Canada tries to stop tech startups from moving to U.S.: ‘American VCs were hungrier’

When Miles Schwartz co-founded payment company Zūm Rails Inc. in Montreal in 2019, he knocked on almost every Canadian venture capitalist’s door looking for funds. They all turned him down.

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So by 2024, Zūm Rails was working on a US expansion, and Schwartz moved to Miami. The company raised C$10.5 million ($7.5 million) from US-based growth equity firm Arthur Ventures LLC that year.

“We tried raising with Canadian VCs,” said Schwartz, 35. “American VCs were hungrier, faster — between them reaching out to us, getting a term sheet was like literally one week.”

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Zūm Rails is one of many Canadian startups that have moved to the US to expand over recent years. Workplace tool Slack was conceived in Vancouver but moved to San Francisco before it was acquired by Salesforce.com Inc. for $27.7 billion in 2020.

A survey earlier this year by tech community organization TechTO found that of 48 Canadian Y Combinator founders who responded, 91% initially incorporated in Canada and 75% later established a US entity.

But now the problem is getting fresh attention from Canada’s government and business leaders, and they’re searching for ways to keep startups at home.

It’s part of a broader effort by Prime Minister Mark Carney to build an economy less reliant on the US, as it reels from President Donald Trump’s tariffs and threats. The latest part of his strategy was the first-of-a-kind Canada Investment Summit this week, which gathered the world’s top money managers in Toronto.

That summit resulted in a slew of patriotic announcements to rejuvenate Canadian business. Toronto-headquartered Radical Ventures unveiled a new late-stage growth fund with more than $1 billion of capital after an initial close, with much of it committed by Canadian pension plans and banks, Bloomberg News reported earlier.

Carney said that new fund will “help Canadian AI companies scale up and stay Canadian.”

‘Alarm Bell’ 

Canada has produced successful technology companies thanks to its highly educated workforce, government incentives, and a still-growing VC scene. But with the exception of firms like Shopify Inc., the country has struggled to create global tech firms, and has nothing on the scale of Apple Inc. or Alphabet Inc.

Aidan Gomez, co-founder and CEO of Canada’s top artificial intelligence firm Cohere Inc., said in an interview that there’s been a lack of Canadian options for growth funding, and bigger Canadian companies “haven’t really supported and bought from the local ecosystem.”

“These two things really pull companies south,” he said.

With a population roughly one-eighth the US’s, Canadian firms have fewer domestic customers. But what’s more, the US also has a greater propensity to keep investing in “high-stage risk” companies, said John Ruffolo, founder of Maverix Private Equity.

In 2022, about a third of seed rounds in Canada had purely Canadian investors, but that fell to just 9% in later rounds, according to a report from the Organisation for Economic Co-operation and Development.

“There’s been a turning of the back on the entrepreneur over the past 10 or 15 years,” Robert Janson, chief investment officer of Toronto-based Westcourt Capital Corp. said in an interview. The entire business ecosystem — from funding to banking and finding talent to tax — has pushed entrepreneurs to the US, he said.

University graduates “somehow have a perception that if they want to have more success in building a technology company, they are better off in doing so in the United States,” Ruffolo said. “This, to me, is the real alarm bell.”

There is, however, a large pool of capital to be tapped: retirement savings. With more than C$2.8 trillion of assets, Canada’s top pension plans are among the world’s largest institutional investors.

Ruffolo, who founded the venture arm of the Ontario Municipal Employees Retirement System, said there’s been an “implicit bias that the returns and companies are superior outside of Canada” at those firms, he said.

Facing pressure to invest more domestically, the heads of the so-called Maple Eight biggest pension managers have said they’re open to doing so. The idea is not new. Caisse de Depot et Placement du Quebec, for example, has a dual mandate of generating returns and supporting Quebec’s economy.

The pension funds’ involvement in the new Radical Ventures vehicle is sign of a sea change. The new fund — backed by Canada Pension Plan Investment Board, PSP Investments and Ontario’s healthcare employees plan, known as Hoopp — is aimed at creating trillion-dollar companies.

Reversing the Drain

Many founders have pointed out that Canada’s proximity to the US creates a tough competition on tax. The northern nation’s general corporate tax rate is 15%, lower than the 21% rate south of the border. But depending on location, other taxes layer on top of that. And Canada’s personal regime has been regularly criticized for stifling productivity, with some analysts suggesting the highest income bracket kicks in too early.

Tax reform could stem the brain drain, said Andrea Johnson, national corporate group leader at law firm Dentons. “Founders and young entrepreneurs leave Canada for capital availability but also because the US tax environment better calibrates risk and reward,” she said.

On Tuesday, Carney announced a step in trying to change that. Canada is expanding the scope of a major investment tax write-off, adding fiber-optic cables, computer equipment, software and more to the list of assets eligible for accelerated deductions in Canada.

It’s one of the most significant tax changes in decades. The government said the relief will reduce Canada’s marginal effective tax rate on new business investment to 6.4% from 13% — the lowest among Group of Seven countries, and half the rate in the US.

Christian Weedbrook, founder of Toronto-based Xanadu Quantum Technologies Ltd., called the news “fantastic.”

“When I put the lens on being an investor, I see these announcements and think, ‘Well, this is a good country to invest in because of these types of tax announcements,’” he told Canada Investment Summit attendees.

As for Zūm Rails, it continues to grow on both sides of the border.

“Canada shouldn’t measure success by how many companies stay inside its borders,” said Schwartz, the company’s co-founder. “It should measure success by how many Canadian companies become global leaders.”

—With assistance from Christine Dobby.

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