Jeffrey Crelinsten is CEO of The Impact Group and is the Publisher and Owner of Research Money.

OPINION & ANALYSIS

Federal Budget 2025 included two funding announcements that have ignited debate about where to spend the promised money. Since details of how these funding commitments will be managed were deferred to this year, it’s worth a deeper look at the situation.

The first was a $1-billion commitment to launch the new Venture and Growth Capital Catalyst Initiative (VGCCI), “a fund-of-funds that would leverage more private venture capital by incentivizing pension funds and other institutional investor participation.” In addition, the “initiative will also support new and emerging fund managers and important sectors such as the life sciences sector.”

The VGCCI will be run by the Business Development Bank of Canada, which also oversaw two former initiatives: the Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI). Both use a similar fund-of-funds mechanism to allocate funds.

The second announcement was to provide $750 million in support of “Canadian firms facing early growth-stage funding gaps.”

Of the two announcements, the second one has generated the most debate. Arguments turn on how to interpret the term “early growth-stage funding.” In other words, how early is “early”?

CVCA says the $750 million should go to support Canadian scale-ups

Last month, at the request of Finance Canada and Innovation, Science and Economic Development Canada, the Canadian Venture Capital and Private Equity Association (CVCA) submitted seven recommendations on the proposed $750-million Early Growth-Stage funding.

In its introductory overview, the CVCA noted that the $750-million envelope is “intended to address early growth-stage financing gaps and to support scaling of Canadian firms.” They note that while the $1-billion VGCCI “reflects a material increase in the scale of the federal platform supporting early-stage formation and venture capital fundraising,” the $750-million envelope is designed to focus “on gaps that persist as companies move into Series B, growth, and later stages.”

The key objective is to create a system that helps domestic companies stay in Canada as they grow. “We should also be supporting domestic companies as they scale, reinforcing the conditions under which successful Canadian firms can remain anchored in Canada as they grow. As companies mature, access to domestic capital at Series B and growth stages influences where ownership, decision-making, and long-term economic benefits are retained.”

The CVCA defines the funding cycles it considers part of the Growth Stage of firms.

• Series B: institutional rounds where a company has established an initial operating model and requires materially larger amounts of capital to scale its business. At this stage, domestic venture capacity becomes more constrained, and Canadian companies increasingly rely on foreign investors.”
• Later (Growth) stage: later-stage expansion (series C and beyond), where capital is deployed to support business scale-up, through market expansion, operational growth, and corporate development.
• Private Equity: investment strategies involving significant ownership stakes in private companies, including growth equity, buyouts, and related approaches, with a focus on long-term value creation. These strategies may support companies through expansion, operational transformation, or ownership transitions, including situations where an IPO is not the intended or optimal outcome.”

CVCA highlights the fact that foreign capital dominates the Canadian VC ecosystem, especially as domestic firms grow and mature. This is one of the reasons why so many domestic scale-ups end up being acquired by foreign interests, especially in the U.S.

• In rounds under $5 million, Canadian-only investors dominate (on average 68 percent over 10 years).
• In rounds over $50 million, Canadian-only share falls dramatically (on average 13.9 percent over 10 years.)
• Heavy U.S. role in large deals greater than $50 million.

In addition, most domestic “dry powder” (uninvested, committed capital that a fund holds ready to deploy into new or follow-on investments) is now primarily reserved for follow-ons, not new investments. This reduced pool for new investments, compressed fund sizes, and increasing concentration in fewer funds weaken domestic capital's ability to continue leading financing rounds as their portfolio firms scale.

As a result of this analysis, among CVCA’s recommendations are the following:

• the $750 million should address a growing gap in growth-stage (Series B and up), private equity, and other later-stage financing rounds.
• the $750 million should be deployed quickly, starting in 2026 to support current funding Rounds.
• the $750 million should target sectors that will drive Canada’s innovation, productivity and economic resilience, including AI, Quantum, Aerospace & Defence (Dual-Use), Life Sciences, Advanced Manufacturing, Clean Energy and Electrification.
• the $750 million should strengthen Canada’s ability to scale Canadian champion companies, particularly those that are increasingly dependent on foreign capital. Increasing private equity capacity can help retain Canadian companies under Canadian ownership.

So, to sum up, CVCA recommends focusing on Series B and up with the goal of helping scaling firms stay in Canada.

NACO says the $750 million should go to support early-stage startups

By contrast, when the Budget 2025 announcement came out, the National Angel Capital Organization’s CEO, Claudio Rojas, saw the $750 million as focusing on angel investment: “This $750-million announcement is a timely and strategic investment in Canada’s angel infrastructure. It recognizes that when we support the networks and investors behind early-stage companies, we strengthen the entire innovation economy.”

On March 5, NACO released a report, produced by San Francisco-based global research and advisory firm Startup Genome in partnership with NACO. The study compares funding rounds since 2006 in eight top Canadian startup ecosystems against seven leading U.S. peer ecosystems, excluding Silicon Valley.

