which we will later elaborate, Chromatis is a company that developed in the right way. The company advanced according to the model we have been trying to sell to our readers for a long time. This model says that the success of a start-up depends on its management and personnel.
Chromatis was founded in 1997 in order to provide a comprehensive technology solution for data transmission over optical urban networks. Since we are not writing for the high tech department, where there are people who understand the technology and who are surely following this company, we will not attempt to describe this technology. The more we would say, the more we would expose our ignorance. We are looking at the business aspect of the company.
The company was founded by Rafi Gidron and Orni Petruschka, who became known to the Israeli capital market when the first company they founded, Scorpio, was sold to US Robotics for $72 million in cash. Scorpio's story was an achievement that began a chain of acquisitions of Israeli technologies by international industrial concerns.
After they sold Scorpio, the two entrepreneurs zeroed in on the niche of data transmission in urban centers by setting up Chromatis. Investors waited in line for the initial capital raising of $12 million. After all, who wouldn't want to join people who had already experienced the sweet taste of success?
Petruschka and Gidron wisely chose investors of the highest level. Three prominent US funds: Crosspoint Ventures, Communications Ventures, Lucent Ventures, and Jerusalem Venture Partners, an Israeli venture capital fund, were selected.
In the next stage, they began recruiting suitable personnel. People were enlisted from companies like 3Com, Nortel, and US Robotics, as well as Scorpio graduates and people from ECI Telecom. Recruiting people like these costs a lot of money, and the entrepreneurs holdings were diluted all along the line. If you do it wisely, however, the dilution is worth its weight in gold.
It can be summed up like this. The niche was an excellent one and the technology was unique. From then on, it all depended on the people. That is why the appearance of Ejabat on the scene was so meaningful. The company management was aware that from the initial stage success depends on people and image. That is also the preferred investment at the current stage - people.
Good people have always wanted to work in a good environment. They want to earn good money, of course. They also want to see continuity - they want to know with whom they are working. These demands were met by Chromatis. This was apparent in the next financing round.
When a start-up manages to add a man like Mory Ejabat to its management in an active role, it proves something. It gives investors a message of quality and risk reduction. When a man of Ejabat's level announces to all and sundry that he is joining Chromatis, it broadcasts confidence that the company is headed in the right direction. To us, as to many others active in the field of high tech for more than a year or two, it says, "This investment is more than just interesting."
If you take an absolute majority of US companies, which became leaders in technology fields - in fact, an absolute majority of any successful US companies, whose numbers are legion, you will detect a similar development path. In the majority of cases, the people who started the company are not those who led it to greatness.
You will also discover another interesting phenomenon, rather unknown in Israel - spending by start-ups on recruitment of managers, elite manpower, and well-known professional directors is unusually high, certainly in comparison with these companies' financial resources. The matter of business development is radically important to beginning US companies. Why? Because experience shows that investment, however large it may be, in business development consultation, high quality personnel, and decision-making leading to profitability is extremely worthwhile.
We are impressed by the fact that these two talented people succeeded in persuading the man who made Ascend Communications one of the world's leading companies in the field of communications solutions, who achieved the merger of Ascend with Lucent (now negotiating with Chromatis), a $25 billion merger, to join Chromatis.
When Ejabat joined Chromatis, he said that Chromatis's technology was both the most practical and the most economical today in the field of wave transmission. "Chromatis is in a position that will enable it to be the winner in its field", said this young man, who took Ascend with $40 million and within five years led it to $1.5 billion in sales. Ascend currently employs over 3,000 staff, compared with less than 100 when Ejabat entered his position in 1995.
Under Ejabat's management, the company grew, mostly through successful acquisitions, the most important of which was Cascade Communications in 1997. Most important of all, since he took the lead, the value of Ascend's share multiplied by 30 (a little more, actually).
Ascend, by the way, is a great believer in success in the Middle East. The company's sales manager has announced that the Middle East region is one of the regions contributing the most to the company's growth. Israel? No. Dubai, Egypt, and Qatar - yes.
A year ago, we asked several experts their opinion of Ejabat's recruitment to Chromatis's management. These experts, all from the US, praised the achievement of Chromatis. The only question is why Ejabat took upon himself another job. Almost everyone's answer (don't get excited, we only asked three people) was that "Chromatis must have a very important technology, and what is more important, one with great chances of successful business application on a large scale. Otherwise, Ejabat wouldn't have come."
The overwhelming answer to the question was given yesterday, with publication of the report on the negotiations with Lucent.
Published by Israel's Business Arena on May 29, 2000