The Decibel - The ‘valley of death’ for Canadian businesses

Episode Date: June 25, 2026

Canadian businesses don’t have an innovation problem – they have a growth funding problem. Small- and medium-sized businesses often find themselves in what’s known as the ‘valley of death’ ��� the crucial time when a business is ready to grow, but can’t access the funding they need to get to the next level. Jameson Berkow reports on capital markets for the Globe. He joins the show to talk about why it’s so hard for Canadian startups to access funding they need to grow, and with a Senate report expected soon, what solutions are being considered. Questions? Comments? Ideas? Email us at [e-mail] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

You know, you talk a lot about these tech businesses, and oftentimes, you know, mostly you're talking about everything exists online. It's either a cloud or, you know, software-related business. But this one, they physically manufacture semiconductor components that are used in AI infrastructure. That's Jameson Burko, the Globe's Capital Markets Reporter. He's talking about a Canadian company called Renovus. What we're talking about here is really like the poster child of the world. the kind of Canadian startups that investors really tend to, at least when they talk to us and talk publicly, they clamor over saying, this is exactly what we want.

You know, they are this really innovative, cutting edge tech right on the, you know, bleeding edge of something really important. But less than one in five of the fundraising dollars that they've gone, they've raised about 160 million U.S. dollars. Less than one in five of those dollars has come from Canadian investors. Today, Renovus has 160 employees and is valued at roughly $1.5 billion U.S. But to get to that point, the company had to make it through what's known as the Valley of Death for Canadian Entrepreneurs. That's the crucial time when a business is just getting off the ground, when sales are starting to pick up, but they need more funding to get to the next level.

In the case of Rinovis, their co-founder, Hamid Arabzada, said he had to go to California to raise the funding they needed to grow. And only after that was he able to come back to his previous sort of seed level, early, early stage investors like Omer's Ventures or the Business Development Bank of Canada and say, look what I got, look at this term sheet, and then they came in. The way actually Hamid put it to me that I thought was really poignant was Canada has a lot of followers. of investors, like they're willing to sort of jump on a bandwagon, but they won't take a leadership role. Canadians have heard a lot over the past year about supporting and investing in homegrown businesses. But while larger companies are getting the lion's share of investment, small and medium-sized businesses, companies that employ fewer than 500 people, are getting left behind. Despite the fact, they create a lot of Canadian jobs.

Jameson has been reporting on this, and a Senate report on the issue is expected soon. Today, he's here to talk about why it's so hard for Canadian startups to access the funding they need to grow and how these problems could actually be solved. I'm Susan Khrinsky-Robatson, sitting in for Cheryl Sutherland, and this is the Decibel from the Globe and Mail. Hi, Jameson. Thanks for joining us. Susan, I'm so happy to be here with you today. So we heard off the top about a Canadian company that has grown quite significantly, but it had to bring in funding from the U.S. in order to do that. How common is that story among Canadian startups?

It is essentially part of the playbook, Susan. It is so common that to hear about a company that didn't have to do that is unusual. It's actually the exception to the rule as opposed to the other way around, which is what I think a lot of people would assume. So, I mean, that is a really illustrative fundamental problem in this country when we talk about, you know, increasing sovereignty, supporting our businesses. It's one of the reasons why, you know, when we look at the Blackberries and the wealth simples and the bombardiers and the Shopify's, like they buck the trend of what is normally a process of companies that either don't succeed at all, like they just straight up fail, which, you know, happens all over the world, but more often in Canada than in other developed countries. And the alternative is even if they succeed, they kind of trundle along in this path of, you know, not quite failing, not quite succeeding, this sort of middle of the road. I'm hesitant to use the term mediocrity because I don't want to, you know, be putting these businesses down. These are, you know, hardworking, doing everything they can businesses, but they simply lack the resources to scale and compete globally. And the Organization for Economic Cooperation and Development or OACD, they actually track this, right? Where does Canada fall among developed countries?

