The Ottawa Business Journal has learned optical networking firm Tropic Networks
has closed a round of debt financing worth $15 million.
While Tropic declined to comment, MM Venture Partners' managing partner Minhas
Mohamed confirmed the deal was closed July 13th. A spokesperson for Tropic says
the company plans to announce the financing shortly after Labour Day.
MMVP led the round with $6.75 million, with $4.5 million and $3.75 million
coming from Transamerica Technology Finance and Silicon Valley Bank, respectively.
"Given their US$60 million equity financing five months ago and this additional
complement of our US$10 million in debt, I think that takes care of their needs
for at least a 24-month period," says Mohamed.
Debt financing, in effect, buys a company more time to accomplish necessary
milestones needed before it can go out and attract a major round of equity financing
at a higher valuation.
The usual deal is $3 million to $4 million, some in equity, but mostly in the
form of a loan repayable over three years in regular installments of principal
and interest, just like a car loan.
Warrants are usually part of the formula, giving investors like MMVP access
to further equity at an opportune time in the future. Details, such as the interest
rates, are specific to each deal and take into account such risk factors as
the length of the "runway" - the length of time before the company
runs out of cash and requires a second infusion - and the milestones they have
already passed, such as product development, proof of viability and acceptance
in the marketplace.
"The company now has a significant amount of runway now to go out there
and execute," says Mohamed. "Once the storm does die down, companies
like Tropic will be clear winners because they fulfil a pain threshold that
remains unfulfilled at this point."
As for the interest rate for the Tropic deal, Mohamed says it is "in the
low teens." Tropic was an attractive investment opportunity for MMVP because
of the space in which the company operates, says Mohamed.
"We believe, in spite of all the horror stories you hear about the telecom
sector, that the optical layer is definitely going to be developed."
In demonstration of this faith, MMVP has been aggressively trying to round
out a three-pronged strategy. The venture firm wanted something in the last
mile, and invested in a company in Vancouver called fSONA, which does the last
mile through free-space wireless laser technology. It also wanted something
in the metro space, which the Tropic deal satisfies, as well as an investment
in the long-haul space.
"We are close to closing a deal with another Ottawa company to be our play
in the long-haul space," says Mohamed. "We've got the three bases
covered."