Venture Capital Industry Admits We Have a Serious Funding Problem.

Venture Capital Industry Admits Canada Has A Serious Problem.

Canada’s venture capital community just said the quiet part out loud.

In a recent discussion among Canadian venture insiders about how to fix Canadian venture capital, insiders described a market that is weak, concentrated, slow, and increasingly dependent on government support. Early-stage firms are being squeezed – or even worse, ignored. The investor base is thinning. Too much of the upside from Canadian innovation still winds up outside the country.

That should be a wake-up call. We need to look at new investment incentives like Flow-Through Shares that already have a hugely successful track record in funding mining exploration.

This warning is not coming from critics on the sidelines. It is coming from people inside the capital stack itself. And it points to a blunt truth: Canada does not simply have a startup problem. It has a capital formation problem.

For years, Canada has relied on a familiar pattern. Government programs try to catalyze capital. Venture funds deploy it. A few winners emerge. We congratulate ourselves when one of them survives long enough to raise a bigger foreign-led round. That may have been tolerable when capital was easier and sovereignty was a softer word in economic policy.

It is not enough now.

Canada’s venture capital market is still alive. But it is not healthy enough.

The problem is no longer just that some startups are struggling to raise money. The bigger problem is that Canada’s capital system is becoming narrower, more concentrated, and less capable of financing a broad base of domestic growth companies. That is not a talking point from critics outside the system. It is now visible in the market data itself.

Canada cannot keep talking about innovation, sovereignty, and productivity while relying on a capital system that is too narrow, too insider-driven, and too dependent on foreign money.

In 2025, Canadian venture capital invested $8 billion across 571 deals. That sounds respectable until you look underneath. Deal count fell 12 percent, average deal size rose to just over $14 million, and more money flowed to fewer companies. Just 26 megadeals captured $5.3 billion or 66 percent of all VC investment for the year. That is not breadth. That is concentration.

And the squeeze is not theoretical. Later-stage rounds rose, but most earlier stages weakened. Pre-seed deal flow fell year over year, average pre-seed deal size dropped to $880,000, , which was 15 percent below the five-year average, seed activity declined, and Series A and Series B rounds reached only about two-thirds of 2024 levels. When the roots weaken while a handful of large rounds dominate the headlines, the system is telling you something important: Canada does not just have a scale-up problem. It has a capital formation problem.

Even the language coming from inside the ecosystem has changed. The CVCA’s own data lead said 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. That is exactly the issue. A country does not build enduring prosperity by celebrating a few oversized financings while the broader pipeline thins out underneath.

The federal government clearly knows there is a financing gap. PM Carney talks constantly about the need to spur investment in Canada. he is courting outside investors but he coulld easily stimulate the billions held by Canadians. 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. That is not nothing. But it is still largely institutional plumbing. It does not by itself solve the deeper problem of who gets to supply risk capital, how broad the domestic investor base is, or how much of the upside stays in Canadian hands.

That is why the current debate between NACO and the CVCA matters. NACO is arguing that Ottawa should lean earlier, proposing that the $750 million envelope be split into $500 million for an early-stage matching funds program and $250 million for early-stage infrastructure. NACO says that model could mobilize another $1 billion in private investment and 500 to 1,000 companies over five years. Whether or not one accepts that exact design, the important point is this: even inside the capital ecosystem, serious players are openly acknowledging that the problem begins earlier in the pipeline than Canada has been willing to admit.

There is another problem buried in the same discussion: dependence. As Canadian firms move into larger rounds, international capital plays a larger role. That may be unavoidable at times, but it also means more of the economic upside can flow out of the country, while the risk of relocation or foreign acquisition rises. A country that cannot finance enough of its own innovation will keep producing value that increasingly belongs to someone else.

This is where Flow-Through Shares enter the conversation.

The case for extending Flow-Through Shares to technology is not that startups deserve a favour. It is that Canada needs another practical way to widen its domestic capital base. FTS already exist because Canada understood something important in mining and energy: when a country wants more private risk capital flowing into a strategically important part of the economy, tax policy can help change investor behaviour.

The same basic logic applies to innovation at a time when the world economy is accelerating the use of technology to power the Fourth Industrial Revolution. We cannot rely just on what we pull from the ground, forests can oceans. Tech in Canada is already a major part of the economy generating xxx billion in GDP why would not want to boost that sector? Former Federal Finance Minister and FTS supporter, John Manley says,

“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.”

If Canada wants more domestic capital flowing into younger technology companies before the funnel narrows and before foreign capital captures more of the upside, it needs more than grants, speeches, and fund-of-funds programs. It needs a broader set of incentives.

And this would not be some leap into the unknown.

Britain has been using tax-advantaged early-stage investment schemes for years. 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. More importantly for this debate, Information and Communication companies accounted for 34 percent of all EIS investment and 39 percent of all SEIS investment. In other words, a major developed economy is already using tax-smart policy to steer private risk capital into innovation-heavy firms. Canada would not be inventing something radical. It would be adapting a proven idea to Canadian conditions.

The objection you will hear is predictable: venture capital already exists, so why add another tool?

Because venture capital alone is not solving the breadth problem.

Because institutional programs alone are not broadening ownership.

Because a system that pushes more money into fewer deals is not a system that is deep enough for a country that says it wants to lead in AI, quantum, cybersecurity, digital infrastructure, and advanced industrial technology.

FTS for tech would not solve everything. It would not eliminate the need for strong funds, better procurement, smarter scale-up policy, or disciplined investors. But it could do something Canada badly needs right now: invite more Canadian private capital into the innovation economy earlier, more broadly, and with a stronger incentive to stay engaged.

That matters for founders.

It matters for jobs.

It matters for ownership.

And it matters for whether Canada builds more companies here or keeps watching the upside migrate elsewhere.

This is not a niche startup issue anymore.

It is a national economic issue.

And it is also a sovereignty issue.

If Canada cannot finance its own growth companies effectively, it will keep losing more of the upside from its own innovation economy. That does not just affect investors. It affects where head offices stay, where senior leadership teams are built, where strategic decisions get made, and whether Canada becomes a serious economic player or a branch-plant supplier of talent and ideas.

Canada’s capital market is telling us that the current model is too narrow. The government has already acknowledged there is a financing gap. The remaining question is whether Ottawa is prepared to use more than one tool to close it.

If Canada wants more Canadian-owned winners, more domestic growth capital, and more of the upside from Canadian innovation to stay in Canada, then it needs to widen the game.

Flow-Through Shares helped unlock capital for one strategically important part of the economy.

It is time to adapt that logic for the companies building Canada’s future.

So, here’s what you can do immediately to Support extending Flow-Through Shares to Canada’s technology sector.

Share this article.
Send it to your MP.
Send it to Finance Canada and
if you believe Canada should keep more of the upside from Canadian innovation in Canadian hands, voice your opinion on our Public Supporter’s page.

Public Supporters Page

Supporting articles and reports linked to: