Cuts incoming to Innovative Solutions Canada

Innovation Solutions Canada to receive deep cuts over the next two years

Innovative Solutions Canada is slated to see reductions in spending. Under this program, many government agencies were mandated to spend 1% of their budgets buying solutions to their challenges from Canadian startups, providing a smoother path to procurement for small companies that were otherwise unable to compete with larger firms for government contracts.

The program came up well short of targets: in 2021, spending through ISC targeted just over $100 million per year, but only delivered about one third of that target in actual spend, as many departments missed the 1% target (See Annex A). This target is expected to get cut down to about one third of this level over the next two years, though it is not clear whether this will represent a drop in actual support delivered given the existing gap between program targets and delivery.

Cutting funding to innovation for the sake of balancing a budget is shortsighted. Faced with a stagnating economy and rock-bottom innovation performance among OECD countries, cutting support for the companies that could be part of the solution in the long run is not the way forward. While this move may provide some short term slack in the budget, it does so at the cost of dragging out this period of stagnation.

Procurement is a good way to support Canadian companies in a specific economic context: companies must be in the scaleup phase and actually have a product to sell. In this context a purchase order is preferable to a grant in many cases for the simple reason that it signals confidence by the Canadian government. On the other hand, it is not useful in the early stages of deep tech and for pre-revenue startups that are developing and commercializing valuable intellectual property, since there is a significant delay generation of intellectual property and having a product that is procurable. In these cases, non-dilutive funding mechanisms, including grants and loans, are preferable. It is important to bear in mind the economic context in which spending programs are effective when making related policy decisions.

There are ways that procurement could be rethought to support pre-revenue startup companies, however: by enabling monetization of the IP assets directly. The closest program that exists in Canada currently is BDC’s IP-backed lending program, wherein companies can borrow money from BDC with their IP as collateral. An analogous process should be implemented in the form of non-dilutive funding rather than a loan, repayable only if the company later exports the funded IP. In effect, procurement could be used as another means to retain domestic IP, in line with the patent box currently in discussion.

The cuts are an inauspicious start to the Canadian Council of Innovators “Year of procurement”. I can only hope that when it comes time to revisit procurement and ISC generally as a means to support Canadian innovation that those who are in a position to benefit are consulted in the process, and that some thought is given to how to enable procurement to impact pre-revenue companies in the early stages of building out valuable IP portfolios.