Scaling up Canadian businesses is key to addressing the productivity crisis and growing the economy but startups face several challenges in becoming large and globally competitive, experts said at Research Money’s annual conference in Ottawa.

These challenges include access to  capital, lack of Canadian investment in scaling companies, insufficient domestic procurement of products, and inconsistent government policies, they said during a panel discussion titled “Addressing Canada’s Scale-Up Problem.”

“Out of all of the challenges that these companies face to scale their company, the No. 1 challenge is capital and access to capital,” said panel moderator Philippa King (photo at right), assistant vice-president of strategic initiatives at the Ontario Centre for Innovation.

To scale up, companies need a market with customers, the ability to have sustainable sources of revenue, technology and the ability to adopt that technology, said Adriana Vega (photo at left), vice-president of government affairs at the Canadian Venture Capital and Private Equity Association.

“The common denominator to all those things is capital,” she said. However, “the issue is not the lack of capital” available in Canada, she added.

“There’s a lot of capital being parked in real estate because it’s safe and because the prospects of investing in an asset class that’s very risky [such the tech sector] is not necessarily appealing, especially at a time like right now when we’re dealing with uncertainty,” Vega said.

There’s a need to incentivize private capital in Canada to reduce the risk of investing in scaling companies in high-risk sectors, such as life sciences and cleantech, she said. “Private capital is the key element in the scale-up debate and incentivizing the investors that come into this asset class.”

The deals in venture capital below $5 million – at the pre-seed and startup stages of companies – are most dominated by Canadian investment, Vega said.

But as companies grow and see investment rounds above $50 million, “that’s when you start seeing a flip into American investment in our ecosystem,” she said.

Scaling companies need to tap into more capital, larger capitalization tables and bigger investment cheques, she pointed out. “The U.S. is simply the largest [venture capital] market. There’s a lot of capital availability,” with a huge diversity of investors.

In Canada’s life sciences sector, venture capital investment makes up almost 80 percent of the money coming into the industry, said Bethany Moir (photo at left), senior director, public affairs at adMare BioInnovations.

However, an overwhelming amount of that investment is foreign capital. Of the limited partners providing funding to the VC firms, only 10 percent of the disclosed limited partners are Canadian, she said.

There are more Canadian investors in the early stages of life sciences companies and then the percentage of Canadian investors drops off as companies move from startup mode to early growth and then late growth, Moir said.

 “When you then look at companies that exit, the VCs are returning money back to their limited partners,” she said. “So when that company exits, all that money is flowing [to places] outside of Canada” and not being reinvested in Canada’s innovation ecosystem.

“When you have, on the one hand international firms acquiring our Canadian companies, and on the other hand you have most of the ROI (return on investment) flowing to international investment, it’s really hard to break the cycle of scaling Canadian firms,” Moir said.         

Vega agreed, saying: “This is a race for capital, it’s a race for talent and ultimately those who are strategic about their incentives are the ones who are going to play.”        

Preventing “premature sales” and leveraging government procurement

The lack of sufficient capital is a “very acute problem” for Canadian companies with annual revenues of $50 million to $100 million, which is when the vast majority of Canadian scale-ups tend to get acquired, said David Wolfe (photo at right), professor emeritus of political science at the University of Toronto Mississauga.

 Research shows that such companies get bought for a discount of about 30 percent compared with what a comparable company in the U.S. would sell for, said Wolfe, co-director of the Innovation Policy Lab at the Munk School of Global Affairs & Public Policy.

 “So we’re undervaluing our own sale-up firms when we sell them,” with critical intellectual property and talent flowing out of Canada along with the sale, he said.

But Canada also loses the “venues” required to train managers in how to run global companies, he noted. “If we never give managers of technology companies a chance to grow a company past $50 million in revenue, then we don’t have the corporate venues where managers actually learn how to take a company to over $100 million or $500 million or hopefully to a billion.”

 “Unless we figure out how to solve the premature sale problem, the capital problem . . . then we won’t solve the scaling problem,” Wolfe said.

Some public investors, such as the Caisse de dépôt et placement du Québec, have figured out the problem and been investing in tech companies for decades, he said. “So it’s not that it’s an unsolvable problem.”

Canada needs a government policy environment that “builds for growth,” including providing fair access to markets, said Daniel Perry (photo at right), director of federal affairs at the Council of Canadian Innovators.

“In today’s global environment, economic policy is security policy, whether it’s data infrastructure, digital tools or emerging technology – who owns it, builds it and runs it really matters,” he said.

