Canadian startups are made vulnerable from their reliance on the US for both funding and customers - but Trump's trade war might change that.

Woman wrapped in Canadian flag

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Donald Trump’s threat to impose 25% tariffs on imports from Canada and Mexico has shaken the two countries. Although tariffs have now been paused for 30 days to allow time for further negotiations, the threat of a trade war is already setting off a shift in startup investment patterns in Canada.

There is now a growing call for investors in the country to focus on homegrown startups and for the economy as a whole to reduce its reliance on the US. For some, it signals a welcome move to focus on domestic innovation and to diversify trading partners.

“I think sometimes you need to have this kind of shaking situation for you to react,” says Miryam Lazarte, CEO and founder of Global Startups Accelerator, a Toronto-based accelerator that also manages a $2.5m venture fund.

“Maybe this is the wake-up call that Canadians need to open up and diversify.”

Miryam Lazarte

“I’m angry with the situation, with all that is happening, but the other part of me is happy to see that maybe this is the wake-up call that Canadians need to open up and diversify, because, honestly, this country has so much to give and to trade with some other partners.”

Lazarte is from Colombia originally, and Global Startups Accelerator primarily supports immigrant founders. She thinks Canada is too dependent on trade with the US. According to the Canadian government’s statistics, almost two-thirds of total trade in 2022 was with the US.

“I think it has been just comfortable to have business with your neighbour on your south border that you know you share values and the same cultural business behavior with,” she says.

Last year, a report by Deloitte Ventures found that only 6% of large public companies in Canada invested in startups, compared with some 40% of their US counterparts. When they do invest, it is mostly in companies outside of Canada, primarily in the US.

This pattern could now change. When the tariffs were first announced on the weekend, there was a furious response from Canadian politicians and the public, promising retaliation against US companies and a drive to buy local.

Lazarte says that while it is hard to be sure what effect this will have on investors, she predicts that the patriotic rally could boost domestic startup funding.

“Many [people] are going to start feeling the necessity to put their investments in Canadian startups, instead of looking at outsiders.”

Miryam Lazarte

“I see more people commenting [on social media] that we need to be looking to invest locally, and to start looking into what we have locally. So, I feel like many of them are going to start feeling the necessity to put their investments in Canadian startups, instead of looking at outsiders.”

Long-term effects, she admits, may be limited, as the US is still likely to remain the global centre of VC and CVC funding, especially when it comes to bigger rounds.

“Going forward, I bet [Canadian startups] are going to continue doing business with US investors, because at the end of the day, most of the bigger [amounts of] money, let’s say for rounds over series B, all that is still in the US.”

A glance at GCV’s CVC Funding Round Database shows that alongside Canada’s VC and PE firms, US corporates also play a prominent role in Canadian startup fundraising. Canadian AI startup Cohere, which raised its $500m series D round in July last year, was backed by the CVC units of Cisco, AMD, Nvidia and Salesforce, which are all US technology companies.

This is the norm in other sectors as well. Zephyr, a Canadian precision medicine startup, received funding from US pharmaceutical company Eli Lilly in its $111m series A round.

Risk appetite

If Canada’s public and private sector is to step in to support domestic startups more effectively, one thing that will have to change is attitudes to risk, says Kyle Briggs, a physicist who founded a nanotechnology startup that he spun out from his university research, and who writes about Canada’s deep tech innovation system on his site Caninnovate.

“Crisis and opportunity go hand in hand,” he says. “[The trade war] is a mess that needs to be addressed, but it’s also an opportunity and a reason to get serious about addressing the challenges that are facing Canadian innovation.”

Briggs says that Canadian deep tech spinouts currently rely on the US to secure their customers, where buyers have a greater appetite for new, riskier technologies. He believes a reason Canada lags in innovation is because government agencies don’t want to spend tax dollars on new ventures that might not come to fruition.

“We have a huge amount of disruptive technologies that are arising in Canadian research institutions, both universities and government bodies, and we are spending a large amount of money in getting those research projects to attack readiness [but] then they tend to not really translate into economic benefit to Canada”

The threat of tariffs could change that. He believes that the push for the government, companies and consumers to buy Canadian goods could lend strength to domestic deep tech startups.

But until that happens, the same startups are exposed to the effect of trade barriers because of this need for early-stage companies to grow by selling internationally.

“Here is where I’m hoping that the message [of threatened tariffs] is able to push the Canadian private sector and Canadian public sector to offset the challenges with exporting in the US. But obviously these things take time to change, and so there’s going to be some short-term pain, I think”

“There’s an opportunity to start to address some of the challenges with innovation that have plagued Canada for a long time now.”

Kyle Briggs

Briggs argues that the Canadian government’s procurement system is too complex and is especially difficult for small companies to navigate. And, while the state runs innovation programmes, there are far too many of them and the system is fragmented.

He says it is therefore no surprise that many Canadian startups will sell outside of Canada, or even leave the country for the US.

“There are plenty of Canadian [founders] who are willing to take risks, but many of them leave Canada to do it because they know it’s going to be a much steeper uphill battle here than it would be abroad,” he says.

“There’s an opportunity [with the change in the political climate] to start to address some of the challenges with innovation that have plagued Canada for a long time now.”

Stephen Hurford

Stephen Hurford is a junior reporter for Global Corporate Venturing.