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October 25, 1999


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One For The Record Books

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J M Shenoy in Boston

Gururaj 'Desh' Deshpande Diwali came a bit early this year for Gururaj 'Desh' Deshpande. For, on Friday, Deshpande, 48, found himself a billionaire when the share price of his Sycamore Networks rose to five times its original value.

It isn't that Deshpande, a product of the Indian Institute of Technology, Madras, is a stranger to instant success.

For Cascade Communications, founded by Deshpande and Daniel E Smith in 1991, had gone public three years later and was bought by Ascend Communications for $ 3.7 billion in 1997. It was recently bought by Lucent Technologies for more than $ 21 billion.

But the response to the initial pubic offering by Sycamore Networks, the 18-month-old firm he heads with Smith as the chairman, has still astounded business circles.

The Chelmsford, Massachusetts-based firm makes sophisticated optical switches whose fiber-optic connections are designed so that software can easily manage it.

It is a company that Fortune magazine said early this year would "do nothing less than change the nature of the Internet".

Sycamore's share price exploded fivefold, from an opening price of 38 to a close of 184 on Friday, making it worth $ 14 billion, and setting a record for the highest market value achieved by an Internet company in its first day of trading.

While the biggest first-day percentage gain for an IPO was 606 percent for, an online community, last November, said Jay Ritter, professor of finance at the University of Florida, on an absolute dollar basis, Sycamore's increase of 146 is the largest ever first-day gain. Its market capitalization is also the highest realized by a company on its stock market debut.

The result was that within a few hours, Deshpande, and Smith, 49, had become billionaires.

Companies like Sycamore that have achieved impressive IPOs in recent months include Juniper Networks Inc in California, which started at 34 a share in June and closed on Friday at 261. California-based Redback Networks Inc, which began at 23 a share in May ended trading 1201/16, while Foundry Networks Inc, also in California, went public at 25 a share and closed at 16213/16, also on Friday.

''Just like 20 years ago when the economy was driven by oil, the economy for the next 25 years will be driven by the networked economy,'' Deshpande told reporters.

Deshpande, who owns 16.3 million Sycamore shares, is worth about $ 3 billion, while Smith's 14.7 million shares are worth about $ 2.7 billion.

'One product. One customer. Billions of Dollars', screamed a headline, referring to the only one major customer the Massachusetts-based Sycamore has till now. The firm earned about $ 11 million this year.

"Another moonshot born and a couple more billionaires coined,'' said John Fitzgibbon, who covers IPOs for Red Herring, a financial magazine. "It's one for the record books, and one for legend. All the stars and planets came together.''

Today, Sycarmore is Massachusetts' fourth-highest-valued company, towering over Staples Inc, Raytheon Co, and TJX Cos, operator of TJ Maxx clothing stores.

Calling the response to Sycamore IPO "amazing" and "astounding," analysts said the enthusiasm for Sycamore is the latest in the continuing saga of success stories for Internet-related firms, and resulted from a strong demand for a relatively limited supply of such stock.

Even in a year considered great for IPOs of networking companies including Redback Networks and Cisco Systems, Sycamore's gain was huge.

Experts believe that the huge reception for Sycamore's IPO is based on the potential for the optical networking market, which is still nascent, coupled with the value of Deshpande and Smith's leadership and track record.

The two proved at Cascade that they knew more than building a prototype and selling it. They also know how to run a company successfully, several experts including Joseph Lassiter, Harvard management professor, said.

Deshpande was named by several publications including Red Herring, one of the top ten entrepreneurs of 1999.

Sycamore made Red Herring's 1999 list of the 100 top companies in the digital economy. Fortune magazine named it among the 12 Cool Companies of 1999. Referring to its shipment of its product in less than a year since the company was founded, Fortune said no other firm, "not Cascade, Ciena, Cisco has left the starting gate so quickly."

Sycamore shipped its first product, the SN 6000, to Williams Communications Group, based in Tulsa, Arizona five months ago. The deal was worth $ 24.5 million.

Deshpande, who has a master's degree in electrical engineering from University of New Brunswick in Canada, and a PhD in data communication from Queen's University, also in Canada, is known not only for his sharp business vision but also his mentoring part in The IndUS Enterprise, a south Asian networking organization.

"He is firmly committed to grooming a new generation of investors and CEOs," says Dr Dinesh Patel, a Boston entrepreneur who has known Deshpande for many years. "He is one of the most self-effacing people in the business."

No surprise then that many reporters who called Deshpande on Friday found him cool and collected. He would rather talk about the possibilities of his product rather than the historic IPO.

"It's an indication of the opportunity that lies ahead," said Deshpande told a reporter as his stock prices were soaring. "People have been talking about the networked economy for a long time. What's fundamental to that revolution is bandwidth."

Playing a key role in the success of Sycamore is the venture capital firm, Matrix Management Co, which introduced two MIT scientists to Deshpande and Smith about a year ago.

Matrix general partners Timothy Barrows and Paul J Ferri introduced Deshpande to two scientists from the Massachusetts Institute of Technology's Lincoln Labs.

Richard A Barry, 33, and Eric A Swanson, 39, had created MIT's all-optical network test bed, and were eager to transform their knowledge of intelligent wavelengths into a commercial product for the telecom industry.

With Barry and Swanson on the deck, Deshpande and Smith quickly created a team with some of the talents they had hired at Cascade.

What is next for Sycamore?

He is intrigued by the long-term opportunity, the soft-spoken Deshpande says, rather than see the firm merely as a hot company "that you want to flip and make some money.

"When I was at Cascade, I had no money," he recalls. "I'm now the largest investor in Sycamore. We believe in the story, and we're fully committed to the long-term potential."

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