Who could have guessed that a survivor of the tech wreck still playing in the optical space with almost $200 million in VC behind it would suddenly announce a reorganization into an Oil Patch player? Even better was the straight-faced assertion by management that this move wasn't event on the radar when Tropic announced a FIFTH round of VC worth $41.5 million in May.
When we first got wind of this last week and were confronted by a 500-page prospectus, our first thought was that Tropic was looking to go public by acquiring the shell of a defunct company with a public listing. This relatively common method for leap-frogging over much of the hassle of an initial public offering is referred to as a reverse take over.
That assumption proved false as it became clear that the Tropic we all know and love would continue on as a new company. The acquisition of the two oil and gas players, Chamaelo Exploration and Tournament Energy, would create a new going concern that would still bear the name Chamaelo and trade on the TSX.
Nor was this an obvious cut and run by investors, since they will continue to hold their same ownership stakes in the new optical company that will still bear the name of Tropic Networks. With a healthy dose of na ïve optimism I welcomed this news. After all we've heard in recent years about how VCs have learned their lessons about sloppy due diligence and dramatically tightened their investment criteria, jumping ship on a company that just received its fifth round of financing would have butchered whatever credibility the venture capital community has regained.
Instead it appears that Tropic has pulled off a coup that will clean up its balance sheet of tax losses and provide additional operating capital. Having said that, it remains unclear why a startup that received a big VC injection only seven months ago would so quickly embark on such a complex series of transactions to squeeze another $9 million.
It only takes a glance at that weighty prospectus to realize this entire transaction was the brainchild of investment banker s and lawyers and other middle men who no doubt made reams of cash on the deal. Nor is it difficult to appreciate why Tropic preferred to keep such a complex deal under wraps until shareholders voted on it Dec. 22, considering the potential for misinformation and confusion.
Ultimately, what's important is that the deal prevents yet another tech wreck survivor from withering on the vine. The same day that Tropic acknowledged its Oil Patch deal was in the works came word that another optical player born during the height of the boom had died after failing to secure fresh financing.
MetroPhotonics first admitted in July that it was down to the wire in terms of securing new sources of capital. The company had just about exhausted the approximate $70 million in investment it had received over the years, including almost $8 million from the federal government's controversial Technology Partnerships program. At the time, chairman and CEO John-Peter Bradford, brought back after a three-year hiatus to turn the company's fortunes around, said negotiations were at a "critical" juncture. Last week, he told local media that the company "simply ran out of money" before it could cut a deal.
Why has one optical player continued to secure the fresh capital it needs to survive while another has not? Is it simply a matter of one having the right technology in demand by the market? That may be part of it, but it is the moneymen who keep a company afloat, not the engineers in the R & D department. The Tropic deal clearly demonstrates a level of creativity and outside-the-box thinking seldom seen in Ottawa' technology sector. There is no guarantee that Tropic has secured its own future, but it has given itself more runway to become cash-flow positive.
Celtic House is one VC investor that has been with Tropic since its inception. The Oil Patch deal comes at the same time that Celtic managing partner Andrew Waitman is drawing comparisons between 1996 and 2006 in terms of where we are in the market cycle for technology. If we truly are on the cusp of a new boom, Tropic demonstrates to Ottawa's tech sector how it must gear up with innovative ideas that are well grounded in dollars and cents.
By Leo Valiquette
leo.valiquette@transcontinental.ca
