A small venture capital industry and a lack of engineering grads is hampering Canada’s innovators.

Canada is facing an innovation dilemma that has the power to cripple our economy for decades to come. It is caused by two separate but related problems. First, Canada’s venture capital market is shockingly small. Second, too few Canadians are studying and graduating with degrees in engineering.

Canada’s venture capital industry is far too small

Few of the problems facing Canada will be as devastating to the future of our economy as the relative lack of venture capital investments in Canada. Even though venture capital as an industry has existed for only about three decades, nearly 20 percent of all publicly traded companies in the United States today are backed by venture capital. What’s more, these companies represent 42 percent of all research and development expenditures by public companies.

The numbers are even more dramatic among US companies that have got started since the first venture capital investment in 1979. Of all public companies founded in the US since 1979, 43 percent are backed by venture capital. They employ nearly 40 percent of all employees working for post-1979 public companies and spend over 80 percent of all the dollars going into R&D among their cohort.

Without venture capital backing, Apple, Google, Facebook, Microsoft and Amazon would not exist. In fact, it is hard to imagine the stock market or modern day-to-day life without venture-capital-backed companies.

But Canada is not keeping up. According to Wellington Financial, one of the best-known technology investors in Canada, American venture-capital-backed companies raised US$93.37 per capita in 2006, while in Canada we raised US$45.76 per capita. Nearly a decade later, in 2015, US companies had doubled their performance, raising an average of US$186.23 per capita, while Canadian companies had only inched up to US$49.42.

It is hard to overstate the potentially devastating impact this disparity will have on Canada’s economy in the decade to come. It’s not that Canadian entrepreneurs are not starting successful businesses — but they are doing so in the United States. They are moving their ideas, their talents and their business to markets where venture capital is readily available.

Just look at Getaround, a car-sharing company based in San Francisco that will probably be bigger than all car rental companies combined within the decade. Getaround was founded by three Canadians who left Canada to start their company. And Getaround’s founders are not alone. Year after year, University of Waterloo alumni are among the largest groups of graduates starting companies with backing from Y Combinator, one of Silicon Valley’s most successful venture capital funds. (Full disclosure: my company, Kash, was started by three Canadians. We now have offices in San Francisco, Toronto and Waterloo and are funded by Y Combinator.)

Unfortunately for Canada, the great majority of founders who go to Silicon Valley in search of capital stay in Silicon Valley once they have received it. This means that Canada will lose out on all the innovation, all the employment and all the tax dollars these companies will generate.

Too few Canadians are studying engineering

Even if Canada were somehow able to solve its venture capital gap — no easy task — we would not be out of the woods. Innovation requires both capital and talent, and Canada is losing the race for talent too. Simply put, there are far too many Canadian university students studying the arts and social sciences and not nearly enough studying engineering and related sciences.

Last year, Canadian universities produced around 12,000 new engineering grads. India, by contrast, produced nearly 1.5 million new engineers. India is graduating 3.5 times as many engineering graduates as Canada. Although only about a third of Indian students graduate from high school (while nearly 85 percent of Canadians do), India is doing 10 times better a job than Canada at turning its high school graduates into engineers. And India is not alone. The United Kingdom is producing 3.5 times as many engineers as Canada, using the same measure. The numbers are even more depressing if we look at STEM (science, technology, engineering and math) PhDs. Canada ranks nearly last in the OECD in the proportion of the population graduating with a STEM PhD.

To add insult to injury, governments across Canada are, in effect, paying students to study political science and drama instead of engineering. At Canada’s top schools, engineering students frequently pay significantly more in tuition than those studying the arts. This year at Queen’s University, for example, a computer engineering student will pay $13,476.51 in tuition, whereas a student of art history will pay $7,502.15. At the University of Toronto, a would-be engineer pays $14,300 while a would-be poet pays $6,400.

The problem is made significantly worse by the gender gap in STEM graduating classes. At the University of Waterloo, Canada’s best engineering school, there are twice as many men graduating with engineering degrees as there are women. That there are so few Canadian women graduating with STEM degrees means that there are fewer women innovating in Canadian technology companies and fewer solutions addressing women’s needs are being developed.

There are so few engineers in Canada that if nothing is done about it, by 2019, the Canadian economy will be short 182,000 people to fill technical positions and nearly 13 percent of young Canadians won’t be able to find a job because they will simply be unqualified for the vacancies. These predictions assume that the economy continues to grow at its current rate. A higher growth rate or a faster-than-expected shift to a more digital economy would lead to greater shortages of the kind of workers we will need.

Too few people innovating with too little money

The lack of venture capital funding combined with the lack of engineering talent means that there are too few Canadians building modern businesses. It means that the jobs that should be created in Toronto, Waterloo and Vancouver are instead being created in Beijing, Delhi and San Francisco.

If these trends continue for the next 10 years as they have for the last 10, it is not hard to see that Canada will be much worse off. The economy will cease to grow, a university degree will not be an automatic path to a successful career, and joining the middle class will be more challenging than it’s been in decades.

If we keep going down the same path, with counterproductive subsidies that subsidize funding of arts degrees at the expense of STEM degrees and less focus on the underlying problems, it is likely that a Canadian child born today will have a lower standard of living than his or her parents. Unless we fix Canada’s innovation dilemma, we could be permanently jeopardizing the Canadian dream.

Photo: liou zojan/Shutterstock.com

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