Local high-technology firm Hyperchip Inc., which has yet to record a speck of revenue, announced yesterday that it has secured another $70 million in financing, bringing to $220 million the amount it has raised since 1997.

The bulk of the money came from the Quebec government, via a $50-million loan from Investissement Québec.

As part of the deal, that agency gets an option to buy Hyperchip shares at a discount should it go public.

The other $20 million is from seven venture-capital firms, all of which have previously invested in Hyperchip.

The money is for product development, marketing, equipment and hiring. Privately held Hyperchip says it will double its work force to 560 by 2005.

The company makes routers - specialized computers - used at the core of the Internet to help ensure traffic gets to its intended destination.

It promises to boost by 1,000 times the amount of data that can be routed by big phone and Internet companies.

The starting price for one of Hyperchip's air-conditioner-size devices: $3 million.

The target market: about 30 huge companies that carry Internet traffic.

Hyperchip's product has been tested by "one of the biggest Internet carriers in the world," and will be commercially available between October and December of 2002, Hyperchip CEO Brian Barry said in an interview.

The $70 million in financing "is a very strong message to the marketplace - that a company like Hyperchip can have venture-capital funding from its investors and also have the government of Quebec saying: 'This is a company we support,' " Barry said.

Hyperchip still has "a lot" of money left from previous financing rounds, he said, but with the telecom and Internet industry in turmoil, fresh cash was needed to show customers Hyperchip is "not a small company that may or may not be around in two or three years. It gives us a good balance sheet."

The government participation is not an indication that Hyperchip couldn't get money elsewhere, Barry said.

"Absolutely not," he said. "We raised the $70 million quite easily in a very difficult market."

Hyperchip is "at least 18 months ahead of competitors and we intend to stay that way. And that's why our investors came back to us," he said.

R&D Subsidies

The company benefits from other government programs, including

research-and-development subsidies and provincial-tax holidays for foreign workers.

But Barry said it "has not been focused on incentives. We have gotten all of our money from VCs. In fact, we have not availed of all the programs available in recruiting." Government help is "a very small percentage of the total (Hyperchip has spent). I'd say it's maybe 5 per cent or something like that - nothing significant," he added.

At a press conference, Quebec Deputy Premier Pauline Marois said the loan will help stimulate Montreal's economy, while keeping highly skilled workers in the region. Hyperchip expects to help create 320 jobs among its Quebec suppliers over three years.

The telecom and Internet sectors are in the throes of a shakeup, with such companies as Nortel Networks Corp. struggling with sluggish demand and much lower stock prices.

Asked why she feels comfortable investing government money in such a volatile industry, Marois said the stock-market troubles occurred because investors overestimated the value of companies.

Despite that, however, "the business is a good one, it's an important one and it's a business of the future," she said.

Net Traffic Is Growing

Barry, for his part, said there is a pressing need for products such as Hyperchip's because Internet traffic continues to grow and an increasing proportion of it involves capacity-hogging activities like video-conferencing.

By allowing carriers to squeeze more data onto networks, Hyperchip can help carriers save money, he noted, pointing to analysts who predict exponential growth in demand for its products.

In a report last month, CIBC World Markets said that continued Internet traffic growth is "straining the design limits of Internet backbone carriers' existing networks," and carriers are looking for ways to keep up.

Hyperchip is among five private companies working on core routers, the report noted. Among public companies, Juniper Networks, Cisco Systems and Avici are active in the area.

"We note Hyperchip's performance goals were initially met with extreme skepticism by many in the routing community, but note that the company has started to deliver tangible products to carrier labs," the report said.

If Hyperchip's products do take off, Quebec stands to get a piece of the action thanks to the loan, said Jean Larivée, vice-president (finance) at Investissement Québec. Under the terms of the loan agreement, the agency has the option to buy, over the next 11 years, $10 million worth of shares in Hyperchip, at what shares in the company are worth today, he said.

The company has said it plans to eventually go public, and Barry said it is looking at "the latter half of 2003" for an initial public offering, though timing will depend on market conditions.

As for the $50 million, Larivée said it must be used to buy equipment. The loan has a 10-year term, with the interest rate based on prevailing commercial rates, he said. Hyperchip must start repaying the loan in three years, in quarterly instalments over the following seven years, he added.

Venture-capital funds taking part in Hyperchip's fourth and latest financing round were: TechnoCap, Vertex Technology Fund, Advent International, Optical Capital Group, JT Ventures, Artémis and Pilgrim Baxter.

Though several of its investors are American, Hyperchip is still majority-owned by Quebececers, including employees and venture-capital funds TechnoCap and Telesystem-Argo.