Way down in the bottom, actually. You have to bear in mind that they track dozens of countries and compare them all. And Canada is actually third from the bottom in terms of the proportion of corporate loans that go to small and medium-sized businesses. So not only are they getting less loans, but then on the flip side, Canada is near the top in terms of the average interest rate that small and medium-sized businesses are having to pay. So Jim Ball Silly, the former co-CEOO of BlackBerry, he actually submitted this testimony to the Senate. And, you know, the guy clearly has a way with words. And the way he sums it up was Canadian startups are not just underbanked. They're also being

overcharged. So it's this one-two punch that, you know, both of these factors really holding these businesses back from growth. And so let's step back for a second. Why does this matter? How important are small and medium-sized businesses to the Canadian economy? Well, it's almost difficult to overstate the importance, Susan. I mean, they account for nearly two-thirds of everybody employed in the private sector in this country. So, you know, stripping out public servants, health care professionals, people who work in education. And yeah, you get something in the neighborhood of, I think the CFIB said it's 64% of all people employed in the private sector, something like 98% of all Canadian businesses are small and medium-sized enterprises. So it's,

we're talking about the whole economy here, frankly, and not just the whole economy, but it's also where growth comes from, right? The companies that are already big, certainly they do get bigger and they do contribute to economic growth, but where you really get that engine of growth is from the companies that start. with no employees and grow to two employees and five employees and 10 employees in 2030, 40, and so on. Those are the ones that really increase our national standard of living and our national stature around the world. Okay.

So let's talk through an example here to get a sense of the landscape. So let's say I'm one of these companies. I'm an entrepreneur. I've started a business selling, let's say, cute looking shoes that women can actually walk in. They're super popular here. I think I could have a lot of success if I just opened up my e-commerce store to other countries, right? But I need money to scale up my production to do that. What funding options do I have right now in Canada?

So I'm going to answer that in kind of a backwards way because if you were in a different country, if you were in the U.S. or somewhere in the EU or various other developed markets around the world, you go to a bank, probably a specialized bank that specializes in small and medium-sized enterprise lending. And they would give you a loan and you would use that money to, you don't buy inventory, build super cool, you know, shoe manufacturing, what have you, maybe have money to spend on marketing to really drive sales better, stronger. In Canada, more often than not, you would go to a Canadian bank. They would say, you don't have profitability yet.

You need to be profitable for a year or you need to at least be break-even. And you as the entrepreneur might come back to them and say, well, but this is what the money is for. The money is so that I can become profitable. And it becomes this endlessly frustrating. And I've heard it from dozens of entrepreneurs, not just researching this story, but in the 20 years that I've been in this business of, you know, but I need it. But you can't have it. And going back and forth until, you know, even if they do get funding eventually, months or even a year or even multiple years have passed. And, you know, the competitive opportunity, that window that was open for them at the time,

odds are it's closed at that point. And investors are often the same way. They're either looking for a really small company to give seed capital to, to get them off the ground, or it's the big institutions, right, like the big pension funds, and they want to cut 50, 60, 70, up to, you know, 200, 500 million dollars checks. They're not interested in helping companies scale in that way. And so that middle place, that's what we're calling the valley of death, that the businesses can't go any further without more funding, but there's not really the funding available. Exactly. And maybe it's more accurate to call it like the, not the valley of death,

but maybe like the valley of near death or the valley of like a coma, right? Because like they don't necessarily die in the valley of death. But if they never make it through, they never manage to scale. They never manage to sort of join the ranks of, you know, what the federal government likes to refer to as national champions in our corporate architecture, where they can really contribute an outsized amount. of benefits to, you know, the entire community that is Canada. Right. It's like a kind of business purgatory, essentially. Exactly. That's actually a really good metaphor for it. You know,

you're sort of just floating in space. And so what's going on in Canada that's different from these other countries? Well, there's a number of things. Our banking system is unique, right, Susan? And that's been a benefit in times of crisis. Like, you know, we famously survived the 2008 crisis, much less scathed than other international markets. but it also means we're much more conservative in the way that we look at things like risk capital. There also just aren't that many options available to Canadian entrepreneurs, even proportionately, right? Like another thing that Jim Ballsilly pointed out in his testimony, he had some written submissions he gave to the Senate as well. He pointed out in the U.S., there's about 5,000 federally insured banks.

