Why Canadian Entrepreneurship is in Decline and How to Revive It

In Canada, the entrepreneurial landscape faces a crossroads, marked by a shocking decline in rates of entrepreneurship. As entrepreneurs and small business owners are the backbone of the Canadian economy, securing the future of Canadian entrepreneurship should be top of mind for more Canadians.

The Decline of Canadian Entrepreneurship

The decrease in entrepreneurship rates in Canada is a symptom of a broader set of problems. In just over 20 years, our nation’s interest in starting a new business has decreased by more than half. Only 1.3 out of every 1,000 Canadians started a new business in 2022, compared with three out of 1,000 in 2000. This is a staggering decline which will have a profound impact on our future economy if not reversed. Unfortunately, there are a number of factors contributing to this decline.

Strong Labour Market

The most obvious factor is the strong Canadian labour market. A robust job market dissuades potential entrepreneurs from venturing into business ownership, favouring stable employment over entrepreneurial risks. Annual wage growth in Canada from 1992 until 2023 was 2.27%. However, the rate in 2023 is estimated to be anywhere from 3.6% to 4.2%, a significant increase. This is driven by the record-low unemployment rate experienced in January 2023 of 3.9%, which has increased to 5.2% as of November 2023.

Decreasing VC activity

A far more interesting reason for the decrease in entrepreneurship rates is that venture capital deals are declining, impacting access to funding for aspiring entrepreneurs, particularly those with innovative and high-growth potential ideas. Canada’s number of VC deals is declining at a much faster rate than the global average. Globally, Q3 of 2023 saw the number of global funding deals decrease for the sixth consecutive quarter (-11% to Q2), while the dollars invested actually increased, meaning there were fewer but larger deals. In Canada, the number of deals decreased by 28% with the dollars decreased by a staggering 55%. When you marry a strong labour market with a shocking decrease in Canadian VC activity, you can see how anyone thinking about starting a high-growth business is hitting the pause button or looking for greener pastures elsewhere.

Retiring Business Owners

New businesses with one employee or 100 employees count for the same when considering the entrepreneurship rate in Canada. This is why it’s important to consider what is happening in smaller cities where the average-sized business is much smaller and less likely to be looking for VC investments. Small businesses are the economic heart and soul of Canada’s smaller cities. It’s in these cities that we see Canada’s entrepreneurial sphere graying, with a significant portion of business owners retiring or preparing for retirement. This demographic shift threatens the continuity of businesses and innovation. You only have to speak with a city’s economic development department to hear about how retiring business owners do not have a succession plan, can’t find a buyer, and are just closing their doors instead. We are in the midst of a mass entrepreneur exodus.

Entrepreneurship Education Shortfalls

So why are retiring business owners having so much trouble finding their replacement? Along with a strong labour market and reduced VC activity, there are issues with how we are educating the next generation and how we are promoting entrepreneurship as an option for Canadian newcomers. High school and post-secondary curriculum modifications are imperative to instill an entrepreneurial mindset, equipping the next generation with essential business skills. The education system often falls short in preparing students for the realities of entrepreneurship, failing to expose them to the essentials. This lack of expertise affects not only their confidence to start a new company but also their ability to nurture an existing one, creating a growing gap between the skills needed versus the skills taught. A recent BDC survey of 1,250 entrepreneurs identified four distinct groups of skills that are critical for entrepreneurial success, in order:

• Grit and relationship skills
• Leadership and people skills
• Marketing and finance skills
• Operational administration skills

The last two sound like a high school course one could take, but the first two, identified as the most important, are a minor by-product of the school experience at best. They need to be explicitly taught. The BDC entrepreneur survey was extended to new entrepreneurs and aspiring entrepreneurs/students, and all three groups identified managing stress and psychological load as the number one skill they want to improve.

An Untapped Pool of Unemployed, Highly Educated Potential Entrepreneurs

It’s no secret that Canada has significantly increased immigration, with 2022’s number more than doubling those of 2021. However, what is less talked about is the demographics of job vacancies among this group. It’s in the most educated group, with a bachelor’s degree or higher, where we see an unexpected trend and an untapped market of entrepreneurs. In this group, the number of unemployed is almost double the number of job vacancies, signalling an abundance of talent. Canada is not doing enough to encourage and support our highly educated group of immigrants to start new businesses or take over existing businesses.

I recently had a conversation with a local Black leader running a new non-profit focused on supporting Black entrepreneurs. She mentioned how being an entrepreneur in her home country couldn’t be any more different than how it is in Canada. Where she was born, it’s encouraged to hustle along the major roads to make a business out of whatever you can. However, in Canada, you can get arrested for that. Everything a migrant from a country like hers knows about starting a business isn’t applicable in Canada. Newcomers are intimidated by the entrepreneurial landscape and lack confidence in navigating Canada’s regulatory complexity and our various economic development agencies. Canada has a large pool of highly educated, unemployed residents and needs to do a better job of supporting their entrepreneurial aspirations.

Competition With the US for Entrepreneurs

The future of entrepreneurship in Canada is directly connected to the future of entrepreneurship in the United States. The US has recognized that innovation requires investment and is doing significantly more for its founders and entrepreneurs than Canada is. In Canada, innovation ecosystem funding is stagnant, which is a decrease in real dollars, given how much costs have increased in recent years.

