Pedestrian at Bay and King Streets in the financial district in Toronto. (Credit: Peter Power/Postmedia files)
Government investment in innovation yields early results, but loses steam later on as foreign buyers snatch up Canadian startups due to the lack of a robust homegrown ecosystem that lets them keep growing from Canada, according to a new Canadian Council of Innovators (CCI) report.
“Because it’s really hard to scale in Canada … we’re systematically losing promising Canadian startups to foreign acquirers, along with their intellectual property and innovations,” Laurent Carbonneau, vice-president of policy and advocacy at the tech advocacy group, said.
The CCI said the 31 founders it interviewed across 30 companies often encounter four major hurdles that lead them to the foreign acquisition path: difficulties in securing early, domestic customers, the capital and specialized talent needed to grow and a disjointed scale-up system.
The report said Canada channels significant investment into supporting innovation through funding for early stage research and development, tax credits such as the Scientific Research and Experimental Development program and venture capital from the likes of Business Development of Canada, which has helped Canadian startups reach early milestones and shows the country can build viable companies.
“(There are) all kinds of support on the theory that they’re important in getting companies from proof of concept to a marketable product, and they are,” Carbonneau said.
The obstacles arise when Canadian companies start to scale. CCI said the companies it interviewed had already demonstrated market demand and commercial success, but Canada was unable to provide them with more capital, customers and the operational capacity to keep growing when they needed it.
Some founders said the prevalence of conservative institutions and investors in Canada led them to turn to investors in the United States or other markets that offered larger sums of capital as well as specialized sectoral expertise and access to international markets.
The founders also said they experienced challenges in securing early Canadian customers in both the public and private sectors due to hard-to-access procurement systems and companies unwilling to take risks on unproven technologies.
“The result was a structural gap: the risks companies needed financed did not align with the risks that the domestic ecosystem was designed to absorb,” the report said.
The mismatch between Canadian startup needs and the risks the domestic ecosystem can support is particularly pronounced in certain sectors such as life sciences, hardware and capital-intensive manufacturing, it said.
For example, several semiconductor startups have either been bought by U.S. companies or have moved across the border in recent years, with Canadian startups saying the acquisitions spotlight the challenges that homegrown companies face in scaling from Canada.
Most recently, Silicon Valley chip giant Advanced Micro Devices Inc. agreed to purchase Toronto-based chip startup Taalas Inc. for an undisclosed amount.
As a result, Canada’s public investments that support domestic companies’ early growth may end up benefitting foreign acquirers if these companies are sold before independently scaling, the CCI said.
“If acquisition by a foreign buyer is the best way up for a Canadian founder, then few of the benefits to those public dollars are staying in Canada, and Canadians aren’t benefitting from the jobs, investments and innovation built here,” Carbonneau said.
The CCI said 63 per cent of acquired Canadian companies maintained an operational presence in the country post-acquisition, but the strategic control and decisions on investment, commercialization, intellectual property and long-term growth increasingly shifted outside Canada.
“When Canadian companies get acquired, and a new Canadian subsidiary of a U.S. parent just becomes an R&D shop instead of the place where really big decisions get made, we lose extremely valuable pipelines to build more of those incredibly valuable skills right here,” Carbonneau said.
The report said both public and private action is required to help strengthen Canada’s later-stage ecosystem, including reducing funding decision delays, tying capital to technical and commercial progress and milestones and improving the pool of private investors and funds with specific sector expertise.
Carbonneau said governments can help by simplifying and streamlining programs to align timelines and requirements with business realities and help investors and founders take more risks, which could include targeted tax changes.
• Email: ylau@postmedia.com