Ideas for Sale: Why IP is a Symptom, Not a Cause, of Canada’s Failure to Scale

Originally produced for the Innovation Economy Council (IEC). The IEC is now the The Conference Board of Canada’s Canadian Centre for the Innovation Economy (CCIE).

Read the detailed report here.

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Here’s a sobering statistic: Three-quarters of the patents held by venture capital-backed Canadian startups involved in recent takeovers are now in foreign hands. Ownership of more than 200 promising young companies, along with a trove of valuable intellectual property, has left the country since 2017, mainly to the U.S., according to research by the Innovation Economy Council. 

Percentage of patent families held by venture-capital-backed Canadian startups involved in recent takeovers by country of new owner. On the surface, the trend suggests an economic disaster in the making. Canada’s startup sector may be in the midst of a destructive hollowing out, as foreign owners grab the upside of our best ideas, often born in publicly funded universities and nurtured with generous tax breaks and government grants. 

And if that’s the case, what can be done about it? 

The takeover trend largely reflects the realities of the venture-capital landscape. Canada is an open and relatively small economy. And much of the money chasing investment opportunities here is foreign, typically American. Successful homegrown companies — particularly in the technology sector — often generate most of their sales outside the country, where the dominant players are based in the U.S., Europe or Asia. In the natural life cycle of startups, prospective acquirers are typically based somewhere else. The good news is that there is scant evidence of a hollowing out of Canada’s startup sector. Just one of the 400 Canadian venture capital-backed startups involved in an M&A since 2017 has failed. 

The steady churn of mergers and acquisitions is generally a healthy process. It’s a vote of confidence in Canada. Foreign buyers are hunting here because a thriving tech ecosystem is producing a steady stream of ventures with good ideas and talented people. Armed with fresh capital and global corporate connections, many of these companies are continuing to grow, hire, pay taxes and innovate — in Canada. 

Even the tech companies that fade or fail often end up spawning new companies and new opportunities. For example, dozens of startups in the Kitchener-Waterloo area are funded, led and staffed by refugees from former local tech superstars, such as BlackBerry and PixStream. The same pattern is repeating in the tech hubs of Toronto, Montreal, Vancouver, Ottawa and elsewhere. 

The real story about foreign takeovers is about much more than a flight of intellectual property. For many companies — particularly software-as-a-service (Saas) companies — patents and IP are often not central to their business. 

What these companies do face are the same challenges that so many startups struggle with in their efforts to scale up and commercialize their innovation. They need financing and the top executive talent who can take a business to the next level. 

The solution is not to put overly strict limits on Canadian IP, even if that innovation is subsidized by governments and universities, argues Krista Jones, who has mentored dozens of startups as vice president of venture services for the Momentum program at MaRS Discovery District. She says that would stifle commercialization. 

We need to help companies get bigger so that we increase the number of Canadian acquirers,” Jones says. “Companies sell out because they see the path to commercialization as way too difficult on their own.” This report explores fresh data on recent mergers and patents, and what this “leakage” of IP suggests about the health of the Canadian technology ecosystem.