Endless freeze of federal clean-tech agency SDTC is crushing Canadian startups

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QEA Tech was planning an ambitious international ramp-up of its energy-efficiency technology last October when a controversy in Ottawa pulled its legs out from under it.

To that point, the Markham, Ont.-based company – which uses drones to identify points of energy loss from high-rise buildings – had every reason to believe it was in line for $10-million from the federal agency Sustainable Development Technology Canada. That funding was key to a $25-million scale-up project involving 500 buildings in Canada and internationally, partly because it was validation for property companies with which QEA planned to partner, as well as for other investors.

Then amid allegations of mismanagement, primarily involving conflict-of-interest and human-resources processes as well as some funding decisions that exceeded its mandate, SDTC abruptly had its funding powers suspended by the government.

Seven months later, they still haven’t been restored, and QEA has had to put its plans on hold. Rather than expanding, it’s imposed a hiring freeze and let go three of its 22 employees. And it’s lost face among the project partners, from whom it had worked hard to get letters of intent on which SDTC funding was conditional.

“We got discredited amongst these companies,” Peyvand Melati, QEA’s founder and chief executive officer, said in an interview. “And we had no answer for them.”

There are currently hundreds of similar stories across Canada’s clean-tech sector, many of them worse, even if other entrepreneurs are more reluctant to go on record with them.

SDTC is – or was – the country’s most important government entity for helping those types of companies avoid falling into the so-called valley of death, in which proponents of promising technologies prove unable to get first commercial projects off the ground. Its records show that, cumulatively spending $1.2-billion on grants since 2001, it has helped grow companies that have created 24,500 jobs.

Its role could be more important now than ever, considering vast amounts of money flowing to clean-tech companies in the United States, and increased risk of Canadian entrepreneurs being unable to compete or heading south.

But with Industry Minister François-Philippe Champagne currently offering no target date for restoring its funding powers, after initially saying the aim was the end of 2023, it’s become increasingly evident that Ottawa feels no great urgency to get it moving again.

Instead, despite having already received a report into SDTC that it commissioned from the accounting firm Raymond Chabot Grant Thornton (RCGT) after a whistleblower came forward with the mismanagement allegations, Mr. Champagne’s office now says it’s waiting on multiple other reports – including by law firm McCarthy Tétrault and the Auditor-General – before further decisions.

That lack of movement, combined with the opposition Conservatives calling for SDTC to be abolished altogether, is leading to a feeling of abandonment among developers of new emissions-reducing technologies with potential global reach, even as Ottawa pours many billions of dollars into established industries to advance decarbonization.

“We are doing irreparable damage to our startup community,” said Marty Reed, a partner at Evok Innovations, one of Canada’s leading clean-tech venture-capital firms, “and I fear we’ll lose a generation of great entrepreneurs that will have to move on to alternative careers.”

A membership survey released last month by the Canada Cleantech Alliance, a coalition of smaller industry associations and organizations, backs that up.

Among approximately 200 companies that responded, two-thirds of which said the SDTC suspension was having a direct impact on them, more than half reported their projects were delayed or frozen. More than one-quarter said they had imposed hiring freezes, and nearly 10 per cent each said that they had laid people off and that they had to sell down their equity interests to stay afloat.

Three companies said they’ve already moved to another country, and several others said they’re considering it. (It’s not known which specific companies those were because the survey results were anonymized.)

SDTC’s freeze has taken such a quick toll on the sector because, with the agency’s primary focus on first commercial projects, it supports companies during an extremely vulnerable stage in which the Canadian advantage of a strong domestic research-and-development ecosystem is often ceded to a relatively low-risk investment culture. That’s a danger for all sorts of technology startups, but a particularly big one in clean tech, because projects involve much longer and more capital-intensive build-outs than products such as software.

It’s not just that companies are now trying to survive with fewer public dollars than expected. Despite its alleged management problems, SDTC had a reputation for performing diligent assessments of technological as well as financial risks before providing backing. So, it gave confidence to private investors, some of whom are now pulling back.

And the fact that SDTC is still allowed to honour grant commitments finalized before its suspension (though some of those are delayed) doesn’t help, in many cases. SDTC’s process normally involves a sort of conditional grant approval, dependent on matching private capital, which companies often line up on the basis of the agency being effectively on board already. Hence the sort of awkward situation Mr. Melati described, in which companies have to explain to investors or partners why the public funding they said was imminent has fallen through.

Even some members of the clean-tech sector frustrated by Ottawa’s handling of the situation acknowledge that some of the responsibility rests with the agency itself. The reported mistakes – including RCGT’s finding that $38-million in COVID-19 emergency support payments were provided to all companies in SDTC’s portfolio, among them those connected to members of the agency’s board, without due consideration of whether that fit within the agency’s mandate – were serious.

But particularly since both chief executive officer Leah Lawrence and board chair Annette Verschuren resigned in November, there has been much puzzlement about why SDTC hasn’t been able to swiftly ramp up again under new management (or at least interim CEO Ziyad Rahme), with stronger conflict-of-interest policies and other basic checks. Ordinarily, when controversy hits a federal agency or department, it doesn’t indefinitely stop operating.

A few factors could be playing into it remaining in limbo.

One is that Mr. Champagne may have backed himself into a corner by taking the line following RCGT’s investigation that he would wait on additional reports, without having control over their timing. Contacted by The Globe and Mail, neither the Auditor-General’s office nor McCarthy Tétrault (which is looking specifically into alleged human-resources problems, such as termination policies) provided any clarity on when their reports will be ready.

A second possible factor is the political environment. The Conservatives, despite having overseen SDTC when they were last in office (and when Ms. Lawrence was appointed CEO), are now branding the agency a “Liberal green slush fund” while saying they’d get rid of it. Already playing defence on many other fronts, the government might be reluctant to avoid breathing fresh life into the controversy.

Underlying that lack of political incentive to move swiftly, or keep SDTC going at all, is the reality that early-stage clean-tech is not a powerful lobby in Ottawa.

That owes partly to preprofit companies not having resources to fund big industry associations. When the modestly sized Cleantech Alliance released its survey last month, along with a letter to Parliament’s standing committee on industry and technology pleading for SDTC to be restored, hardly anyone seemed to notice.

Whether it should require much intervention for politicians to recognize the damage of leaving hundreds of promising clean-tech startups twisting in the wind – even as the Liberals’ economic strategy rests heavily on seizing competitive opportunities from decarbonization, and the Conservatives say their approach to climate change would involve “technology not taxes” – is a different matter.

Some of the companies may nevertheless prove resilient, if they have enough experience and adaptability.

In the interview, Mr. Melati, who has previously led other early-stage companies, said that after QEA modified its scale-up plans this winter, it’s begun to rebuild its partner relationships and is confident about moving forward more slowly.

He also said that his company has no plans to move out of Canada as of now. But he hinted at flight becoming a growing danger for the sector, as the situation drags on.

“The gap between the startups in Canada and the U.S. is much larger now,” he said. “We’re going backward.”