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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."

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