How to stop a global downturn from stalling Canada’s high-tech engine

The last time inflation was this high, China was the 10th largest economy in the world, the New York Islanders were a Stanley Cup dynasty and Mark Zuckerberg was three years from birth.

Anyone who actually remembers those times and the recession caused by the combination of stubborn inflation and rising interest rates is now over 55. We’ve had recessions since then, but we’ve also had a steady wave of technological innovation, expanding world trade with historically low central bank interest rates and low inflation to weather the storm.

But today we live in a different world. A global pandemic that will not go away; Supply chain chaos shaking the economy and a bloody war in Europe that could become something we’d rather not think about. With a global slowdown looming, the pressure is on policymakers to manage the volatility and find the right response.

One thing Canada didn’t have when we were last hit by multiple inflationary forces was a thriving innovation sector fueled by startups. Tech startups and investments in advanced technologies by established industrial companies form an innovation economy that already accounts for 12 percent of national GDP and 16 percent in Ontario, according to the Innovation Economy Council. In addition, it is growing more than three times faster than any other sector. The innovation economy is key to Canada’s future economic growth.

The most promising startups are led by founders with no safety nets in their prime, and they rely on venture capital in the race to scale their innovations, attract customers and hire talented people. But risk investing has fallen sharply, an unintended consequence of rate hikes as central banks have battled inflation.

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This is a time when we need to ensure the availability of capital for our technology startups. Without venture capital, they have to downsize their operations to keep the lights going. That means no investments in infrastructure, talent, people, processes and systems to support growth; This then means missed opportunities to open up new markets, increase productivity and stay one step ahead of global competitors.

Policymakers need to take surgical measures to address the decline in the availability of venture capital and investments in productive capacity. Choking off capital in this sector now is like stepping on the hose that waters the vegetable garden when you need produce to survive.

The innovation economy is the backbone for Canada’s future economy. But let’s also understand that a capital deduction has implications for the innovation economy that go well beyond the start-up companies themselves. It’s about the impact these companies make when they deliver transformative solutions that create a better future for us all.

Take the cleantech sector. As the world experiences the highest temperatures in recorded history, Canadian innovations in direct air capture and carbon capture and storage are being touted as leading moves to actually remove greenhouse gases from the atmosphere. We cannot afford to see a reset of this and other cleantech developments. And to be clear: Without innovation, there is no path to net-zero emissions. We must take action that maintains the momentum for our cleantech sector and its critical role in tackling climate change.

Canada’s Emission Reduction Plan has set ambitious goals to reduce greenhouse gases by 2030, and the cleantech solutions that can help us meet those goals are now available here. Encouraging large energy consumers to adopt these solutions is not just an economic opportunity, it is an existential necessity.

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The recently announced GHG Offset Credit Regulations can be specifically endorsed by the Canadian Securities Administrators as they produce high quality offsets that can be used towards corporate net zero targets. This small change will boost innovation financing with ESG benefits for investors. An updated offset system could also allow for venture capital investments in cleantech portfolio companies, allowing offset credits to flow back to investors and limited partners in funds investing in innovative cleantech startups.

We should also consider using some of the funds raised through Canada’s Greenhouse Gas Pollution Pricing Act (GGPPA) for programs that support the creation, growth and scale of these cleantech companies. For example, there is a clear opportunity for governments to up their game on cleantech procurement. A one-stop-shop marketplace for cleantech and circular economy innovation would give this sector an immediate boost. These programs are the innovation infrastructure that will provide a recurring launch pad for companies that will show us a path to net zero and create jobs for the future in a multi-trillion-dollar global climate economy.

As for the broader innovation economy, policymakers could consider creating accessible funding schemes to automatically match investments from savvy global investors with the best track records in the world.

We should definitely consider taking a page out of Israel’s playbook: allowing founders who have achieved successful liquidity events to reinvest their proceeds into new innovations and innovators without capital gains taxes within two years of their exit. This creates a cross-generational flywheel of experience and capital that can be invested in subsequent generations of entrepreneurs.

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Given the existing dynamism in our startup community, Canada cannot be without an innovation ecosystem that we have carefully cultivated over the past 20 years into one of the major growth engines for our economy.

Yung Wu is CEO of the MaRS Discovery District, one of the world’s largest innovation hubs.

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