The deal is the latest feather in the cap for Vinod Khosla, Cerent's chairman and a partner at the venture-capital firm of Kleiner Perkins Caufield & Byers. It was Khosla, a "hands-on" venture capitalist, who conceived Petaluma, California-based Cerent in late 1996 and recruited the first engineers to the company, including co-founder and vice-president of engineering Ajaib Bhadare.

Khosla served as chief executive officer at Cerent for 18 months and engineered Kleiner Perkins' investment of $8 million in the start-up. That $8 million investment, a 30.8 per cent stake, is now worth about $2.1 billion. The Cerent takeover comes shortly after the meteoric rise of Mountain View (California)-based Juniper Networks Inc, another new start-up that Khosla brought to Kleiner Perkins.

Co-founded in 1996 byPradeep Sindhu, a former principal scientist at the Computer Science Lab at Xerox Parc, Juniper received $200,000 in seed money from Kleiner Perkins and went public in June. Shares in the Internet router company have risen from its first-day closing price of about $99 a share on June 24 to over $210 recently, giving Kleiner Perkins another $2 billion-plus stake.

Bhadare told the California newspaper India-West that "Vinod (Khosla) had the idea about the space" for Cerent to occupy. The idea was to make more efficient the rings of fibre-optic cables that encircle many metropolitan areas.

It was Bhadare who "built the team and the architecture" for Cerent's networking product, which serves as a bridge between traditional copper lines and newer high-speed fibre optic cables.

The latest sale is likely to fuel another wave of "start-ups in Sonoma County's Telecom Valley," according to the Santa Rosa Press Democrat.

According to industry observers, the deal easily beats the previous record for buyinga privately-held telecommunications company - the acquisition of Nexabit Networks by Lucent Technologies for $1.1 billion in stock.

It is the third-largest merger in the telecommunications industry, smaller than only Lucent's $20 billion deal to buy Ascend and Nortel Networks' $9 billion deal to buy Bay Networks. Although Cerent, which has about 289 employees, lost $29.3 million in the first half of its current fiscal year on sales of just $9.9 million, industry analysts feel Cisco, which dominates the market for computer-networking equipment, needs Cerent's product to build networks to handle large volumes of voice, data and video traffic. It is a far less expensive proposition for Cisco than building the product itself.

Cisco estimates the market for the networks will expand to $10 billion in 2002. "It's a scary thing to say," Elias Moosa, an analyst at Thomas Weisel Partners told Bloomberg News service, "but price is not an issue". Time is almost measured in days in the developing fibre-optic market,he said. Bhadare said while he was surprised by how the telecommunications market has exploded in value recently, "I always knew we would be successful." Cerent, he said, came to the market "at the right time. If anything, I think we want to prove that they (Cisco) underpaid for us."

Khosla told the Wall Street Journal that he keeps on top of his investments by having "the smartest people in the world educating me every day. The only thing I really do is filter and modify to arrive at my own opinions." His "next big thing," he said, is application-service providers, companies that run corporate software programs as a service over the Internet.