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A Shopify credit card reader is seen with an Ipad August 27, 2013 in Ottawa. Canadian mid-level tech startups are encountering a capital crunch as few domestic venture-capital firms are providing Series B funding, with the exception of an exclusive club of financiers willing to cut large chequesDave Chan/The Globe and Mail

From Shopify Inc. and Hootsuite Media to Desire2Learn Inc., a growing number of medium-sized Canadian technology startups have attracted big-dollar financing over the past 18 months. But industry players say those blockbuster deals may be masking a capital crunch for other Canadian startups.

As more money and mentorship flows to Canadian tech startups in the early stages, a serious lack of local funding plagues mid-level Canadian tech startups. What's left is an exclusive club of Canadian venture-capital firms willing to cut large cheques.

A recent Canadian Venture Capital Association (CVCA) report reveals a furious level of venture-capital activity at lower-dollar funding levels in 2014: Ontario led the way in dollars invested, while Quebec took the lead in terms of most deals.

Several private or independent companies stood out for their pace of investment, among them Real Ventures (42 deals), Inovia Capital Inc. (14 deals), Yaletown Partners (10 deals) and Version One Ventures (eight deals). BDC Capital Inc., the government agency committed to early-stage startup financing, dwarfed them all with 102 deals.

Mark Evans, a former journalist and startup marketing consultant, has for the past two years published a widely shared infographic categorizing types of funding and support available to Canadian companies. This year's includes accelerators and incubators (no money), angels (under $1-million), seed funding ($500,000 to $2-million),

Series A ($2-million to $5-million) and Series B ($5-million or more).

"There's a fairly healthy angel market," says Brad Johns, partner with Vancouver-based Yaletown Venture Partners. There are also prominent Series A round funding companies such as Rho Ventures, Relay Ventures and iNovia Capital (14 deals in 2014).

Jim Orlando, managing director with OMERS Ventures, the investment arm of the Ontario pension fund, agrees. For companies looking to raise an A round "on a relative basis, those are easy to do. There are a number of top-tier $50-million funds."

But what Mr. Johns calls a "capital cliff" and what Mr. Orlando calls a "capital crunch" starts to appear when Canadian tech companies need Series B funding. When startups begin earning revenue in the millions and need growth funding, they can't self-finance, the funnel narrows and fewer financiers are still in the ring.

Mr. Evans and Mr. Johns agree that right now there are two Canadian companies that will open their wallets and spend $10- or $20-million on a single deal: Toronto-based Georgian Partners Inc. (seven deals in 2014) and OMERS Ventures (nine deals).

"OMERS has written several cheques for more than $20-million," Mr. Orlando says. The venture arm of the massive Ontario Municipal Employees Retirement System pension fund has about $430-million under management, with about half of that currently invested. Its portfolio includes a who's who of highly valued Canadian tech: Shopify, Desire2Learn, BuildDirect, Wattpad and Hootsuite.

Outside of Georgian and OMERS, Canadian companies turn to several U.S. entities willing to invest at that higher level, Mr. Orlando notes.

Some of the biggest funding deals of 2014 were led by U.S. money, including such Silicon Valley investors as Accel Partners, Sequoia Capital, Bessemer Venture Partners, companies with billions of dollars under management. Mr. Johns argues those greenbacks come with advantages in terms of advice from major industry players and introductions to key international markets.

Georgian managing partner Justin LaFayette also confirmed his group is willing to spend as much as $15-million on a single deal, and has done so.

"It's a very healthy time for technology investing, a lot of the funds are specializing and working on specific phases," he said in an interview. His group – currently investing its second fund, a $100-million pool raised in 2014 – focuses on late-stage growth investing in enterprise software. "There's a lot more capital chasing good companies," he says.

Mr. Orlando believes Canada's lack of late-stage funding has been made more visible by the creation of so many new companies across the country, many of which are maturing at the same time. "The crunch at that stage has been hard all along. The problem was always there. But there were very few companies who ran into it," he says.

The CVCA has identified at least 14 investors with the resources to help fund companies caught in the crunch, though they appear to be on the sidelines for now. They include private groups such as Tandem Expansion Fund, family groups like Beedie Capital, pension funds like Caisse de dépôt et placement du Québec and AIMCo and retail outfits such as Fonds de solidarité FTQ and Desjardins Venture Capital.

"They [OMERS] are all over the place – they will write a cheque for a million dollars, they will write a cheque for $20-million," Mr. Evans says. "They are the big fish in town. What we need is two, or three or four OMERS operating in the space."

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