In recent years, Canada has been making substantial strides in the global innovation landscape. Our nation has become a hub for groundbreaking technology and entrepreneurial endeavors, boasting remarkable companies, leading the world in areas like AI and green technology, and fostering a thriving venture capital sector. While challenges remain, particularly in the scaling of Canadian businesses, we see these as opportunities for innovative policies and collective efforts to propel Canada’s continued success into the future.
In July, the C.D. Howe Institute published a research commentary titled “The Missing Ingredient: Solving Canada’s Shortcomings in Growing Large Firms and Increasing Productivity.” This report delves into the complexities of Canada’s innovation ecosystem, with a specific focus on the challenges Canadian businesses face when expanding globally. While we align with many of the report’s findings, our aim here is to offer an additional perspective, one that highlights the optimism we hold for Canada’s innovation journey.
It’s Time for Action
We believe now is an ideal time to thoroughly review all government programs and identify those that align with strategic objectives, have growth potential, and provide good financial returns to the treasury. Such a review would inform policymakers on the effectiveness of these programs so far, and assist in setting out a strategic vision on their possible expansion as a means to continue stimulating economic growth, in partnership with private capital. In our analysis below, we provide a suitable comparison of our domestic situation vis-à-vis global peers, aiming to help propel Canadian companies into becoming global contenders, and we present a critical analysis with clear steps to continue building our innovation ecosystem.
The Strengths and Valid Points
First and foremost, we wholeheartedly agree that Canada’s innovation landscape is a thriving ecosystem, one that requires continuous growth and attention, particularly concerning the scaling and commercialization of new technologies. We also agree with the commentary’s central findings, that innovation plays a pivotal role in driving productivity growth, and the vital contributions of startups and SMEs to Canada’s economic landscape.
We share the viewpoint that past government policies may have tilted too heavily towards research and innovation programs while inadvertently overlooking crucial elements such as resource scarcity, experience, and talent for commercialization. It is only logical that when funding is tied to these metrics, they naturally rise to the forefront for those seeking support.
It is indisputable that Canada has a shortage of seasoned and highly specialized leaders, with a track record of guiding companies through rapid growth. Few Canadian startups have made the leap from a modest team to employing thousands within a short span. To excel in navigating such growth, firsthand experience at the helm of a company is indispensable. The report highlights possible reasons behind the hesitance of sales and marketing professionals from the United States to relocate to Canada. However, the challenges in accessing top talent capable of effectively translating capital into scalable value warrant a more holistic view. In a globally competitive talent market, Canadian policymakers need to look beyond our healthcare system and social safety net to attract highly skilled individuals. Consideration should be given to policy adjustments, including tax structure modifications, to address talent needs across various economic sectors.
When it comes to access to capital, the report raises valid questions about the performance of Canadian venture capitalists compared to their American counterparts and whether government support remains justified given suboptimal growth rates. To the question of whether Canadian governments should be partners with venture capital, our answer is emphatically yes.
Access to Capital: A Deeper Dive
A robust and competitive domestic venture capital industry is the core of a vibrant innovation ecosystem. According to OECD data, in 2014, Canada’s VC investors deployed a mere USD $1.8 billion in Canada, while their U.S. counterparts invested USD $56 billion. In 2021, Canadian entrepreneurs secured USD $9.4 billion from local investors, compared to a staggering USD $254 billion deployed in the United States.
It is essential to acknowledge that while comparing the Canadian and U.S. markets is informative, it is not always an apples-to-apples comparison due to inherent ecosystem differences. Examining Canada’s historical performance in the VC sector over the years reveals that we are still a relatively young market compared to the United States.
In the United States, it was after World War II in 1946 that the country saw the emergence of VC. Georges Doriot, the “father of venture capitalism”, along with some partners, founded the American Research and Development Corporation (ARDC) to encourage private-sector investment in businesses run by soldiers returning from the war. In these early days, VC was focused on financing startups in emerging technology sectors, paving the way for the modern ecosystem that exists today.
Canada, on the other hand, embarked on our VC journey with a relatively later start. In the 1960s and 1970s, Canada saw the establishment of early VC firms which aimed to provide funding to innovative startups. Over the last 30 years, the Canadian VC scene has ebbed and flowed. According to commentary presented in The Logic last year, Canada’s venture capital industry was virtually non-existent in the early 2000s which had been nearly wiped out following the dotcom bust and was still struggling to re-emerge, and then was hit again in 2008, nearly disappearing in the aftermath of the Financial Crisis. The sector has been on a course to reestablish itself since the early 2010s.