See “Canada’s top startup ecosystems are hemorrhaging value and growth due to structural funding gaps.”

The study found a $141-million funding gap at the pre-seed and seed stage nationally, and a $181-million Series A funding gap.

With this new study, NACO is recommending that the government apply the $750 million commitment to filling the funding gap that their report has identified.

Some ideas for a resolution

So where should the $750 million go – pre-seed, seed and Series A as NACO recommends or Series B and later as CVCA recommends?

Some, like NACO and others, are arguing that we need to fund a large number of startups because only a small percentage will reach scale-up status. Starting with a large number increases the odds of getting some promising scale-ups in the pipeline. So put the $750 million into pre-seed, seed and Series A.

The problem with this argument is that if we don’t have enough early growth-stage capital for those scale-ups, they will leave the country, either by voluntary relocation or via acquisition. We’ll continue to be a farm team for the U.S. and other international jurisdictions.

Others argue, like CVCA, that the money should focus on early-growth scaling firms. Two years ago, adMare Bioinnovations released a white paper arguing persuasively for policies aimed at building anchor firms in the health and life sciences sector, one of the federal government’s priority sectors in Budget 2025.

See: “Canada’s life sciences industry needs anchor firms to create world-class clusters: report”

Focusing the $750 million on early-growth scaling firms would increase the chances of building domestic anchor firms in priority sectors. Having large domestic firms will also address Canada’s productivity problem, since large firms are more productive than small ones. Canada has been struggling for decades with a private sector dominated by small firms, which we lose regularly as they grow.

Another advantage of having large domestic anchor firms is that they become a source of capital and talent for domestic startups. Startup entrepreneurs who want to exit via a sale will have Canadian acquirers in the mix of candidates.

For these reasons, I’m inclined to agree with the CVCA position on this one.

What about the startups? Let’s think outside the box.

Canada is awash in private capital. Besides our pension funds and institutions, much of it is sitting in family offices set up by successful entrepreneurs and high-net-worth individuals. An enormous amount also sits in Canadians’ investment accounts, being managed by retail investment advisors in Canada’s financial institutions.

Government can work with NACO and the angel investment community in an innovative way. Instead of throwing public money at them, why not create regulations that allow retail investors to follow experienced, accredited angel investors and put a small percentage of their capital into Canadian startups? Create retail angel funds where angel investors are the managers who allocate the investments and Canadians are the limited partners who invest in the funds.

A decade ago, we organized a Research Money conference on new models of financing innovation in London, U.K. Back then, the UK was already experimenting with this approach. In 2021, the UK’s Financial Conduct Authority introduced the Long-Term Asset Fund, a regulated structure to allow investments in illiquid assets.

I’m not suggesting that retired senior citizens be enticed into such risky investments. Yet there is an enormous wealth transfer afoot as baby boomers pass wealth onto the younger generation. Young professionals and workers with investment portfolios have long time horizons ahead of them. A sensible scheme to allow them to invest a small portion of their portfolios into Canadian startups would, properly executed, unlock hundreds of millions for startups, dwarfing the $750 million public money that people are arguing about.

What about the $1 million in VGCII funding being managed by BDC? CVCA has looked at historical federal allocation patterns for BDC’s two predecessor funds, VCAP and VCCI. They found that across both programs:

• 63 percent to 71 percent of fund count and 56 percent of committed capital were allocated to seed and early -stage funds.
• ICT accounted for 63 percent to 81 percent of committed capital.
• Growth-stage ICT fund represented a minority of total allocations.

CVCA also cites RBCx analysis indicating “that while early-stage formation capacity expanded under these programs, later-stage domestic growth capacity developed more gradually and at smaller relative scale.”

If the $1-billion VGCII fund is going to galvanize the building of anchor companies in priority sectors, BDC will need to change its mindset and focus its support on scale-up firms that are on a growth track to becoming large domestic anchor firms. Many of these firms don’t want more dilutive capital. Non-dilutive capital, such as low-interest loans and grants, can help them grow by acquisition, for example.

The VC model should only be one tool in the VGCII toolbox. The BDC needs to develop a suite of instruments designed to build Canadian multinational firms.

At these later stages, the pool of promising firms is smaller, but the chances of success are greater. The $1-billion envelope will need to focus on these relatively few potential winners, because the amount of funding required is enormous.

Take the life sciences, for example. $100 million is a small-to-medium-sized A round financing in the U.S. for a life sciences scale-up. Canadian companies need to be financed at that level to be competitive. A successful A round leads to the need for B, C and D rounds as scale-up progresses. If BDC invests competitively in too many candidates, it won’t have enough in the tank for any of the subsequent funding rounds.

So, even the $1-billion fund needs to be carefully thought through.

If Canadians are serious about building a more sovereign and resilient economy, we will need to align on one goal – like a “moon shot” – and focus single-mindedly on it until we succeed. I’m suggesting that building anchor companies in one or more of our priority industry sectors fits the bill. All the other noise will recede if we keep this goal top of mind.

R$