Via the CHIPS Act, the US introduced the Regional Technology and Innovation Hubs program, authorizing $10 billion for the program over five years. There are currently 31 designated tech hubs, with five of them right on the US-Canada border. This funding isn’t for areas like New York, Silicon Valley, Dallas, or Chicago but for smaller cities looking to scale up, like Akron, Missoula, Colorado Springs, and Providence. Even on a per capita basis, this type of investment is unheard of in Canada. Anyone thinking of starting a high-potential business in Canada will be looking to the US to see how they can cash in. Canada should be expecting founders and their innovative startups to move South of the border as the $10 billion rolls out.

How to Revive Canadian Entrepreneurship

Like all complex problems, there is no single thing Canada can do to ensure that it is founder-friendly and that it can secure the future of entrepreneurship. Money is great, but money alone won’t help us compete and develop the next generation of entrepreneurs.

Business Ownership Pathways for Newcomers

Canada must start making it easier for newcomers to start or purchase businesses in Canada. The IRCC is making progress here, but it’s not fast enough. The processing wait time for the startup visa program is 37 months. That is unacceptable for a program for “entrepreneurs with the skill and potential to build a business in Canada that is innovative, can create jobs for Canadians, [and] can compete on a global scale.” This timeline must be reduced significantly so Canada can capitalize on the highly educated, unemployed newcomers mentioned earlier. Canada must also start demystifying the entrepreneurship journey for its newcomers, offering targeted and accessible supports for aspiring entrepreneurs.

Canadian Pension Funds Investing in Canadian Entrepreneurship

Canada must stop politely asking Canadian pension funds to invest more in Canada and start legislating it. However, it would be a mistake to pass legislation in isolation. Government must better understand why pension funds are investing abroad and make domestic pension investment more appealing. Furthermore, there needs to be a very small portion of investment dedicated to high-potential Canadian startups. This is low-hanging fruit and easy to do.

Additionally, pensions have shifted their portfolios out of publicly traded stocks, from 23% in 1990 down to 4% today, by moving dollars into real estate, infrastructure, and private loans. This shift does not help our businesses scale up and must be reversed.

Defending IP Abroad

Strengthening intellectual property ownership safeguards innovation, encouraging entrepreneurs to innovate confidently without fear of idea theft or replication. The federal and provincial governments have started investing in IP support for Canadian businesses. This includes IP education, increasing IP capacity in Canada, and developing and implementing IP strategies. What it doesn’t include, though, is clear support for defending IP overseas, where the majority of IP infringement occurs. Canada has many programs to support creating IP, but that doesn’t matter if those businesses can’t afford to enforce it. 

Incentivizing Business Research and Development

Canada shouldn’t focus solely on starting new businesses but on growing existing ones. How can we get a business from five employees to 50 and then 500? Canada needs to create navigable pathways for entrepreneurs to develop and bring new products and services to the market. Encouraging business R&D through incentives promotes innovation as a fundamental business practice, fostering a culture of continuous improvement and creativity. Defending IP abroad is one driver of R&D. Another important driver is tax breaks, like SR&ED, that incentive businesses to invest in their R&D. However, a recent ruling significantly narrowed the definition of eligible expenses for SR&ED and businesses are in for a rude awakening when it starts getting enforced. Anything that is not a market-rate debt instrument, like low-interest loans from federal programs like the Canada Digital Adoption Program, is now considered to be government assistance, and you cannot apply for SR&ED with expenses paid for with government assistance. This ruling will stifle R&D at our most important tech companies and needs to be revisited.

Increasing Tech Adoption for Small Businesses

Addressing the tech adoption gap among small businesses is pivotal. As a whole, Canada is slightly behind the global average in AI adoption. Furthermore, our rate of adoption is driven entirely by large firms, with 20% of them having adopted AI technology while only 5% of small businesses have. When pressed on why they weren’t looking into AI to support business operations, Canadian small businesses said that there were “No business needs identified.” A real-world example of this misguided perception occurred at the 2023 Digital Transformation Conference in Thunder Bay, ON, where business owners chose not to attend the AI Stream because “it didn’t apply to them”. Canada clearly has an education and awareness issue around how profoundly AI will impact our small businesses.

Municipal Investment in Entrepreneurs

Local government needs to step up. This op-ed mentions the federal and provincial governments a lot, and that’s the problem. Amplified municipal support through funding and resources will incubate local entrepreneurial ecosystems, nurturing business growth from the grassroots level. Councils in small cities must start including words like innovation, productivity, and entrepreneurs in their strategic plans.

Canadian Innovation Hubs Competing with US Hubs

The aforementioned CHIPS Act is establishing regional innovation hubs across the US. This is one point where Canada is already ahead, as innovation hubs were established here decades ago. They just aren’t leveraged enough by our political leaders. As a result, these organizations and consortiums have been operating at a grassroots level. It’s time for them to be elevated similarly to the new US hubs. A similar per capita investment will be necessary to stop the flow of entrepreneurs and VC dollars South.

The future of Canadian entrepreneurship hinges on proactive measures to address these challenges. By fostering a supportive ecosystem for entrepreneurs—embracing newcomers, enabling technological integration, safeguarding innovation, and facilitating municipal, provincial, and national support—Canada can secure its entrepreneurial future. Investing now in these strategic solutions will pave the way for a vibrant and resilient entrepreneurial landscape, safeguarding Canada’s position in the global innovation arena.