Canadian startups struggle to raise capital as US relationship sours

“It’s almost paralysed people, both the founders and investors,” says Talia Abramowitz, managing partner at Deloitte Ventures, about the strained US-Canada relations, on the CVC Unplugged podcast.  “It’s like you don’t know which way’s up anymore, and people are just sort of sitting on their hands, waiting for it to pass. As the days pass, it’s even more crazy and even more uncertain.”

Canada, and its innovation ecosystem, has always been inextricably linked to the US market, which is a near-universal path in Canadian startups’ trajectory. Now, with its neighbour imposing tariffs and questioning its sovereignty, there’s a wholesale reappraisal of the entire relationship.  

“I think there’s now a realisation, after three months of not knowing which way is up, this is the new normal.”  

She likens the political situation to the first few months of the Covid-19 pandemic, when no-one knew quite how to move forward. Founders are finding it hard to find capital. Abramowitz sees founders falling into two camps on how to deal with it. One camp is bootstrapping much more, she says, focusing on capital efficiency after their early rounds, which is leaving early-stage investors without a way to exit amid a dearth of later raises. Another camp is looking anywhere it can for capital, including bank debt, to have on hand if things get bad.

“Obviously the IPO markets are struggling – that’s not a decent option. There are a lot of funds that are pretty long in the tooth on their investments. They haven’t had liquidity in a long time. It’s creating this strange environment that founders and investors are still trying to figure out how to navigate appropriately.”

For Deloitte Ventures, which invests primarily in software, tariffs don’t have as much of a direct effect as they do on goods, and the route to the US market is very much still there. However, even software startups can be hit indirectly if potential buyers of the software ease up on spending.

More Canadian corporates invest

More broadly, the Canadian ecosystem has been growing from strength to strength in recent years. According to a report put out by Deloitte last year, participation by Canadian corporates in venture rounds tripled between 2019 and 2022, though still only 6% of public corporates in Canada with over $1bn in revenue do direct CVC investment.

Government schemes such as the Venture Capital Catalyst Initiative (VCCI), a state-run fund-of-funds, has helped buoy domestic investors, as has its strong higher education system and tax incentives for scientific R&D.

Of Deloitte Ventures’ nine direct investments to date, eight have been in Canadian companies.