In Canada, of course, there's the big six, and there are other banks, but the total is actually less than 100. It's about 83. And if you were to, you know, adjust that proportionately, given the fact that the U.S. is 10 times larger, Canada should actually have something like 500 to 800 banks. So we just have way less competition in the banking sector. There isn't that much attention being paid. And our investors are simply limited by the capacity of what they have available to lend, right? I mean, that's something that came up in the conversations I had with a lot of private. lenders, right? They simply don't have the resources, like they'll have companies coming to them

asking for, you know, collectively $500 million. And these private lenders will say, you know, we'd love to lend you $500 million. We only have 80. So we'd have to, you know, pick and choose because even though we would certainly love to fund all of these, these all meet our criteria. And the only reason we're saying no is because we don't have the money. And that's a shame. It sounds like it's sort of a cultural thing, though, too, right? A conservative attitude. Maybe people need some affirmation before they can come in and support something? That is definitely got to be part of it, Susan, this sort of quintessentially Canadian attitude of, you know, being very, very cautious.

And these can be very positive attributes. But when we're talking about trying to be globally competitive and taking on, you know, these bleeding edge businesses that are absolutely rushing. forward in that, you know, infamous or famous depending on your perspective, you know, move fast and break stuff mentality, that is just not the Canadian cultural status quo. And it serves us well in times of crisis. And we suffer for it in times where we're trying to really stand out globally. So it sounds like this kind of risk aversion leads to a kind of stagnation. what's the consequence of businesses stalling out instead of growing?

Well, there's a few consequences. I mean, primarily when they stall out instead of grow, they get gobbled up, right? Usually, and we've seen this in multiple sectors over multiple, you know, waves of economic ebbs and flows where startups instead of growing and getting to the point where they can, you know, acquire competitors, a competitor in another country scoops them up. And then all of a sudden the benefits, and often, you know, that means the jobs leave the country. And even if they don't, all the profits do, or at least a huge portion of the profits do. And then the economic growth isn't something that is the ultimate benefit of Canada.

Because, you know, we really need to think of the economy as this interconnected, you know, multi-spoke machine where if we can keep more of the benefits, more of the profits, more of the tax revenue, all of a sudden we have more money for better infrastructure. infrastructure, better transit, better schools for our children, better standards of living for everyone in this country. But if those companies stall, they pay less taxes in Canada. They employ less Canadians. And the potential that they were able to offer to the country get stunted. And, you know, it's that old investor expression of leaving money on the table, right? We'll be right back. So Jameson, we know drumming up investment for Canadian businesses is a priority in Ottawa, and we know the Senate has been studying this, and a report is expected soon. What's happening there? Well, I think the frustration that entrepreneurs are hearing is that a lot of the effort that the

government is making right now is on already successful large businesses, like with the major projects office, and partnering with these big companies that, you know, I think it's a pretty strong argument to make that they don't need the help as much as the small and medium-sized enterprise of this country. So what this Senate report is hoping to do, that's part of the reason I wanted to put out this story now, because many of the recommendations that they are considering including in their report are in the story because I, you know, had a very fun time reading transcripts and testimony and written submissions that were given to the Senate over the course of the last, actually almost six months now that they've been sitting and gathering expert testimony

from, you know, not just the Jim Ballsillies of the corporate world, but also various other entrepreneurs and small businesses, several of which are quoted in the story. So they're really getting a big, broad picture of where the frustration lies, what entrepreneurs in this country would like from the federal government. And now, of course, whenever that report does come out, it's going to be up to the government to decide whether they want to listen or not. Right. So there are a number of solutions expected in this report. Let's go through them one by one. Let's start with banking. You spoke about some of the gaps that exist there. How could banks be better suited to help small and medium-sized businesses? Well, the really bold idea there, Susan, is to essentially build new banks that are better equipped and specifically geared towards the small and medium-sized enterprise community. And was interesting. is that other countries already do this. You know, there's several banks in the U.S., but in the

