The real reason Canadian startups sell out? A broken capital system

I recently read yet another article in which a prominent leader lamented Canada’s lack of competitiveness on the global stage, labelling it as the “600-pound beaver in the room.” As a mid-market investment banker, I witness firsthand the challenges faced by Canadian entrepreneurs. The good news is that with a few smart policy changes we can dramatically shift the landscape in favour of homegrown businesses. These are changes that any political party could support, and they could make all the difference in keeping innovative Canadian companies from selling out too soon. A familiar refrain we hear is the “lack of ambition or risk-taking” among Canadian entrepreneurs. There’s truth to that sentiment. While we build great businesses, too often they get sold to American companies as they scale. The most frequently cited reason for this? A lack of capital. Before diving into solutions, there are two key points we must understand. First, numbers matter. When a Canadian entrepreneur identifies a problem and starts a business to solve it, chances are entrepreneurs in larger countries—like the United States—are doing the same. With a population 10 times the size of Canada’s, the U.S. naturally produces more entrepreneurs tackling the same problems, which increases the probability of success. This creates a survival bias issue—Canada simply doesn’t have as many shots on goal. Stephan May is the managing director at Welch Capital Partners. Photograph courtesy of Stephan May Second, Canadian entrepreneurs face a significant capital disadvantage. In the U.S., 50 states mean 50 state pensions, teacher pensions, and police pensions—all large pools of capital actively funding private equity and venture capital. In Canada, we have some of the world’s largest pension funds—like OMERS and the Ontario Teachers’ Pension Plan—but their size demands that they focus on massive investments, often directly through their own funds, rather than supporting small, first-time venture capitalists or private equity funds. This has created a monolithic investment culture in Canada in which only the safest, most middle-of-the-road ventures get institutional capital. As a result, most first-time venture or private equity funds here struggle to raise money, and rely on high-net-worth individuals instead of institutional investors. We don’t need another analysis of the problem—we need tangible solutions. There are two areas to focus on: growing entrepreneurship, and supporting successful outcomes for entrepreneurs. Growing entrepreneurship: reduce the risk To grow entrepreneurship, we must reduce the risks involved in starting a business. If we truly want to celebrate entrepreneurs, we need to make it easier for people to take the leap. One policy option is to allow RRSP withdrawals for first-time entrepreneurs. Similar to the Home Buyers’ Plan, which lets individuals withdraw from their RRSPs to purchase a home, this policy would enable people to tap into their RRSP savings to fund the launch of a business. This would be structured to ensure that retirement savings goals are still met through a repayment plan, much like the current RRSP home-buying model. Another approach could be a one-time use of Employment Insurance (EI) benefits for business launch. Eligible applicants could receive up to 26 weeks of EI benefits or the equivalent value in a lump sum, which could be used to cover startup costs like salary, registration fees, office rental, or legal services. To qualify, individuals must have paid into the EI system for at least 12 months over the last five years. Neither of these options should be seen as a handout—they simply reduce the personal risk entrepreneurs take on when starting a business. Supporting entrepreneurs: increasing capital availability To grow successful companies, access to capital is essential. Here are two ways we can increase the flow of capital to Canadian entrepreneurs. First, we could establish an Entrepreneurial Development and Capital Working Capital Guarantee Program. Modelled after Export Development Canada’s successful Trade Expansion Lending Program for exporters, this domestic version would provide government-backed guarantees for loans or lines of credit issued to small and medium-sized enterprises. Administered through the Business Development Bank of Canada in partnership with financial institutions, this program would offer working capital guarantees of up to 75 per cent to encourage lending in high-impact sectors such as technology, agriculture, and innovation. Even better, we could be supporting management buy-out. This would reduce the risk for lenders and provide much-needed capital to Canadian entrepreneurs. Second, we need to diversify our capital landscape by encouraging more fund providers. A corporate tax incentive for limited partners investing in first-time Canadian private equity or venture capital funds would do just that. By offering tax breaks to corporations and holding companies that invest as limited partners in first-time funds, we could stimulate private investment in the venture capital space. The policy would provide incentives such as a tax deduction for capital contributions, allowing corporations to deduct 100 per cent of their investments in these funds from their taxable income. Additionally, it could offer capital gains deferral for reinvested profits, tax-free dividend income, and loss carryforward for unsuccessful investments, thus reducing the risk for investors. These changes would create a more dynamic investment environment, with more players willing to fund the next generation of Canadian startups. The narrative that Canada’s entrepreneurs lack ambition or are too risk-averse misses the mark. In reality, the challenges Canadian entrepreneurs face are systemic: insufficient capital, limited shots at success, and a risk-averse investment culture. The solutions are clear: reduce the risk of starting a business, and create a more competitive, diversified capital market. With policies like RRSP withdrawals for entrepreneurs, one-time EI use for startups, working capital guarantees, and tax incentives for first-time fund investors, we can transform Canada into a country where entrepreneurs thrive and build globally competitive companies. All we need is the political will to make it happen. Stephan May is the managing director at Welch Capital Partners. He is recognized for his expertise in mergers and acquisition, and private equity. The Hill Times