Canada’s Innovation Policy: Lessons from the US SBIR Lapse to Protect Domestic IP

In October 2025, the US Congress failed to renew funding for the Small Business Innovation Research (SBIR) program. One of the cornerstones of American technological dominance since 1982, the SBIR provides risk-tolerant public grant funding for pre-revenue startups commercializing innovative technologies. It is a massive economic driver: for its $4B USD annual budget, every $1 spent results in $22-$33 in long-term economic value.

While the SBIR was ultimately reauthorized on March 3, 2026 (albeit with major structural changes), the long-term economic cost of that six-month lapse will be measured in the tens of billions of dollars. It serves as a cautionary tale about the economic damage caused by even a temporary lapse in sound national intellectual property (IP) policy.

The Two Pillars Behind America’s Innovation Success

The historical success of the US approach relies on a two-pillared foundation: patient capital paired with nationally unified IP policy. Where the Bayh-Dole Act provides a legislative framework for how universities manage and commercialize IP arising from publicly funded research, the SBIR provides the risk-tolerant capital to make that commercialization possible. Together, they create a powerful force for retention of domestic IP and attraction of foreign IP, often to Canada’s detriment. While not explicitly focused on defence, this is where much of America’s defence innovation gets started. 

Canada urgently needs to learn from this dual approach. The recently announced Defence Industrial Strategy (DIS) and INDU Committee Report are clear demand signals for emerging technologies. The Canadian government is spending billions on new Canada Research Chairs to attract world-leading researchers. Without a unified policy framework to govern IP, and without patient funding to de-risk the associated technologies, we are simply accelerating the process of feeding our world-class, taxpayer-funded research to other countries.

Fragmented IP Systems Are Undermining Canadian Competitiveness

On the policy pillar, Canada’s approach is fragmented. Since we lack a Bayh-Dole equivalent to guide universities in managing IP, every institution in the country has a different IP policy. This creates unnecessary friction in turning research into socioeconomic impact. The digital economy complicates things further.

Unlike inventions that can be protected through patents, the data underpinning modern digital innovation, including training data for AI, relies on trade secrecy for protection. Here, too, Canada lags.

While the US and most other nations have nationally unified trade secret legislation,Canada manages trade secrets at the provincial level. Together, these fragmented IP policy regimes put Canadian data and emerging technologies at risk and contribute to our stagnant economic performance.

We must recognize that unifying trade secret legislation under federal jurisdiction and providing clear national guidance on public research commercialization is fundamental to our economic security. 

The Capital Gap: Why Innovation Funding Isn’t Working

Policy is only half the equation. To be practical, we must consider the capital pillar as well. Here, a long-standing market failure has to date prevented Canada from realizing the value of its public spending on research.

Investing in emerging technology is high-risk, high-reward, and takes years to see results. Venture capital (VC) requires a relatively fast return on investment, precluding its involvement in the earliest stages of bringing technologies from lab to market.

Conversely, pure government funding is vulnerable to political cycles (as the US SBIR lapse proved) and is limited by systemic risk intolerance, often requiring matching funds that pre-revenue startups do not have.

This well-intentioned but counterproductive risk intolerance creates a self-perpetuating cycle: underinvestment in high-risk, high-reward innovation guarantees that we miss the outliers that create most of the long-term value, resulting in aggregate underperformance that then becomes justification for continued underinvestment. The only path forward is to embrace risk as a core element of our innovation capital strategy. 

Why Canada Needs a New Innovation Funding Model

We cannot simply import the American approach. We lack the scale of government demand to make a direct SBIR equivalent effective, and lack the depth of risk-tolerant private capital required for the Bayh-Dole approach.

Canada has already begun working toward a more unified approach to tech transfer. Next, we need a made-in-Canada funding model that shares risk between the public and private sectors, creates distance from political cycles, invests in many pre-revenue companies, and relieves the time pressure to liquidate those investments too early.

An innovative venture philanthropy model pioneered by the UK achieves exactly this. The UK Innovation & Science Seed Fund (UKI2S) uses a not-for-profit structure that makes dilutive investments in university spinouts and recycles returns. It is designed to be self-sustaining and has given rise to a thriving private investment ecosystem in technologies coming out of university research. Companies in its portfolio have gone on to receive £29 of private investment for every £1 invested by the fund, and 78% of its portfolio companies attribute their existence to its early support.

Venture philanthropy can be adapted to Canada to make the risk-tolerant, early-stage investments necessary to secure real socioeconomic benefit from our research strength in areas that align with national priorities, from defence and quantum technologies to agri-food, AI, and semiconductors. As Gordon Harling, CEO of CMC Microsystems, notes: “With the commitment of public sector dollars to emerging technology, the private sector will be able to accelerate commercialization into international markets by startups that remain under Canadian control.”

Building a Unified and Resilient Innovation Economy in Canada

Canada cannot afford continued fragmentation. We must act decisively to secure the full value of our public spending on research while respecting what makes our innovation ecosystem unique. By combining federal trade secret legislation, a unified framework for managing the IP created in the course of publicly funded research, and nationally-scoped venture philanthropy, we can lay the foundation of a resilient, secure, and innovative Canadian economy.