UK there's this great institution in terms of the example that you want to set up called Alika Bank, where, you know, if you look at their About Us section, they say they exclusively serve businesses that have between five and 250 employees. But the idea being that they understand the small business community really well, and that by injecting that level of competition, into the market, you would also get, you know, the big six and the 83 total banks in this country that already exist, you would get them to pay a little more attention because they would see these new banks starting to, you know, make money in this space and be successful. And you would see the follow-on effects of these startups starting to actually grow and then

needing more money. And I am going to preempt a question on that because I can almost hear the audience saying like, oh, yeah, starting a new bank. That's easy. It's not, especially in Canada. It takes many years. But as it happens, actually, one of our very talented colleagues, Stephanie Marota, our banking reporter, has done a very good feature about the regulator in this country, the Office for the Superintendent of Financial Institutions, Peter Rutledge, is making it a priority to speed up the process of starting new banks. So that actually is not so much of like a pipe dream idea as it might have been. in in previous years now that regulators are saying, you know what, maybe we do need more new banks

in this country, and we're going to try and make it easier for that to happen. And so that's the banks. What about other kinds of lenders? You know, pension funds are a major investor in Canadian companies, but why don't they invest more in small and medium-sized enterprises like my fictional shoe business? It's a great question, and it's because your fictional shoe business isn't big enough yet to get a check from a big pension fund, because pension funds, don't, they essentially don't have the resources to pay attention and do diligence for smaller.

And it's funny, like I say, smaller, like $20 million is smaller. But to them, it is. They don't really want to cut a check for less than $200 million. So it's a scale issue for them. They can't really fund small and medium-sized businesses. They, you know, they all point out they have their venture arms and they're trying to do what they can. But probably the most novel idea that was submitted to the Senate was essentially to have, pension funds kick in and then they can cut their two, three, four hundred million

dollar checks to what Jeff Deakin, who is a private lender, who is the managing partner of a private lender that is, you know, very self-explanatorily called the private debt partners. They are trying to put together what he calls the Canada private debt growth fund, where effectively these private lenders, I mentioned earlier, that they only have so much money, available to lend to small and medium-sized enterprises, if, say, Jeff Deacon wanted to lend $20 million to Renovus, which it helped arrange a $20 million financing a couple of years ago for them, they would only need to put up half of their own money for that. And then the other half, they would draw down from this fund that is made up of various

contributions from various pension funds and other large institutional investors. So that, according to his math, it's difficult to double check because it's all very speculative, but he believes that would create between $3 to $5 billion worth of additional funding available specifically for small and medium-sized enterprises that are looking to sort of navigate that valley of death. So specifically addressing that real funding gap and trying to close it. But what are the risks involved with that kind of private debt? I mean, do we want our pension funds, or our retirement money essentially invested in this kind of thing? There is certainly controversy around the whole notion of private debt right now, Susan.

There's been all these retail funds. They're sort of like mutual funds, but they're only available to what are known as accredited investors. So accredited investors, there's a specific definition, but essentially means the wealthy, the people who have money available to make these time of investments. They're trying to gate these funds because what they do is they invest in what's called illiquid assets, illiquid being meaning that it's difficult to. to sell quickly. It's not just like another stock. It'll be something like a shopping mall or an

apartment building, not something you can just go and say, hey, give me this money for that. It takes a long time and often is impossible to do quickly. And so when there's been times in the past that these investors have said, hey, I want to cash out my holdings in this private debt fund, the fund managers will say, well, we don't have the money to give you. So they essentially block investors from cashing out. And there are some funds that have been, where their investors have been trapped for years. So that has certainly colored public opinion and policy opinion of private debt. And rightfully so, that is a risk. What the argument Jeff Deacon would make in response to that is what he is proposing is not for retail investors.

Individual investors would not be investing in this. This is strictly for huge institutions like pension funds. So it's extremely unlikely, effectively. that they would then go to, you know, whoever's managing the fund, whether that's Jeff Deakin or whomever, and say, you know, I need to pull my money out earlier than I expected as, you know, with individuals, that happens really often. They have a job loss or a health crisis or etc., etc. That isn't going to happen to, you know, the Canada pension plan, right? They understand that sort of thing.

