I have spent years inside the conversation about how Canada funds its innovation economy. Here is what I keep coming back to.
Canada does not have a startup problem. It has a capital formation problem.
We keep routing the country’s risk capital through a small group of venture funds, many of them backstopped with public money. Then we act surprised when the pipeline thins, the winners get bought by foreign acquirers, and the upside leaves the country.
The evidence for a better path already exists. It has been sitting in our own tax code for fifty years, and I have laid out the mechanics in detail at canflowthrough.com.
This article deals with one part of that problem: who gets to provide the capital and participate in the upside. But the issue is wider than venture capital or retail investment alone. It touches startup financing, founder retention, ownership, commercialization, productivity and ultimately Canada’s ability to build globally significant companies here. I bring those pieces together in Canada Doesn’t Have an Innovation Problem. It Has a Capital Formation Problem. Think of that as the big picture. What follows here is one of the most important pieces of the solution.
The Venture Capital Record Deserves Scrutiny
Start with the numbers, because the numbers end the debate about whether the current model is working.
In 2025, Canadian venture capital invested $8 billion across 571 deals. That sounds respectable until you look underneath it.
- Deal count fell 12 percent year over year.
- Just 26 megadeals captured $5.3 billion, which is 66 percent of all VC investment for the year.
- Pre-seed deal flow fell, and average pre-seed deal size dropped to $880,000, 15 percent below the five-year average.
- Series A and Series B rounds reached only about two-thirds of 2024 levels.
That is concentration, and concentration at the top while the roots weaken is a system in decline.
Even the CVCA’s own data lead acknowledged that concentration raises questions about breadth, and warned that long-term ecosystem health depends on a steady pipeline of companies moving from early stages to scale.
The people inside the capital stack are saying it themselves. The market is narrow, insider-driven, and increasingly dependent on government support.
The Risk-Aversion Reality
Here is the part of the story that gets glossed over in every panel discussion I sit through.
Venture capital markets itself as the asset class that funds bold, early, unproven ideas. The 2025 data shows Canadian VC doing the opposite.
Later-stage rounds grew while nearly every earlier stage weakened. More money flowed into fewer, larger, safer deals. The pre-seed and seed companies, the ones that actually carry the risk the industry claims to embrace, got squeezed hardest.
I have watched this pattern repeat for years. Funds cluster around companies that already have traction, already have revenue, already have a lead investor. The genuinely early bets, the ones that build new industries, go unfunded or get funded from abroad.
This matters because of where the money comes from. Through fund-of-funds programs, catalyst initiatives, and matching schemes, taxpayer dollars flow into these vehicles. Ordinary Canadians supply the capital and receive no say in where it goes.
If the intermediaries were producing exceptional returns, you could defend the arrangement on results. The concentration data, the shrinking early-stage pipeline, and the steady migration of Canadian upside to foreign acquirers show the results are weak.
So the question becomes practical. Canadians already fund this system. They deserve the option to fund it directly, on their own judgment, in companies they believe in.
Ottawa Already Admits the Gap Exists
The federal government knows there is a financing gap. Budget 2025, now law, includes $750 million to address early-stage funding gaps and a separate $1 billion Venture and Growth Capital Catalyst Initiative, with $700 million for funds-of-funds, $200 million for life sciences, and $100 million for emerging fund managers.
I give the government credit for acknowledging the problem. The response, though, is institutional plumbing. It routes more public money through the same intermediaries whose track record created the gap in the first place.
NACO has proposed splitting the $750 million envelope into a $500 million early-stage matching program and $250 million for early-stage infrastructure, arguing it could mobilize another $1 billion in private investment across 500 to 1,000 companies over five years. The design details matter less than what the proposal reveals. Serious players inside the ecosystem now openly admit the problem begins far earlier in the pipeline than Canada has been willing to say.
💡 The overlooked point: Prime Minister Carney talks constantly about spurring investment in Canada and courts outside investors to do it. The billions already held by ordinary Canadians sit untapped, waiting for an incentive structure that invites them in.
Flow-Through Shares Are the Proven Instrument
Canada already solved this exact problem once, in a different sector.
When the country wanted more private risk capital flowing into mining and energy exploration, it created Flow-Through Shares. Investors deduct the eligible expenses of the companies they back. Capital flowed. Exploration got funded. The mechanism has run successfully for decades.
The logic ports directly to technology. Capital follows incentive structure, and right now the incentive structure tells individual Canadians to stay out of the innovation economy while their tax dollars enter it through intermediaries they never chose.
I have written about why this tool remains locked away from the tech sector at Flow-Through Shares for tech, and the core argument is simple. Extending FTS to startups puts investment decisions back in the hands of the people who fund the system.
Britain Already Proved the Model Works
This proposal involves zero speculation. HMRC’s official statistics show that in 2022–23, the UK’s Enterprise Investment Scheme backed 4,205 companies raising £1.957 billion, while the Seed Enterprise Investment Scheme backed 1,815 companies raising £157 million.
Information and Communication companies accounted for 34 percent of all EIS investment and 39 percent of all SEIS investment.
A major developed economy already uses tax-smart policy to steer private risk capital into innovation-heavy firms, at scale, through individual investors making their own decisions. Canada would adapt a proven idea to Canadian conditions.
This Is a Sovereignty Issue
Former federal Finance Minister John Manley, a supporter of extending FTS, put the stakes plainly:
“We are at a decision point that will determine whether Canada remains a serious player in global innovation, or becomes a spectator. When we lose our founders, we lose the companies they would have built, the jobs they would have created and anchored new industries here at home.”
Ownership determines everything. It determines who builds, who stays, who profits, and who leaves. As Canadian firms move into larger rounds, international capital plays a larger role, and more of the economic upside flows out of the country while the risk of relocation or foreign acquisition rises.
A country that finances too little of its own innovation keeps producing value that belongs to someone else. Head offices, senior leadership teams, and strategic decisions follow the capital.
Economic sovereignty means keeping the value you create. That starts with who supplies the capital.
Let Canadians Decide
Extending Flow-Through Shares to technology startups accomplishes three things at once.
- It widens the domestic investor base beyond a concentrated group of funds pushing money into fewer, larger deals.
- It moves capital to the earliest stages, exactly where the 2025 data shows the pipeline collapsing.
- It broadens ownership, so wealth creation from Canadian innovation reaches Canadians directly instead of routing through intermediaries first.
FTS for tech will not fix everything. Canada still needs disciplined investors, better procurement, and smarter scale-up policy. FTS adds the piece the current system lacks: a direct channel for Canadian private capital to reach Canadian founders early, broadly, and with a strong incentive to stay engaged.
You already fund this system through your taxes. The intermediaries spending that money have delivered concentration, a shrinking early-stage pipeline, and departing upside.
You deserve the option to make those decisions yourself.
What You Can Do Right Now
⚠️ The window matters. Budget cycles move slowly, and the early-stage pipeline weakens every quarter Ottawa waits.
Support extending Flow-Through Shares to Canada’s technology sector:
- Share this article with your network.
- Send it to your MP and ask where they stand.
- Send it to Finance Canada.
- Add your voice on the public supporters page at canflowthrough.com if you believe more of the upside from Canadian innovation belongs in Canadian hands.
Flow-Through Shares unlocked capital for one strategically important part of the economy. It is time to apply that logic to the companies building Canada’s future, and to let Canadians make the call.