It is noteworthy that Canadian firms attracting substantial interest from U.S. venture capital firms signify our progress as a world-class destination. In recent years, we have witnessed a growing trend — Canadian firms choosing to remain in Canada after securing U.S. venture capital investments. Through ongoing efforts and collaborative initiatives, Canada’s VC market is poised for further growth and global competitiveness.
Canada and Its Global Counterparts
While the U.S. undoubtedly holds significant sway in the global VC narrative, choosing to compare Canada with comparably sized and similarly challenged markets, such as Australia, Germany, and Israel, can offer a contextually relevant analysis.
The Australian venture capital sector took off in the 1980s, with significant traction and activity being observed throughout the 1990s. During the 2000s, cities such as Sydney and Melbourne became startup hubs, with increased venture capital activity defining that era.
The Australian government has been actively involved in the domestic VC market. With proactive initiatives such as the Innovation Investment Fund (IIF) and a number of tax incentives for investors, it has significantly catalyzed the country’s VC activity. Moreover, Australian sovereign funds are substantially invested in their domestic VC ecosystem. The AustralianSuper, Australia’s largest pension fund, for instance, has committed to invest more than $2 billion to support emerging industries and promising Australian companies, including a commitment of approximately $1 billion to Australian venture capital funds.
Two examples of Australia’s VC success are the acquisition of Afterpay by Square in 2021 for a USD $29B, and the rise of Canva, which has touched multi-billion-dollar valuations.
Germany’s VC market can trace its beginnings to the late 1960s but the VC market really took off in the aftermath of the global financial crisis. The country, and particularly Berlin, began to mark its place as a European hub for startups and innovation.
LPs invested in the country have significant faith in the investment environment– which are further cemented by government support. Both at the federal and state levels, initiatives have been rolled out, with the High-Tech Gründerfonds (HTGF) being a particularly prominent example. When it comes to success stories, Zalando’s 2014 IPO and Delivery Hero’s entry into the public market in 2017 are testaments to Germany’s robust VC sector.
Israel’s venture capital sector, which began in the early 1990s, was further stimulated by the Yozma program in 1993, anchoring its status as the “Startup Nation.” By the late 2000s, the country’s tech capabilities grew, with notable investments in domains like cybersecurity and health tech. Two standout exits, Mobileye’s USD $15.3B acquisition by Intel in 2017 and Waze’s USD $1.1B purchase by Google in 2013, spotlight Israel’s innovation caliber.
The examples of Australia, Germany, and Israel provide valuable comparative insights to Canada’s journey. Each of these countries, like Canada, has created a significant niche in VC through a mix of government support, innovation, and strategic foresight. Australia, has demonstrated a remarkable ability for fostering and scaling startups, becoming an influential VC powerhouse in the Asia-Pacific region. Germany, leveraging its industrial legacy, has transitioned effectively into the digital age, with Berlin operating as a hub of European tech entrepreneurship. Israel, with its focus on specialized tech verticals like cybersecurity, continues to outperform its size and is a testament to its strategic investments in innovation.
Comparatively, Canada showcases its own set of unique strengths. Our diverse and multicultural fabric plays a pivotal role in fostering a rich and varied startup ecosystem, drawing talent from across the globe. Cities like Toronto, Vancouver, and Montreal are not only hubs of innovation but also play a crucial role in connecting Canadian startups to global markets.
Canada’s commitment to education, research, and development, combined with proactive government initiatives, has enabled a conducive environment for venture capital to thrive.
The Government’s Role
Canada has consciously cultivated our venture ecosystem through strategic government initiatives. The results of this approach, especially with programs like the Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI), have been transformative.
Before the Venture Capital Action Plan (VCAP), Canada faced a decline in funds available for promising businesses, especially after the 2008 global financial crisis. This capital scarcity was a big problem for Canadian entrepreneurs wanting to grow and create jobs. Many experts and business leaders, including CVCA, called on the government to partner with the private sector. Recognizing the need, the federal government, decided to step in with their Economic Action Plan in 2012.
In 2013, the Canadian government launched the VCAP program, investing CAD $400M to boost business funding. By putting this money forward, it would attract private investment to contribute, aiming for a combined total of CAD $1.2B. This strategy worked. The government backed large funds-of-funds, which in turn supported smaller ones. These smaller funds then financed up-and-coming businesses. By using government funds as a starting point, it drew more private investment into the sector. As these businesses flourished, it meant a positive return for the entire economy, creating more jobs, and benefiting the taxpayers who funded the initiative in the first place.
