Funding gaps in Canadian startups

Canada's Startup Funding Gap & Economic Outlook - Detailed Summary

Key Concepts:

• Funding Gap: The significant disparity in early-stage funding between Canadian and US startups, particularly in sectors like Life Sciences and AI.
• Angel Investors: Individuals who provide capital for startups, typically in exchange for ownership equity. Considered crucial for the early stages of the innovation ecosystem.
• Seed Rounds: The initial funding stage for startups, typically used for product development and early market validation.
• Vicious Circle: The negative feedback loop where lower early-stage returns discourage further investment, hindering growth.
• GDP per Capita: A measure of a country's economic output per person, used to assess living standards.
• Final Domestic Demand: The total spending by households, businesses, and governments within a country.
• Indebtedness: The level of debt held by consumers, impacting their spending capacity.

I. Startup Funding Crisis: A $66 Billion Loss

Between 2019 and 2024, Canadian startup communities in Toronto, Waterloo, Vancouver, and Montreal experienced a collective loss of $66 billion USD due to underfunding. This shortfall translates to an estimated 133,000 fewer jobs and $77 billion USD in reduced public market value. A report by the National Angel Capital Organization and Startup Genome revealed that Canada’s startup growth averaged 2.2% annually over the five-year period, significantly lagging behind international peers who experienced growth rates between 9% and 17%.

A key issue identified is the smaller size of seed rounds in Canada, being 40% smaller than those in the US. Canadian startups also take 15-40% longer to begin raising capital. The most substantial gaps were observed in Life Sciences, where Canadian startups raised 85% less funding than their US counterparts, and in Artificial Intelligence (AI), with 66% lower early funding. This disparity creates a “vicious circle” – lower returns for early investors lead to reduced investment in subsequent rounds, hindering long-term growth.

II. Interview with JF Goce, Founder & CEO of Startup Genome

JF Goce explained that the funding gap is “structural” and has been developing since 2017, stemming from a shift in support towards Series A and institutional investors, while neglecting the crucial role of angel investors. He emphasized that angel investors are “the core part of the infrastructure of the entire innovation economy” and require consistent returns to continue investing.

Goce highlighted that the US benefits from a robust pool of private investors who are reinvesting profits generated over the past 10-20 years. He advocated for government support to leverage public funds with private capital, particularly at the seed and pre-seed stages, to “derisk” investments and stimulate the innovation ecosystem. He stated that the early stages of the funding funnel are critical for creating fast growth, leading to larger Series A/B rounds and ultimately, successful exits that generate economic impact.

Goce stressed the importance of local investment at the seed stage, noting that angel investors typically invest within their own communities. He argued that supporting local angel networks is essential for fostering Canadian champions and creating jobs – specifically mentioning the potential to create the 133,000 jobs lost due to the funding gap.

Regarding potential government interventions, Goce suggested investor tax credits, but specifically through “angel side car funds” to facilitate grouping, build capacity, and enable larger, faster investments. He emphasized that these groups are a core component of thriving startup ecosystems. He stated, “If we want to take those jobs right and we’re talking about you know 133,000 jobs that we could have had if we had continue to grow at the normal pace we can create those jobs by investing in the infrastructure in the right way and unlock the 66 billion dollars that’s that’s really ours.”

III. Canadian Economic Outlook for 2026 – Canadian Chamber of Commerce Analysis

Andrew DiCapua, Principal Economist at the Canadian Chamber of Commerce, presented six predictions for the Canadian economy in 2026. A key concern is that non-defense business investment will remain “muted” due to ongoing uncertainty surrounding trade negotiations. He indicated that a rebound in “final domestic demand” – consumer and business spending – is unlikely to be strong this year.

DiCapua also highlighted rising consumer indebtedness as a factor that will likely lead to a pullback in consumer spending. He noted that the youngest cohort (18-24) has a 50% probability of missing a payment, a concerning trend that is rising across all age categories. Renewing mortgages at higher rates will further exacerbate this pressure.

He explained that while GDP growth may appear positive due to slowing population growth, GDP per capita will be a more accurate reflection of economic well-being.

DiCapua acknowledged that the current economic landscape is undergoing a “recalibration” due to factors like AI’s impact on the job market, shifts in trade, and population dynamics. He cautioned that the challenges faced by the younger cohort could have long-term economic consequences, but emphasized that adapting to these changes will be crucial. He stated, “We’re in a shift and so how we adapt to that is going to matter a lot.”

IV. US Government Shutdown Impact on Canadian Travelers

A partial US government shutdown resulted in the suspension of the Global Entry program, impacting Canadian travelers. While the Department of Homeland Security initially threatened to end TSA PreCheck, it ultimately stopped short of that action. Canadian Nexus card holders traveling to the US will lose access to express lines.

Conclusion:

Canada faces a significant challenge in its startup ecosystem due to a substantial funding gap, particularly in high-growth sectors like Life Sciences and AI. Addressing this requires a strategic focus on supporting angel investors and derisking early-stage investments through government initiatives like targeted tax credits. Simultaneously, the Canadian economy faces headwinds from consumer indebtedness, trade uncertainty, and structural shifts in the job market. Successfully navigating these challenges will require proactive adaptation and a commitment to fostering a more robust and resilient economic environment.