“Where have all the Canadian startups gone?”

Leaders Fund study finds things are worse than feared

It’s not every day that one gets the chance to present some actionable solutions to a group of Parliamentarians. The House of Commons Standing Committee on Industry & Technology is currently holding hearings on “Canada’s underlying productivity gaps and capital outflow.” The opportunity arose due to a recent study (which I’ll get to in a bit) launched by David Stein and Gideon Hayden from Leaders Fund; their analysis got the attention of some of the Committee members, and Chad Bayne and I were asked to round out the list of four industry witnesses (along with Dave and Gideon). Off to rainy Ottawa we went.

We each had five minutes to pitch our thoughts on the vast and complicated subject. I took the Committee through our nation’s 25-year deficit in GDP growth relative to the USA, and tied that back to capital flows in the two Innovation Economies. Blog readers will recall some of the stats and criticisms from earlier missives (see representative prior posts “Only entrepreneurs can get Canada out of its economic funk” Jan 8-25, “Canada can create New Economy jobs without subsidizing foreign corporate shareholders in the process” Apr. 28-23 and “60 additional intern jobs” is not an Innovation Strategy” Apr 18-23).

In summary, my advice was as follows:

1. Canada has been a centre for Mining and Oil & Gas finance for decades. Canadian tax policy supports flow-through shares for those two sectors, but not the innovation economy. Do we wonder why we aren’t a leader in attracting capital to this sector?The “Finance Dept.” argument is, I suppose, that Startups can access SR&ED funds, and that’s true — even if the dollars are insufficient. We’ve been giving this very advice to Ottawa for more than a decade, but hope springs eternal that they’ll take it this time.

2. Consider this: if I have a full-time job and want to start a retail honey business as a sideline, the tax system will let me write-off tens of thousands of start-up expenses over the net few years against my main income. But if I want to invest $50,000 in my neighbour’s AI start-up, I can only write off any losses that might arise from that investment against a future capital gain. We are consciously prioritizing side gigs over commercializing IP. An Angel Tax Credit is long overdue. Cap it at $250k-500k a year overall, and no more than $100k to any one Canadian-based company in a single tax yr.

3. Privatize the Business Development Bank of Canada and take it public on the TSX. Simply put, if BoC Senior deputy governor Carolyn Rogers wants more competition, BDC just so happens to be the only obvious vehicle available to spur the right type of private sector-owned competition within our P&C banking sector. It’s not as though OSFI is going to approve a new greenfield bank charter before the end of the decade. There’s also the issue of opportunity cost: The taxpayers of Canada currently have over $15 billion of shareholder’s equity tied-up in a business that produced “core net income” of just $492 million for the 2025 fiscal year. Which means that taxpayers borrow $15 billion on a rolling basis to keep BDC in business, paying around $477 million of additional annual federal interest expense, less $50 million of dividends to help defray those costs. No investor would pay 3% in margin interest to earn a gross return of 3.2%. If BDC focused merely on “filling the gaps,” as required by its 1995 Act, outstanding loan balances wouldn’t have grown five fold — to >$42 billion — over the past 15 years. To put the size of this bloated balance sheet in context, National Bank had an average business & gov’t loan book of ~$70B as of the end of fiscal 2023; CWB’s was actually smaller, at $29B.

4. Of BDC’s $50 billion of assets, just $3 billion is invested in companies and funds associated with the VC sector. A mere 6%. There are clear policy benefits of bringing public funding to private markets, but the under-appreciated corners of the economy can be tackled with other government tools. VCCI need not sit on BDC’s balance sheet, for example. What’s worse, BDC has been the most active (direct) venture capital in Canada for far too long. That hasn’t fixed anything — it’s time to put that $3B slice of capital into 3^rd party funds, too.

During their presentation at Monday’s Committee hearing, Dave and Gideon discussed what they found when they analyzed ~3,000 venture-backed startups founded by Canadians between 2015-24. They looked at where the firms were founded, how much capital was raised, and what the revenue growth profile looked like. At the highest level, they found that:

1. Since 2020, Canada has been contributing fewer of the world’s high-potential startups.

2. Founders are increasingly starting their companies abroad.

While we didn’t organize the content of our presentations in advance, it was interesting to note that our advice didn’t overlap. There are just that many different elements to fixing “the problem” as we collectively see it. Gideon and Dave provided this excellent incremental advice:

Eliminate capital gains on startups. Create a more aggressive, Canadian version of the US Qualified Small Business Stock exemption to incentivize company formation here.

Adopt a “Buy Red” culture, make it tax deductible: In Israel, the “Buy Blue” mindset helps Israeli companies land their first customers at home. They’re funded locally, get to a few million of ARR locally and are able to raise abroad thereafter. We should adopt this mentality, but take it a step further. If you buy true Canadian technology, it should be tax deductible.

Let 1,000 companies bloom. Like China did in the EV and solar markets, the Canadian government should massively incentivize startup formation in key industries where Canada can lead globally, then let the market decide which companies have the right to survive.

Engage founders in shaping government programs. Programs like SR&ED cost billions but often bog down startups in process. Founders should help redesign them so they actually work for entrepreneurs.

Change the culture. Put Tobi’s face on the $5 bill. Too often, we cut down winners instead of elevating them. We need to champion and celebrate companies like Shopify, Stackadapt, Ada, 360 Insights, Cohere and many others and use them to inspire the next wave.

Invest in future leaders. Longer-term, we need to deliberately cultivate leadership capacity through initiatives like Huron University’s Nation Builder program, designed to nurture thoughtful, courageous builders who understand how prosperity is created and how to lead with conviction.

“Founders matter,” As Gideon puts it. “They create jobs, attract investment, and anchor ecosystems. If Canada loses a generation of scale-ups, we risk missing out on the next Shopify — and the prosperity that comes with it. One company can drive hundreds of billions in economic impact. We need to maximize our chances of that company being built here.”

For a country that’s known to be so sophisticated on the institutional investment side, the recent Startup spiral is all the more inexplicable. Ottawa now knows this is a Five Alarm fire — no excuses.

MRM

(note: this post, like all blogs, is an Opinion Piece)