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Ottawa startup Tropic Networks Inc. has secured a fourth round of financing worth about $41 million, the largest local venture capital deal in 18 months.

The official word came Wednesday morning, the day after the lead investor in the round, telecom equipment giant Alcatel, spilled the beans by announcing it had invested in Tropic and signed a marketing partnership with the four-year-old firm.

Tropic also boasted the second-largest VC win of 2003 with a third round worth $30 million. Its first two rounds during the tech boom bagged US$75 million, or more than CDN$99 million at current exchange rates.

When the third round was announced early last year the company had just downsized and restructured its operations to focus on the most promising half of its business, dense wavelength division multiplexing (DWDM) technology for transmitting data over optical networks.

At the time, CEO Kevin Rankin charted an ambitious course to achieve profitability by the end of this year. That target has now been pushed back to the end of 2005, but Mr. Rankin said Wednesday three key objectives have been accomplished with the third-round financing.

The first goal, to deliver into the market the reconfigurable element of Tropic's DWDM technology, was achieved late last year and initial revenues were realized shortly after.

The next step was to get Tropic's technology into the hands of tier one North American telecom service providers, "where this product had its best value proposition and get tremendous traction there. We've done that in spades", Mr. Rankin said.

Finally, Tropic set out to secure a big player to help with distribution, service and support. That deal was struck last week with telecom equipment giant Alcatel of France.

DWDM technology crams data from different sources together on a single optical fibre with each signal carried at the same time on its own separate light wavelength. Up to 80 separate wavelengths of data can be combined, or "multiplexed" into a lightstream transmitted on a single fibre. The technology is expected to be the central technology for all optical networks of the future.

Alcatel is interested in the reconfigurable software that Tropic has developed that makes it easier to separate and deliver these different wavelengths of data to different points on a network. Having software that can remotely manage DWDM traffic cuts down on equipment costs and allows telecom service providers to upgrade their networks more quickly and cheaply with fewer service interruptions.

Mr. Rankin said the next step with the latest financing round will be to parlay the company's initial revenues and customer traction in to volume orders at home and abroad.

"The first step really is to turn this North American service provider traction into volume deployments ... the second thing is to take this product and recreate those successes in the rest of the world with Alcatel. Those are really the kind of two simple things that we're going to with this (financing)."

At this point, the focus is on driving profitability. Mr. Rankin said there is interest in an exit strategy that involves a merger or acquisition.

"The senior management and the board are viewing the improved IPO market for tech companies as a viable option for the company," he said. "At the highest level, building a profitable company is the first step in any exit strategy. That's our primary short-term goal."

After the cuts in 2003, Tropic's head local count has been holding around 65 with some sales staff in Washington D.C. and Dallas. Mr. Rankin said that is already changing.

"We're actively recruiting in Ottawa ... we're hiring in all areas." However, he declined to offer projections.


Wednesday's funding announcement cements Tropic's status as an optical startup that has not only survived the burst of the tech bubble and the demise of many of its peers, but thrived.

In 2003, the company ranked as the region's second-largest VC deal with a third round worth $30 million. The largest deal came in January 2003 with SiGe Semiconductor bagging a second round worth $66 million.

Aside from SiGe, deals of $40 million or above have not been seen in Ottawa since the first half of 2002. The fist six months of that year saw Catena Networks, now owned by U.S. telecom equipment maker Ciena Corp., lead the pack with a round worth $120.25 million.

Three other deals that year ranked among the top five--$88 million for Innovance Networks, $43.5 million for Trillium Photonics and $58.5 million for Silicon Access Networks. All three of these telecom startups have since floundered and vanished from the Ottawa tech scene.

Venture capitalists have since grown much more selective about where they will risk putting their money, making Tropic's latest financing round that much more significant considering its slate of investors.

In addition to Alcatel, previous investors Celtic House Venture Partners, Crescendo Ventures, Goldman Sachs, Kodiak Venture Partners and Teachers' Private Capital, the private equity arm of the Ontario Teachers' Pension Plan, contributed to the round.

Posted in: Communications

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