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federal election 2015

Last week, Justin Trudeau announced a three-year plan to pump $900-million dollars into a ‘new innovation agenda.’Paul Chiasson/The Canadian Press

A big-dollar promise by Justin Trudeau to support Canada's innovation economy is turning up the heat on a simmering debate inside Canada's startup community.

At issue is what, if anything, government should be doing to foster the creation of businesses and tech hubs, and whether those efforts should be about creating structures or just providing investment or incentive dollars. And it comes at a time when people on both sides of the issue are questioning whether existing systems are working.

Last week, the Liberal Leader announced a three-year plan to pump $900-million dollars into a "new innovation agenda" during a campaign stop in Winnipeg. The proposal included $200-million a year for technology incubators as well as financing for research facilities and some direct small business funding, with the goal of creating stronger networks between government and academic institutions and entrepreneurs. He also committed $100-million a year for three years to the Industrial Research Assistance Program, known as IRAP, that is designed to connect startups with new technologies.

The plan is proving controversial in the tech sector.

"One of my issues is that announcements such as this can lead to funding for some of the weakest models, while strong independent accelerators can be ignored and ultimately must compete for market perception with well-funded yet misaligned publicly supported 'incubators' with armies of well-intentioned but inexperienced managers and advisers," said Sunil Sharma, co-director of the Toronto branch of Founder institute, a U.S.-based private accelerator that operates in 100 cities. Mr. Sharma says his chapter has helped 24 companies get started, with another 16 posed to join.

His main beef with incubators and accelerators is that they tend to focus on creating expensive physical co-work spaces and often pay tech executives hefty fees to mentor startups, all of which means overhead.

"It takes $2 or $3 to deliver $1 in funding … that's not effective," he said. Mr. Sharma points to for-profit companies creating the same co-work spaces, and groups like his that get startup founders – such as Allen Lau from Wattpad or Michele Romanow of Snapsave and Dragon's Den – to mentor for free.

"In a lot of other areas, Canada's got everything right, low tax rates, engineering talent. Now, we've reached the tipping point for less involvement in government and more private money."

Venture capital investor Christian Lassonde says companies looking for funding first go to the investors who have best track records.

"Venture funds get first stab at the good deals," he said. "Government dollars are only allowed to invest in B players and C players."

But some think Mr. Trudeau's announcement is not only the right move, but that he could go further. Leo Lax, CEO of Ottawa accelerator L-Spark, thinks the Liberals could easily double or triple their cash commitment.

"Some of the VCs will say we have had checkered results. I would say that's true," but he says some other jurisdictions are spending more to nurture their startup institutions. He points to the Canada Accelerator and Incubator Program, a Conservative exercise that picked winners through a selection process and awards $100-million over 5 years. Mr. Lax used CAIP to pay entrepreneurs to help companies gain the business knowledge they need to grow Canadian companies in a sometimes hostile global marketplace.

"They are competing with entrepreneurs who get significantly more money in the United States … my view is I can't fix the money situation, I don't have any levers to do that," said Mr. Lax, who added his model will begin paying off in the next 5 or 10 years. "We need to continue experimenting. We need to try different approaches and, in order to do that, we need low-risk money, i.e. government money, to keep trying."

Some argue that this focus on institutions is entirely wrong, that the money should go directly to investors who are creating companies.

"The really good investors, the guys are getting good results, no government in the world could hire them," said Yuri Navarro, executive director of the National Angel Capital Organization. "You can't pay them enough to work for the government. Just leverage their money and encourage them to take risk that is a better approach."

Mr. Navarro says often the first cheque a startup will see comes from an angel investor, which is why he is in favour of using federal money as a tax credit to boost investments.

His organization tracks 30 networks of investors that provide seed funding, about 1,700 individuals, and says money flowing into startups has boomed in the past 5 years. In the past year, he says, the angels he tracks invested $90-million in 230 companies, up from perhaps $30-million in recent years. The average deal size has also boomed: Where once it was $50,000 or $100,000 cheque, some angel groups can offer $1-million or $5-million investments now.

Mr. Navarro likens the startup ecosystem to a conveyor belt: From idea incubators, to angels, to accelerators, to larger venture funding supports and on. To dump millions into one part of the process, and not the others, could disrupt that cycle.

Even some who support incubators and accelerators say it is time for change.

"There's this feeling overall in the marketplace, where the needs of founders have rapidly changed. Some accelerators have changed and many have failed to adapt. Most of these models are highly dependent of government dollars," said Marcus Daniels, who is the founder and CEO of the private accelerator Highline, and the chairman of the industry group Canadian Acceleration and Business Incubation (CABI). In part, there may not be enough time and data to understand what model works best to foster tech startups. Mr. Daniels points out that the most successful accelerator in Silicon Valley is the 10-year-old Y Combinator, which has graduated hundreds of companies, though its portfolio relies on some of the outsize success like AirBnB. In Canada, some accelerators have been operating for less than three years, and some, such as Kitchener's Communitech Hyperdrive, were shuttered and reborn in other forms in that period.

Mr. Daniels notes the Centre for Digital Entrepreneurship and Economic Performance is ready to issue a nationwide survey on the effectiveness of these hubs, which is widely anticipated in the startup community and is expected to be made public after the election.

Editor's note: An earlier version of this article incorrectly said the Centre for Digital Entrepreneurship and Economic Performance is affiliated with the University of Waterloo. In fact, it is an independent Waterloo-based think tank.