The Y Combinator Wake-Up Call: Why Canada Must Finally Bet on Itself
By Tarek Sadek – Ontario Hub Lead & Academic Lead, Lab2Market, Toronto Metropolitan University
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The False Reprieve and the Reality by the Numbers
Y Combinator recently announced a reversal of its policy, stating it will continue to invest in Canadian companies without requiring an immediate move to the US. While many in the ecosystem are breathing a sigh of relief, we should not mistake this reprieve for safety.
The fact that a single administrative decision from a Silicon Valley accelerator could send shockwaves through our tech sector is proof of our fragility, not our strength. YC’s decision-making process is designed to work for them—to optimize their returns and logistics—not to safeguard the Canadian economy.
This reversal changes nothing about the fundamental reality: we cannot build a sovereign innovation ecosystem on the shifting sands of foreign policy. When the news first broke that YC might stop investing directly in Canadian companies, it sent a distinct ripple through our tech sector. For years, Canada was one of the few exceptions to YC’s "US-only" preference—a nod to our talent and proximity. Now, we know that this exception is conditional.
It is easy to frame the initial "ban" as a disaster, but the data suggests that the "loss" of our ecosystem’s center of gravity was already well underway. This "silent exit" is visible in the numbers: A 2025 study by Leaders Fund found that only 32.4% of Canadian-led "high-potential" startups founded in 2024 kept their headquarters in Canada—a precipitous drop from approximately 67% in 2019. Furthermore, US investor participation in Canadian seed deals has dropped from roughly 36% to under 28% in just two years.
YC’s policy fluctuations didn't create this exodus; they merely dramatized a reality we have been ignoring. We were already bleeding out our most promising assets to foreign jurisdictions. Whether the door is open or closed today, the need to build our own house—capable of supporting the birth, growth, and retention of our companies—has never been more urgent. We must ensure that the ROI of Canadian innovation benefits Canada.
Naming Reality: The "Rupture" is Here
In his address at Davos last month, Prime Minister Carney was blunt: "The power of the less powerful starts with honesty." He warned that the old rules-based order is fading and that we are in a "rupture, not a transition." He argued that great powers are increasingly retreating into "fortresses," leaving middle powers like Canada with a stark choice: build our own "strategic autonomy" or be left behind.
The volatility of YC’s policy is exactly what that rupture looks like in practice. It is a signal that the era of relying on American institutions to validate and fund our innovation is over. We cannot outsource our ambition to a neighbor that can close—and reopen—its doors on a whim.
The Crisis Catalyst: A History Lesson
We should not view this isolation as a death sentence, but rather as a prerequisite for greatness. There is a persistent myth that Silicon Valley was built solely by hoodies and venture capitalists in coffee shops. That is false.
Silicon Valley was born because the United States was cornered. In 1957, the Soviet Union launched Sputnik, shocking the American establishment. The US realized it was technologically behind and vulnerable. The response was not to wait for the free market to fix it. The response was a massive, desperate mobilization of public resources.
The government created NASA and DARPA, pouring billions into "uninvestable" technologies. But crucially, the crisis did more than just supply capital; it created a market. The government became the first customer and aggressive early adopter of the disruptive inventions emerging from universities and labs. For years, the single biggest customer for early microchips wasn't Apple or Microsoft—it was the US military for the Minuteman missile program. This guaranteed demand de-risked the technology and allowed early-stage companies to scale. The crisis created the Valley. It was the fear of irrelevance that forced the alignment of government, academia, and industry.
Canada is now in its own Sputnik moment. We are being threatened with being cut off from the easy capital that made us complacent. We are cornered. And that is exactly where we need to be to finally build something real.
The Dichotomy of Control
So how do we respond? The Stoics practiced the Dichotomy of Control: separating what we can control (our actions) from what we cannot (external forces).
We cannot control YC’s investment thesis. We cannot control US border policy. We cannot control the "weather" of global venture capital. But we can control the quality of the companies we build. As the visionary architect Buckminster Fuller famously said:
"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."
It is time for Canada to stop lamenting the loss of the old model and start building the new one.
Stepping Up Our Game
1. Government as the De-risking Engine
We need our government to play a more aggressive role in seed funding, but not just as a grant-giver. We need to look at the US Small Business Innovation Research (SBIR) program—"America's Seed Fund"—which deploys roughly $4 billion USD annually to bridge the "valley of death" for high-risk tech.
Canada does not have the equivalent of SBIR. NSERC’s Idea to Innovation (I2I) program invests approximately $7 million CAD per year at this stage, but with funding constraints and multiple priorities, it simply does not have sufficient budget to fill this gap. Canada must do more and dramatically increase funding for NSERC’s I2I program and other supports at this stage.
However, the critical distinction is that the US model often acts as a procurement vehicle. The government acts as a customer, buying the chips and the software, rather than just keeping zombie companies alive on grants. We are trying to win a Formula 1 race with a go-kart budget. Public capital must stop being a safety net and start being a catalyst.
2. Universities as Multipliers
Our universities must leverage their specialized infrastructure not just for academic pursuit, but for commercial survival. This means a radical shift in three areas:
Prioritizing Our Own Industrial Giants: We need to stop taking our homegrown success stories for granted. Leading Canadian companies like Geotab are globally dominant, yet they often find it easier to establish research collaborations with US institutions than with those in their own backyard. This is a failure of agility on our part. We must roll out the red carpet for our own champions, ensuring that when Canadian industry needs deep research, their first call is to a Canadian university.
