OTTAWA — Nearly two years after the federal government pledged $250 million to help Canadian firms developing valuable IP to get through the pandemic and stave off opportunistic foreign buyers, it has yet to announce any awards from the program. 

Ottawa’s flagship Strategic Innovation Fund (SIF) issues loans or subsidies of $10 million or more to domestic firms for R&D efforts or to scale up operations, as well as the local subsidiaries of multinationals making investments here. The Liberal government first established the program in the March 2017 federal budget, and has since expanded it to more than $17 billion in fixed-term capital, plus $751 million annually. 

During the pandemic, Ottawa used the SIF to finance firms producing personal protective equipment and vaccines. Policymakers also promised more backing for companies innovating in other sectors. The government’s November 2020 fall economic statement added $250 million over five years to the SIF, starting in fiscal 2021–22, to “ensure that innovative, intellectual property-rich firms have the support they need to face the challenges presented by COVID-19.” 

Speaking to the Financial Post shortly after the announcement, then-innovation minister Navdeep Bains described the new capital as a “down payment.” But Ottawa has not yet publicly committed a single dollar from the initiative.  

The federal government “is working on enough projects that would fully subscribe the IP-rich funding, which is seeing high demand,” said Doreen Flynn, spokesperson for Innovation, Science & Economic Development Canada (ISED), which administers the SIF. But the department declined to provide details of the number of term sheets or contribution agreements it has signed with firms, citing commercial confidentiality, even though The Logic asked for aggregate information. 

Flynn maintained that the program is a “current investment priority,” adding that details on some finalized agreements will be made public in the coming weeks.

Canadian innovation-economy executives have long expressed concerns that the country lacks robust IP policy and training for businesses, and about barriers to accessing debt financing using such intangible assets. “Canada has a systemic leaky bucket problem where we’re the inventors for corporate America,” said Chris Wormald, a Kitchener, Ont., investor and former BlackBerry executive. Domestic startups come up with new ideas, but then sell out to foreign acquirers, which in turn sell them the commercialized products and services to consumers and businesses here, he explained.

Canadian companies that do manage to scale and start taking market share from larger incumbents can become targets for threats of IP-based litigation, Wormald said. Unless a smaller firm has patents of its own it can use to counter, it may end up having to pay licensing fees, draining its own coffers of capital meant for R&D and growth, while boosting those of its bigger rival.  

A series of high-profile Canadian scale-ups sold to foreign buyers during the early pandemic. In June 2020, Google subsumed North, a Kitchener-based wearables firm, at a reported cost of US$180 million. Santa Clara, Calif.-headquartered ServiceNow bought Montreal’s Element AI for about US$230 million that November. Each of the acquired firms had raised more in venture funding than their buyers reportedly paid for them. Also in November, Nasdaq bought St. John’s-based Verafin for US$2.75 billion. 

Ottawa signalled it was watching takeover trends. “Sudden declines in valuations” due to COVID-19 could “lead to opportunistic investment behaviour,” Bains warned in an April 2020 statement, promising closer scrutiny of foreign acquirers, particularly in critical-goods supply chains. The new funding for IP-rich firms in the fall economic statement was designed to “support Canadian firms to remain in Canada when faced with foreign acquisition,” noted a January memo prepared by the SIF operations directorate, which The Logic obtained via access-to-information (ATI) request. 

For firms that apply to the stream, ISED assesses their IP portfolio and management capacity, as well as their “strategic growth path, especially as it relates to R&D activities,” said Flynn. But the department said it does not have a rubric that it could share. Companies that receive funding from the stream must receive government approval before granting exclusive licences to any project IP, a term sheet The Logic also obtained via ATI shows.

Similar programs in other countries have been heavily subscribed. Germany launched the Wirtschaftsstabilisierungsfonds in March 2020, allowing the state to acquire equity in firms to block foreign takeovers; the program issued almost €9.65 billion ($13 billion) in financing through its expiry this June. And the U.K.’s startup-focused Future Fund made convertible loans worth £1.14 billion ($2 billion) to 1,190 firms between May 2020 and January 2021, although some government officials have raised concerns about its choices.

In Canada, rapid shifts in market conditions may have dampened demand for the SIF’s IP-rich stream. During the first months of the pandemic, “there was a pause on investment,” said Myron Mallia-Dare, a Toronto-based partner at Miller Thomson focused on technology deals. Venture capital and private equity firms were waiting to see how COVID-19 would affect sales, supply chains and financing. Funds “didn’t know how to value companies, with the uncertainty,” he said.

The investment climate soon improved, however, with venture capital financing hitting record highs in 2021. The speed of the rebound limited the number of cash-strapped startups forced to sell to opportunistic buyers, according to Mallia-Dare. “There wasn’t really enough time for companies [to] become distressed assets,” he said. (Mallia-Dare’s practice did see a rise in both inbound and outbound M&A deals during the pandemic, with Canadian private equity funds shopping in the U.S. and Europe, and vice versa.)

Despite the fundraising recovery, public programs remain attractive to growing Canadian firms. Montreal-headquartered GHGSat applied to the wider SIF program in 2019 seeking financing for a project designed to scale up its constellation of emissions-monitoring satellites and establish analytics centres to commercialize the data they generate. “We want to tackle climate change,” said president Stephane Germain. Adding capacity “is critical to that, because it allows us to monitor more sites more often [and] get more customers to better understand, control and reduce their emissions.”

GHGSat’s application went in before the IP-rich stream was established, but it’s the kind of firm Ottawa had hoped to help, with two granted patents and three applications pending and published. “The fundamental invention is still the most advanced technology of its kind in the world,” said Germain. 

The company faced delays with its SIF application as program officials waited for the program to be recapitalized, and then as higher-priority cases received funding. GHGSat instead raised a US$45-million Series B round from backers including Investissement Québec (IQ), with the two tranches closing in September 2020 and July 2021. That helped pay for its scale-up project, which is now more than halfway complete. 

“We wound up having to sell more shares than [we] would have liked,” said Germain. “If we had won the Strategic Innovation Fund, we probably wouldn’t have had to sell quite as much.”  The federal agency Sustainable Development Technology Canada has provided financial support, awarding the firm $20 million in funding in November 2021. 

“We’re scaling as fast as we can, and we do need to access those next pools of capital,” said Germain, noting that the company has “outgrown” federal financing sources and will have to look elsewhere. “But that doesn’t mean we’re going to leave Canada—quite the opposite. We’ve got good roots here now.”