Canada has pledged to champion home-grown innovation, but the newest data show that the venture capital environment for Canadian start-ups is moving in the opposite direction. Domestic investors are writing fewer cheques to Canadian companies at a time when founders say the rhetoric of “build here” isn’t being matched by action.

In the quarter ended September 30 2025, Canadian venture capital firms backed 66 domestic companies—down from 125 the previous quarter and 104 a year earlier, according to analytics from PitchBook. About two-thirds of the deals made by Canadian investors in that period were in non-Canadian companies, placing the share of investments in Canadian firms roughly 3.9 per cent below the average for the same period in 2023-24.

At the seed and pre-seed levels, which are considered the bedrock of the innovation system, the contraction is particularly sharp. The Canadian Venture Capital & Private Equity Association (CVCA) reports that in the first half of 2025 a combined CAD $297 million was deployed across 133 deals—marking a 16 per cent decline in dollars and a 28 per cent drop in deals compared with the same period in 2024.

This pull-back in Canadian funding comes even as federal policy leans into domestic procurement, including a CAD $5 billion “Buy Canadian” initiative tied to defence and construction. It raises the question of why, despite a favourable background, many early-stage companies in Canada are struggling to secure domestic capital or stay put.

One clear consequence of the drop in funding is that start-ups are increasingly looking abroad for growth and capital. Some founders say they are licensing operations overseas or considering manufacturing outside Canada, having encountered hurdles raising rounds at home. Analysts say the decline in early-stage deals threatens the long-term health of the ecosystem: fewer companies will progress to larger rounds, which in turn reduces potential exits and reinvestment in new ventures.

The structural reasons behind the slowdown are both global and domestic. Rising interest rates, inflation and economic uncertainty have dampened risk appetite worldwide. But in Canada the terrain has additional pitfalls: a slower rate of entrepreneurial formation, competition for talent globally and a noted shift in how investors talk about backing Canadian founders regardless of location rather than strictly Canadian firms.

For policy-makers and ecosystem builders in Canada the task ahead is clear: the messaging of prioritizing Canadian innovation must translate into actionable and timely capital, especially at the earliest stages. Without that, the vision of home-grown global champions risks remaining aspirational rather than real.