Accelerating the Spin-off Engine: We must move beyond the "publish or perish" mentality to one of "invent and impact." This requires cultivating an entrepreneurial DNA within our faculties—normalizing the idea that commercialization is a noble and expected outcome of research. However, this shift cannot be achieved through standardized contracts and fast-track IP licensing alone. We must provide the tangible resources and structural support necessary for our brightest minds to balance their duties as researchers and educators with the demanding work of venture creation. We need to make it operationally viable for them to move their inventions out of the lab, recognizing that this is not a distraction from their academic mission but a fulfillment of it. This is how we transform abstract ideas into products and services that strengthen our economy, sustain our planet, and provide healthier, higher standards of living for us and the world.
Bridging the Defense Gap: We need to mirror the US model where universities collaborate with the Department of Defense (DoD) on programs like the NSIN Fellowship or the MURI initiative. These act as powerful de-risking engines for deep tech. By creating similar bridges here, we can turn national challenges into commercial opportunities.
Cultivating a Value-Driven Mindset: Finally, we must fundamentally rethink how we teach entrepreneurship to the next generation. It is not enough to teach our youth how to pitch a deck or chase a quick exit; we must teach them how to identify and solve hard problems. We need to shift the educational focus from "quick wins" and valuation arbitrage to real value creation. Our curriculum must inspire students to build solutions that address genuine human needs—resilience, sustainability, and health—rather than just the next disposable app. By instilling the discipline of long-term thinking and ethical innovation early on, we prepare a generation of founders who are not just looking to sell out, but are committed to building the lasting pillars of our future economy.
Innovation-Based Public Goods
Public goods are commodities or services that every member of a society can use without reducing its availability to all others. Public goods are the lifeblood of a thriving society, a collective commitment to ensuring that progress benefits everyone. It’s about building a future where equity, innovation, and opportunity are not just ideals but realities for all.
Enter the realm of next-generation public goods: these aren’t just bridges and roads of the past; they are dynamic, evolving assets like open-source software, breakthrough health research, and renewable energy technologies that shape our tomorrow. Traditionally, the role of academic institutions has been creating knowledge, conducting research, and driving innovation that eventually will lead to public goods. We believe that the challenges imposed on us by the new transformative technologies call for a new role for our institutions when it comes to public goods.
We believe that academic-led, innovation-based public goods reflect the needs and priorities of the current era. The next era of public goods will need to bring together experts from diverse disciplines—engineering, social sciences, medicine, environmental studies, and more—who can collaborate to address multifaceted issues. Innovation-based public goods often require such cross-disciplinary approaches to create solutions that are holistic and effective. We can offer that.
Finally, both our universities and our government must stop viewing our global connections as passive bonuses and start treating them as strategic assets. We possess immense "soft strategic power" and a uniquely privileged position on the world stage, yet we rarely play these cards effectively. We are now a fully associated member of Horizon Europe, the world's largest research and innovation program, and we sit at the intersection of major global trade agreements. We must aggressively leverage these mechanisms. Universities need to use these frameworks to secure international research partners and funding, while the government must activate our diaspora and alumni networks to channel global capital back home. We have the relationships, the trade infrastructure, and the global goodwill; we simply need the coordinated will to convert this soft power into hard economic gains and market access for our companies.
Why We Need To Work Together
Lab2Market Network’s vision is to champion Canadian research talent, transforming research and ideas into real-world solutions that build a prosperous economy, enhance societal well-being, and secure a sustainable future.
We aren't just saying this; we are doing it. This is why the Lab2Market Network exists. We are evolving into the connective tissue of the national innovation ecosystem, serving all Canadian universities and collaborating with several key stakeholders—from federal agencies to industry leaders and private capital.
We also know it is not just about programs. It is about working closely with our ecosystem partners to adopt global best practices, adapt them to our specific university policies, and connect with practitioners to help overcome the artificial wall between our campuses and the world. Crucially, we bring real data and intellect to this process. By leveraging our on-the-ground insights, we are able to inform necessary policy changes, optimize program designs, and establish rigorous evaluation frameworks that ensure our ecosystem evolves based on evidence, not just theory.
Lab2Market is using the Y Combinator "scare" as a catalyst to deepen and expand this work. We see this moment not as a setback, but as an opportunity to strengthen Canada’s own commercialization pathways. By continuing to scale our programs, partnerships, and national network, we are building a credible, sustainable alternative for founders who want to grow global companies from Canada. Startups should not feel that leaving the country is their only option. Lab2Market is laying the foundation for a more resilient innovation ecosystem, and realizing its full potential will require collective commitment from investors, institutions, industry, and policymakers alike.
The Graduation Requirement
Ultimately, YC’s policy flip-flop is a graduation requirement we didn't know we needed. A mature ecosystem does not rely on foreign accelerators to validate its worth.
This is our opportunity to pivot from a nascent ecosystem—happy just to be invited to the table—to a strong, independent one that sets its own menu. We don't just need to build companies; we need to build our own innovation ecosystem, one defined by the values that make us who we are: inclusivity, humanity, sustainability, and open innovation.
Crucially, we must stop treating our ecosystem like a company that exists to please shareholders, chase "wins," or look for a quick exit. A national ecosystem is not a transaction; it is a foundation. While we absolutely aim to create wealth and return capital to investors, we believe that values and profit are not mutually exclusive. In fact, they are entwined. Real, sustainable value—and long-term human flourishing—can only be built by those who refuse to compromise one for the other.
The safety net is not gone yet, but the signs are on the door. We better learn from this lesson and start building a future on our own terms.