Yet a large amount of the money provided by the federal Scientific Research & Experimental Development tax credit program goes to foreign multinationals with branch plants in Canada, Perry said. “We have a lot of Canadian talent and Canadian ideas that need that funding.”

There’s a lot of early-stage capital in Canada and an eagerness to invest, Perry said. But a many of the problems arise when companies move into the growth stage, because scaling firms don’t have access to customers, he said.

Specifically, companies don’t have access to the largest customer – the federal government – which spends about $37 million procuring goods and services each year.

One of the biggest hurdles for scaling Canaian companies is the “incumbent advantage” in procurement that the federal government gives to large multinationals, Perry said.

The Council of Canadian Innovators, in its recently released A Mandate to Innovate document, recommended that government create a scale-up procurement stream to establish clear metrics around Canadian IP ownership, retention and security awareness, and provide opportunities for Canadian companies in the procurement process in Canada.

“It’s something that needs to be looked at, because that [procurement] is a great vehicle for investment when it comes to not just helping innovators but also allowing companies to scale, by using our federal dollars to invest into them,” Perry said.

Policy/regulatory barriers and interprovincial competition

For Canada’s life sciences sector, it takes about two years for a new drug or medicine to reach the market – putting Canada 19^th out of 20 compared with competing jurisdictions, Moir said. “That impacts investment as well.”

Also, drugs and medicines are paid for by the 13 different provincial/territorial health care systems, each with their own policies and pricing schemes.

For startups developing novel drugs and medicines and looking for investors, the first question investors will ask is “Who’s going to buy this?” Moir said.

“If you look at your home market, it’s really difficult to go through the timelines through Health Canada, through clinical trial regulations [and] the timelines in Canada are longer,” she said. “Then we’ve got this fragmented system, which means it takes a long time to negotiate pricing with each individual province.”

Potential investors are going to think that’s too hard and too long a process, and want the company to relocate to another jurisdiction or focus on another market rather than Canada, Moir said. “That’s impacting companies getting funded but it’s also impacting Canadians because they’re not getting access to the best, most innovative medicines.”

Several provinces have life sciences strategies to support the life sciences industry in their respective provinces.

“But when you look at some of the programs, they actually cause interprovincial competition because to access the program you’ve got to be located in that province,” Moir said.

So if companies want to scale beyond their home province, they might actually lose access to that provincial funding support, she said. “I do think we have to look at that bigger picture of what it takes to compete globally and really reduce the interprovincial trade barriers and competition.”

When it comes to capital, Vega said in Atlantic Canada individual and corporate investors investing in a small business get a tax credit.

British Columbia is the only province in Canada that has successfully established an incentive to create a pool of venture capital that deploys into startups, she said. But even with this incentive there are challenges as companies start succeeding and try to go outside their province.

Vega pointed to a capital fund in B.C. that benefited from the province’s tax incentives and raised capital. But to expand beyond B.C., the fund would have to make the decision whether to relinquish the tax credit that it gets in B.C.

“Are we giving a little bit of a perverse incentive in keeping funds and keeping companies small because they’re incentivized to stay local?” Vega asked.

She said the Canadian Venture Capital and Private Equity Association is advocating for creating a federal incentive to create a pool of venture capital, “to eliminate this interprovincial competition and appetite to keep thing domestically.”

Is access to and retaining talent a factor in scaling up companies?        

A 2024 Mitacs-funded study, by Wolfe’s former postdoc Steven Denney, Travis Southin at Carleton University, and Wolfe found that inadequate incentive structure, weak government support and misalignment of support for scaling companies hinders their performance.

Their study found that scale-up entrepreneurs prefer a more active role by government in the form of direct grants and targeted demand-side innovation instruments, including procurement.

The study showed that the vast majority of scaling businesses don’t actually access government innovation support programs provided through direct spending – the biggest program in terms of spending – until after they have scaled.

That government support has measurable impacts that includes increased R&D expenditures, higher incidence of R&D, more exports and higher wages, Wolfe noted.          

Other research that included Denney and Ryan Kelly, an economist at Innovation, Science and Economic Development Canada, identified 5,000 to 6,000 scale-up companies across Canada’s entire economy.

That research found that it typically takes 10 years for a company to reach scale-up level, compared with the three to five years cited in the scientific literature, Wolfe said.

“So scaling is a slower process in Canada, and if we’re going to design policy to support scale-ups, I think we need to recognize this fact,” he said.