And on top of that, he also points out that as opposed to investing in big infrastructure, they're investing in individual businesses with short payment returns. So not only are they making regular interest payments, but they pay the principal back pretty quickly because it's meant to be like a rapid scale kind of investment. So they want to be able to pay it back quickly so they can take out another loan and grow even faster. So that is the sort of distinction that he tries to draw, but I still think it's a valid point, you raise Susan. It is going to be a tough sell, even if it makes it past the Senate review, which is not necessarily guaranteed. But then again, nobody's going to force pension funds to cut checks for anything at the end of the day, right?

So we've talked about a couple potential solutions here, but we haven't talked about taxes yet. Yay, let's talk about taxes. Got to talk about taxes. Oh, yeah. What are the suggestions on that side of things, Jameson? You know, all joking aside, this is sort of the lowest hanging for the government, right? because there's no new ideas. They don't have to build new banks or support new growth funds or anything like that.

They just literally change some lines in legislation. And the National Angel Capital Organization, or NACO is the, for angel investors, it's the national body for them. They submitted a few really interesting ideas where you could, what they call it capital recycling, right? where if you say as an investor or an angel investor or a venture capital fund or what have you, if you invest in a particular type of Canadian business, so it has to be headquartered in Canada or it has to have received a lot of investment from Canadian investors already, then let's say someone invests a million dollars in your shoe business, right? And your shoe business gets crazy successful and they end up cashing out for $100 million.

So that's a huge capital gains tax check that Ottawa would get at that moment, unless goes this suggestion, they take that $100 million windfall and put it into another Canadian startup to help that grow. And then so essentially what they're trying to propose is not, you know, don't pay capital gains on it, but defer the capital gains because, you know, ultimately that investor is going to cash out and not reinvest. and at that point, then they pay capital gains. But by then maybe it's like $5 billion, right?

And, you know, the investor's happy. And then, you know, the government still gets paid. They just have to wait a little longer. But in the interim, all these businesses are created and all these jobs are created and so much more benefit is derived to the country as a whole. So basically creating an incentive to invest in businesses that will help grow the Canadian economy

as opposed to maybe other investments. You're giving people a little carrot there. Exactly. And it doesn't even, it's not even saying the government needs to deny itself any tax revenue. It's just saying, you know, instead of taxing them now, tax them later, and you'll probably actually end up with more tax revenue if everything goes, you know, really well. It doesn't always. Just to end here, Jameson, we're a year and a half into a trade war with the U.S. You know, that's put a renewed focus on our economic sovereignty, right? So what does it tell you that small and medium-sized businesses are still in this position where it's so hard for them to grow? You know, it is this tale as old as time in that these are politicians who naturally like to make

these highfalutin statements about progress and what's been accomplished. And, you know, a lot has been, but there's still so much more work to do. And I think the fact that this gap not only still exists, but seems to be just as wide as it has been throughout the economic history of this country shows that there still is a lot more walking to do than there is talking. And the policy options that Ottawa has available, they are starting to pay attention. They're starting to take advantage of some of those levers and pull them, but there are plenty more levers to pull. And hopefully, you know, this story, this conversation, the Senate report that's coming out, all of that will just help draw attention to what is really going to be a key part of the

strategy of if we actually do want to reinforce our economic sovereignty, then the only way to ensure that happens for the long term is to close the Valley of Death and give Canadian entrepreneurs the growth capital that they need to build these, you know, air quotes, champions that then all of a sudden managed to get the federal government's attention. Jameson, thanks so much for joining us today. I had a really fun time, Susan. Thank you. That was Jameson Burko, the Globe's Capital Markets Reporter.

That's it for today. I'm Susan Krishinsky-Robertson, sitting in for Cheryl Sutherland. Our producers are Madeline White, Rachel Levy McLaughlin and Michal Stein. Our editor is David Crosby, Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thank you for listening.