Opinion: Trouble looms for Canadian tech companies no matter who the next U.S. president is

Teal Pennebaker is the co-founder of Shallot Communication and an alumna of Amazon and the Obama administration. Thomas Park is lead partner of the BDC Deep Tech Ventures Fund.

For the past decade, the Canadian innovation ecosystem thrived with easy access to Silicon Valley. Canadian founders raised capital from top American investors like A16Z and Eclipse. Cross-border travel was rampant, with Canadians forming U.S.-based teams and taking on sizable research and development projects on both sides of the border. Large American tech companies such as Google, Amazon and Apple acquired Canadian companies at a higher rate than our local corporations.

We’re concerned the Canadian tech sector may soon see that ease of access disappear. The U.S. political landscape has shifted quickly, and no matter which candidate wins, there is concern among many founders and funds that the implications won’t be positive for Canadian startups.

As a result, we risk Canadian startups moving south of the border, opting to headquarter their companies in the U.S. instead of Canada. As we approach the reauthorization of the United States-Mexico-Canada Agreement, these risks could manifest in less than 24 months.

Aspects of the USMCA have serious implications for the tech sector. Take access to talent and ease of travel across the border. Canadian tech workers rely on the TN professional non-immigrant visa to enter and work in the U.S. for extended periods of time. TN visas preclude the need for many tech professionals (for example, scientists) to apply for more difficult-to-obtain work visas.

Canadian tech companies need a U.S. president with a favourable view toward immigration since so many engineers live in both countries – and want the option to go to and from. However, both parties are eschewing immigration.

There’s a fear that the labour market is tightening, even with low unemployment. And both U.S. political parties have embraced “let’s get tough on the border” political rhetoric that could prove problematic for Canadian tech talent that wants to move freely between the two countries.

Another example: Under USMCA, Canadian firms can avoid tariffs on sales of digital goods, restrictions on cross-border data transfers or being required to provide access to source codes as a condition of doing business in the U.S.

Under a new president, especially with Canada now considering various new taxes on American tech companies, much of Canada’s current favourable treatment in the U.S. could go away.

Our innovation ecosystem is not prepared for this risk. According to data from the Canadian Venture Capital and Private Equity Association, venture-capital investments have decreased by nearly 30 per cent between 2022 and 2023, from $10.3-billion to $7.1-billion, a trend unlikely to reverse in 2024. This will mean startups will have fewer resources and less time to adapt.

And, as the Organization for Economic Co-operation and Development continues to point out, with Canadian corporations continuing to trail peer countries in R&D investments, the domestic market is not a viable option for the startups looking for significant revenue growth.

What can be done?

First, the Canadian ecosystem needs to be well-versed on which sections within the USMCA are mission critical for their business and needs to prepare in the event of drastic changes. Many items that founders take for granted may be at risk, such as tariff-free sales of software or frequent visa-free travel by senior management across the border.

Second, our founders and investors need to adapt not only to an environment of capital scarcity and open-source AI platforms, but also to one taking into account tougher access to the U.S. market. There are many examples we can point to abroad where tech companies scaled globally. We need to learn from other ecosystems such as those in Korea, Britain and Israel that have strong U.S. market traction despite not enjoying the same access Canada has.

Finally, Canadian founders should start exploring other markets beyond the U.S. We have hosted dozens of Japanese and Korean conglomerates that are keen to partner with our startups. While the U.S. market may be the biggest tech scene, it’s not the only one.

The postpandemic environment has been tough on the Canadian ecosystem and, after November, it’s likely to become worse. ­­­At least we have time to prepare.