When it comes to talent, Perry pointed out that it’s easier to do research development in the U.S. “A lot of the strong researchers are in the U.S. When it comes to growing and scaling with the IP, the U.S. just has a better system,” he said.

Moir noted that adMare BioInnovations, which rents wet laboratory spaces in Montreal and Vancouver, designed for emerging biotech companies, has helped build 38 companies in Canada’s life sciences sector.

adMare BioInnovations also runs its Executive Institute to help enhance the leadership capacity in the life sciences industry. Seven cohorts, of about 20 individuals per year, have so far completed the nine-month program.

Wolfe pointed out that the Ontario government “has basically flat-lined postsecondary education funding, both to the universities and the colleges, since 2019.”

“The fact that we’re producing the quality of talent that we are, with the incredibly low levels of provincial funding that we’re getting, is amazing,” he said. “We need to recognize how much more the postsecondary sector could do if they were adequately funded.”

Wolfe said a study he’s engaged in, of the artificial intelligence cluster at the University of Toronto, has found that the Toronto-based startups growing in the cluster and multinational enterprises locating to Toronto to establish R&D facilities “are coming for one reason and one reason only, and that’s the talent.”

 Given the Trump administration’s budget cuts to science agencies and programs, and reductions in science and research personnel, Canada has a unique opportunity to bring talent from the U.S.

“So far, we have had no clear indication from the federal government of how they’re going to respond to this unique opportunity,” Wolfe said.

“I fear that by the time they decide what they’re going to do or how they’re going to get their act together, the door will have closed and we will have missed this opportunity.”

Need for consistent government policies

Despite the challenges faced by scaling companies in Canada, the panellists pointed to some positive indicators, including opportunities to enhance the supportive ecosystem for scaling firms.

Canada’s life sciences industry has grown substantially during the last 10 to 15 years, and the return on investment in the sector is the highest among multiple sectors, Moir said.

In the top 50 venture capital-backed exits coming out of Canada, 11 were life sciences companies and they represented 44 percent of the exit value, according to an RBCx report last year.

“So when it comes to returns, there are huge returns to be had in our Canadian industry, she said.

Likewise, pension funds make up the biggest group of the limited partners supporting VC investment in Canada’s life sciences industry, but the proportion of Canadian pension funds is small, Moir said. “There’s a huge opportunity for more domestic institutional investment.”

Vega noted that there are about 70 companies in Canada that are above the $100-million-per-year threshold in revenue and more than 40 privately supported “unicorns” (companies valued at $1 billion or more).

Also, last year saw the highest-ever number of startups created in Canada, she said. “I think the pipeline is robust.”

Investors need to keep seeding the field of startups and Canada should play to its strengths by supporting sectors that have a competitive advantage, Vega said.

“There’s this perception that innovation happens in one silo and that capital happens in another silo,” she said. “We need to break away from that perception and work together.”

The University of Toronto launched more than 1,200 venture-backed startups within the last 10 years, Wolfe noted. “Student entrepreneurship has become a high-growth industry for the postsecondary sector.”

Those startups, which include companies like Cohere, Waabi, Blue J Legal, and Deep Genomics, raised $12 billion in capital and generated 17,000 jobs during the past five years, he said.

However, while Canada does a “fabulous job” of starting software companies, research by the Centre for the Study of Living Standards on productivity shows Canadian companies “horribly underinvest in upgrading capital, particularly in software,” Wolfe said.

“I think a key part of the scaling question is: How do we either convince or incentivize large established companies to seriously up their investment in software?”

Doing so would make these companies more competitive while stimulating the growth of scaling firms across Canada, he added.

Canada also has a “dual problem” of not learning from its successes so it constantly reinvents the wheel and changing governments scrap the policies – including those that work – put in place by the previous government, Wolfe said.

 “The one exception to that in this country for decades has been Quebec. The degree of continuity and degree of thinking, in policy design, is just remarkable,” he said.

However, Canadians somehow have to find a way to convince governments to stick with policies that are actually working, Wolfe said.

He pointed to the proposed Canada Investment Corporation, which took two years to design and would have addressed some of Canada’s scale-up problems but wasn’t mentioned in the Liberals’ campaign platform during the recent federal election.

“Scaling is the key to our future economic growth and success,” Wolfe said.

“If we can’t figure out how to put a consistent set of policies in place and stick with them – whether it’s on the capital front, on the procurement front, on the direct spending support front – I don’t think we’re going to solve this problem.”

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