When Vancouver-based legal software firm Clio closed a record $1.24 billion round in 2024, financed entirely by U.S. investors, it underscored a structural gap in Canada’s capital markets. The same pattern shows up in life sciences. Canadian investors hold 42 percent of early-stage deals, but by the time companies reach growth rounds their share falls to 24 percent, and more than 75 percent of the returns from top exits flow to international investors.
Domestic investors still anchor the earliest rounds, but the pool is shallow. Canadian funds face limits in raising successive vintages, and entrepreneurs struggle to recycle gains back into the ecosystem when capital gains treatment discourages reinvestment. Even programs that work well, like VCCI, run on finite appropriations that leave firms uncertain about the stability of domestic capital over the long term. As companies grow, foreign investors step in with the larger financings that determine where ownership and economic gains end up.
Budget 2025 is Canada’s chance to change that. The CVCA is calling for four linked measures: renew the Venture Capital Catalyst Initiative with at least one billion dollars; move forward with the previously announced mid-cap growth fund to help Canadian firms stay Canadian as they expand; introduce a targeted capital gains exemption for startup equity modelled on the U.S. Qualified Small Business Stock program; and adopt an evergreen model for venture programs so public returns are recycled back into future growth.
These are disciplined co-investments pairing public dollars with private fund managers who take on the same risks. On average, every federal dollar crowds in about three dollars of private capital, multiplying its impact and creating jobs and tax revenues that more than repay the public investment. Other countries have long recognized the value of this approach. Unless Canada scales what already works, it risks falling further behind.
Why Private Capital
When a Canadian startup gets off the ground, the first investors are usually close to home: local venture funds, angel networks, and other private backers willing to take early risk. That early money has scale. Since 2013, venture capital and private equity have poured nearly $300 billion into more than 7,000 Canadian companies, employing over 300,000 people. Venture-backed firms grow productivity 40 percent faster than their peers. Private equity has funded thousands of smaller firms, with most deals under $25 million, that go on to triple their job growth.
The difference with private capital is not just the cash. Investors sit on boards, connect founders to customers, and bring the networks needed to grow beyond Canada’s borders. That is why government programs that co-invest alongside these funds work: the public money leverages what already produces measurable results.
Canada’s Structural Imbalance
Early-stage investing is one of Canada’s successes. Domestic funds are still the backbone of pre-seed and seed rounds. But by the time a company raises $50 million or more, Canadian investors fade from the table. They made up just 12.7 percent of the biggest rounds in 2024, while U.S. investors filled two-thirds.
Being reliant on foreign capital to define and fund Canada’s innovation economy is concerning. In key sectors of Canada’s innovation economy, such as life sciences and healthcare, we have allowed a troubling pattern to emerge, as U.S. investors, primarily backed by American pension funds and endowments, capture almost all of the value created by Canadian healthcare innovation. This is particularly concerning given that much of the underlying research and discovery was funded by Canadian taxpayers, either directly through grants where these breakthroughs originate (CIHR invests over $1 billion annually in health research) or indirectly through investments in universities and healthcare institutions (Canada Foundation for Innovation funds labs and infrastructure nationwide).
To safeguard long-term national prosperity, we must view entrepreneurs and the domestic innovation economy as strategic assets to be cultivated, supported, and scaled for the benefit of future generations of Canadians. Canada can build promising companies, but without deeper domestic pools the richest rewards flow abroad. Canada can build promising companies, but without deeper domestic pools the richest rewards flow abroad.
Global Approaches to Scaling Capital
Other countries have already solved this problem. In the United Kingdom, the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme have channelled more than £34 billion into over 59,000 firms, giving investors clear, long-term incentives to back young companies.
Germany built the Zukunftsfonds through its state bank to crowd in private capital and has recently added another €200 million to expand targeted streams.
France turned its state investor, Bpifrance, into a permanent anchor in local venture funds, stabilizing fundraising and keeping ownership closer to home.
Australia uses flow-through structures and targeted concessions via its VCLP and ESVCLP programs to keep risk capital domestic.
Singapore goes further. State investors Temasek and GIC act as cornerstone LPs, while stable tax incentives, the founder visa EntrePass, and the cross-border Global Innovation Alliance make it a launchpad for global expansion.
Each approach differs, but the principle is the same: design predictable tools that give private capital the confidence to scale firms at home.
Canada’s Track Record
Canada already has our own success story. The Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI) mobilized more than $5.2 billion in capital, of which $3.7 billion was earmarked for Canadian VC funds. These programs followed a disciplined design: government dollars invested alongside private fund managers, at market terms, with clear accountability.
Independent evaluations show both programs performed in line with global benchmarks, catalyzed strong follow-on fundraising, and supported investment in at least 796 Canadian companies. The models have delivered tens of thousands of jobs with returns that matched the private market, proving risk to the taxpayer is well managed.
What Budget 2025 Should Do
Canada has four priorities if it wants to secure its innovation and improve its economy. One is to renew the Venture Capital Catalyst Initiative with at least one billion dollars. The funds-of-funds stream has already proven it can multiply private capital and should remain the anchor.
Another step is to launch the at least one-billion-dollar mid-cap growth fund to help Canadian firms expand without shifting control outside Canada. This step is about keeping ownership in Canada as companies scale.
A third measure is to introduce a targeted capital gains exemption for startup equity, modelled on the U.S. QSBS. The measure would level the playing field for Canadian founders and investors, encourage reinvestment, and reflect international best practice. Evidence from the United States shows that exempting startup equity from capital gains drives more investment and deal flow. In Canada, EY estimates the cost at less than two percent of annual R&D spend, while the benefits include more capital deployed at home, more Canadian-led exits, and a stronger tax base over time.
Finally, Canada should adopt an evergreen structure for federal venture programs so that government returns are recycled into future growth. This would reduce the need for new appropriations and provide long-term stability.
The Payoff
Canada’s productivity gap is real, but the issue runs deeper. With strong capital at home, firms create jobs, keep ownership, and draw in global investors who want access to a thriving market. Venture and private equity backing also helps companies recruit the best global talent, develop intellectual property in Canada, and expand into new markets while keeping their headquarters here.
The proposed measures will more than pay for themselves. They raise tax revenue, strengthen public finances, and let Canada keep more of its own innovation.
Budget 2025 offers a chance to build on what already works and lock in the benefits of Canadian innovation here, instead of letting the gains drift abroad.