The results were clear. Through the initiative, VCAP-supported funds invested in 381 Canadian companies. From a sample of these companies, they reported employing a total of 25,336 individuals with an aggregated revenue for 2021 reaching approximately CAD $4.38B. Funds-of-funds under the program committed around 84% of their financial support to Canadian funds, translating to a significant boost in domestic venture capital activity. Some beneficiaries of this program, such as Shopify, SkiptheDishes, and Lightspeed, have since become major players in their industries.
By 2016, the Canada’s VC sector had made meaningful progress but there was work left do to, especially in an environment of ambitious investments pouring into startups in countries like the U.S. and China. Many Canadian business leaders and innovators, and once again the CVCA, saw the need for a follow-up to VCAP. Sharing this vision, the Canadian government launched VCCI.
Introduced in 2017, VCCI’s main goal was to put CAD $450M into Canada’s startup funding scene. The idea was not just about capital, but also about making sure everyone got a fair chance. This meant paying special attention to traditionally underrepresented groups, especially women, in the world of startup funding. The way VCCI worked was like VCAP: it would support big funds-of-funds, which would then back smaller funds that directly helped innovative startups.
Since its launch, VCCI has significantly contributed to Canada’s investment landscape. By December 2021, program data has shown that four funds-of-funds successfully drew considerable investments, accumulating a total of CAD $1.176B. Out of this, private investors pitched in CAD $840M. VCCI had extended support to 302 Canadian companies, with a collective capital injection of CAD $1.4B. 108 sampled VCCI-backed companies had a combined workforce of 13,289 employees. VCCI-backed companies have had also invested around CAD $287M in research and development, further demonstrating the spillover effects of the program.
In the 2021 Federal Budget, a renewed VCCI program was announced, with a dedicated funding of CAD $450 million. The program features three distinct streams, each targeting different areas of VC to drive the growth of high-potential companies and sectors within Canada.
The first stream, CAD $350 million, is designed as a fund-of-funds stream. Currently, all managers within this fund-of-funds stream have either had a full close or are approaching it.
The second stream, with an allocation of CAD $50 million, is directed towards life sciences. This stream is now fully allocated and is managed by six GPs. They are AllosteRx Advanced Therapies, Amplitude Ventures, CTI Life Sciences Fund, Genesys Capital, Pender Ventures, and Sectoral Asset Management.
The third stream, also with a CAD $50 million allocation, is the Inclusive Growth stream. This stream is designed to promote a more equitable distribution of capital, targeting underrepresented groups within the entrepreneurial ecosystem. Innovation, Science and Economic Development Canada (ISED) is currently accepting the second round of applications for the inclusive growth stream, the deadline is set for November 22, 2023.
Without these programs, the startup environment would have suffered from stagnant VC funding, leaving companies wrestling with financial limitations that stifle their capacity to innovate and grow. This lack of resources would have driven droves of ambitious Canadian entrepreneurs to look toward places like Silicon Valley, causing an intellectual exodus from Canada.
Additionally, the international footprint and attraction of VCAP and VCCI would have been noticeably absent, making Canada less appealing to overseas investors. Moreover, the broader venture capital ecosystem, including angel investors and VC firms, would have evolved at a more leisurely pace, missing out on myriad opportunities and breakthroughs.
These tailored strategies have carved out a dynamic ecosystem and it is essential to both celebrate these past successes and strategize for what lies ahead.
Moving forward, it’s not just about keeping up with the world, but about making Canada stand out through new ideas and a strong economy. This calls for working together, evolving our rules, and forming smart partnerships.
Now is a good time to take a close look at all government-supported programs. We should focus on those that fit well with our big-picture plans and have strong potential for growth. Doing this review will give our policymakers the information they need to make wise choices about these partnership programs. The VCAP and VCCI programs effectively address key policy objectives identified by the government: job creation, innovation, growth, and export. Additionally, they return the invested capital back to the government. Through partnership, we can create a conducive environment for economic growth and seed exciting new developments.
Through these combined efforts, transforming Canada into a hub of thriving innovation and entrepreneurial spirit isn’t just a dream — it’s an attainable goal. By fostering a conducive environment for starting and growing businesses, we’re not only creating companies and jobs but also building an economically resilient nation.