Why do Canadian startups ignore government funding sources?

Despite significant investment, many entrepreneurs aren't using government grants. Their reasons aren’t encouraging

Stressed young man sitting at office desk

(Natalie Faye/Getty)

Canadian entrepreneurs are leaving money on the table: A new study from PricewaterhouseCoopers (PwC) found that close to half of startups aren’t taking advantage of available government funding.

The news is surprising given the significant investment made by at both the federal and provincial levels to spur growth in Canada’s startup scene. Existing initiatives developed by the federal government include the Industrial Research Assistance Program, the Scientific Research and Experimental Development tax credits, the Northleaf Venture Catalyst Fund and the Small Business Job Credit.

But despite the options available to them, 43% of entrepreneurs responded that finding the right investor remains the biggest challenge facing their startup, while more than half said they haven’t accessed government grants.

Credit: Pricewaterhouse Coopers


Instead, nearly three out of four firms that were successful in obtaining funding (the amounts were small, $500,000 or less) sought it from angel investors, family or friends, all typically regarded as easier-going breed of investors, relative to venture capital. (More than half of respondents said they plan to pursue angel funding in their next financing round.)

Some of this is probably due to a lack of awareness. But more likely, the researchers say, it’s because firms would rather secure funding for the first few rounds of financing through faster, more efficient channels in the private sector. The researchers found that startups often don’t feel “big enough” to deal with the hassle and delay that accompanies applying for grants:

Early stage companies in particular often try to spend very little money—and may not feel it’s worth the time and cost involved in applying for funding or submit SR&ED [the Scientific Research and Experimental Development tax credit] claims for what they see as modest expenditures.

Government programs might also be suffering from a bit of an image problem—governments are perceived to be more in the business of saving losers than picking winners, so the saying goes—but the reality is that agencies don’t “simply approve grants and loans for every firm that asks.” In truth, applying for grants requires a significant investment of time and preparation. The recommendation from PwC is that entrepreneurs treat the process as if they were approaching private investors:

Firms need to develop their networks within agencies and funding bodies, build key relationships and deliver a compelling, persuasive argument for why their idea and business deserves government support. Those founders and entrepreneurs who have invested their time to build relationships well before the “ask” are the ones who typically succeed.

Another interesting statistic in the study is that 44% of startups turn to American VCs to get their companies funded. Meaning that despite our efforts to foster them in Canada, some our most enterprising entrepreneurs are heading for the exits.