Report says difficulties securing domestic clients, capital, and talent are driving founders to exit early.<\/p>\n
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Canadian technology companies are exiting to international buyers \u201cat precisely the moment when scaling becomes more complex and capital-intensive,\u201d according to a new study<\/a> released today by the Council of Canadian Innovators<\/a> (CCI).<\/p>\n \u201cOnce you hit product-market fit and you go, it\u2019s time to scale\u2014that\u2019s when the wheels start coming off.\u201d<\/p>\n CCI identified four main barriers driving these early sales: difficulty securing domestic clients, growth financing, specialized talent, as well as a lack of cohesion across the ecosystem.<\/p>\n As one unnamed founder put it in the report, \u201conce you hit product-market fit and you go, it\u2019s time to scale\u2014that\u2019s when the wheels start coming off.\u201d<\/p>\n CCI, which lobbies on behalf of the country\u2019s tech scaleups, teamed up with Impact Group, DataAngel Policy Research, Yvan Clermont, and Labmedia Consulting to produce the report, which is based on in-depth interviews with 30 undisclosed Canadian founders and one senior executive across 30 unnamed businesses that were acquired by foreign buyers.<\/p>\n The CCI study\u2019s authors checked in with entrepreneurs in software, health and life sciences, transportation, energy, finance, and hardware to determine why they sold when they did and what might have kept them Canadian-headquartered.<\/p>\n The companies surveyed had demonstrated commercial success, but faced a \u201cscale conversion gap\u201d when growing them required more funding, customers, and other capacity than the Canadian ecosystem could provide, the report notes.<\/p>\n \u201cWhen those elements are unavailable or slow to access, foreign acquisition can become the most viable path,\u201d the study said.<\/p>\n Trouble scaling top-tier tech<\/p>\n During a virtual panel discussing the report, Labmedia founder and principal Lindsay Borthwick said she was surprised to learn so many companies developing tech their customers called the best on the market faced such a challenging path to scaling in Canada.\u00a0<\/p>\n Despite producing \u201coutstanding\u201d software and other products, Borthwick said Canadian founders still \u201ccouldn\u2019t find the support they needed to get to the next stage.\u201d<\/p>\n \u201cI just kept hearing that again and again,\u201d she added.<\/p>\n A lack of funding available \u201cat the size, speed, or risk tolerance required,\u201d particularly in science-based or capital-intensive sectors, made foreign investment the only viable source for many, according to the report.<\/p>\n RELATED: Canadian startups face a home-market adoption problem, CentML co-founder says<\/a><\/p>\n These companies often required a \u201cstamp of approval\u201d from international clients first to secure domestic recognition, the report said. Some still encountered challenges getting their foot in the door with Canadian customers and governments after achieving it.<\/p>\n Fellow panellist Kyle Briggs, co-founder of The SAIL Fund and entrepreneur-in-residence at the University of Ottawa\u2019s Faculty of Science, previously built, bootstrapped, and sold his own Ottawa-based deep tech startup.\u00a0<\/p>\n The Northern Nanopore Instruments co-founder and CEO, who had a product on day one, said his firm was only able to obtain customers abroad, and met with lots of folks who wanted to see milestones before investing that would have only been possible with outside capital.\u00a0<\/p>\n \u201cWe definitely ran into issues with risk tolerance,\u201d Briggs said, noting that Northern Nanopore Instruments\u2019 inability to secure the equity and non-dilutive funding it needed to grow in Canada led to its sale to a UK-based Oxford Nanopore Technologies in late 2023.<\/p>\n RELATED: CVCA and NACO offer competing visions for feds\u2019 $750-million venture envelope<\/a><\/p>\n Northern Nanopore Instruments is not alone. Just last week, US semiconductor giant AMD struck a deal to acquire Toronto AI chipmaker Taalas<\/a>. In April, Toronto-based AI-powered 911 call screening firm Hyper sold to Motorola<\/a>. They are just two of the latest in a long line of promising Canadian tech companies that have sold early to foreign buyers.<\/p>\n A Canadian ecosystem that works \u201cin pieces rather than as a connected pathway,\u201d with \u201clittle coordination\u201d between grants, investors, lenders, and public programs has also made maintaining momentum tough for the entrepreneurs surveyed.<\/p>\n As another founder put it, \u201cThere was no step between the early-stage startup support\u2026 and the kind of capital I needed to keep the company in Canada.\u201d<\/p>\n Decision-making power moves abroad<\/p>\n A shortage of experienced executives and specialized workers needed to scale globally and a cumbersome domestic procurement system also spurred respondents to turn to international clients, investors, partners, and acquirers.<\/p>\n While some of these exits were driven by individual business decisions, the report found that the aforementioned structural barriers have had an outsized influence on these types of deals.<\/p>\n \u201cThere was no step between the early-stage startup support\u2026 and the kind of capital I needed to keep the company in Canada.\u201d<\/p>\n Though 93 percent of acquired companies maintained a presence in Canada in engineering, product development, or manufacturing, the power largely moved elsewhere.<\/p>\n \u201cWhen these firms are acquired before reaching maturity, Canada may retain talented employees and local operations, but loses something much more important: strategic control,\u201d the study added, noting that in 93 percent of cases, leadership and decision-making shifted abroad post-acquisition.<\/p>\n Only a third of the founders behind these businesses went on to build new companies. Another third stayed with their acquirers, while the remainder either contributed to the ecosystem in advisory, investment, or operational roles, or exited it entirely.<\/p>\n The report offered some recommendations that governments and private players could adopt to stop this outflow. These included aligning financing criteria with commercialization timelines, using public procurement to validate emerging firms, improving continuity across government programs, accelerating access to specialized immigration routes, and developing funds with the sector expertise and ability to lead large rounds.<\/p>\n