Bracing for impact: Canadian startups grapple with U.S. trade upheaval
In a recent survey of MaRS and Communitech ventures, more than three-quarters of startups report that tariffs will impact their business. As one founder told us, “it’s a very, very challenging situation.”
Whether it’s to access funding, clients or talent, the journey to entrepreneurial success for Canadian tech founders invariably involves a route through the United States. Over the last few months, however, that path has become increasingly precarious as the escalating trade war with our southern neighbour has added steep hurdles for startups hoping to expand, fundraise or land contracts. Our economy is already grappling with the 25 percent tariffs on Canadian steel and aluminum imports to the U.S. that were imposed mid-March; the sweeping additional levies on a range of products set to come into effect on April 2 has the potential to irrevocably shift the trade landscape. For years, Canadian businesses have enjoyed the close proximity to U.S. markets and a relatively undramatic trading relationship, but the past few months have shown the risks of being overly reliant on one trading partner. As an opinion piece recently published by the RBC noted, “few countries have as much at stake as Canada.”
This precarious economic situation is challenging for any business, but startups face particularly daunting obstacles. “It’s critical that Canada finds levers to not only build a stronger domestic market but also incentivize home-grown investment. Forces outside of our control are stifling the growth of some of our most promising startups,” says Grace Lee Reynolds, the CEO of MaRS Discovery District. “If we don’t do something about it, there is a risk that too many of them could disappear.”
Anything but business as usual
The fine details of the proposed tariffs — products affected, rate of duties, even when they will come into effect — have fluctuated by the week (and sometimes by the hour). To better understand how Canadian entrepreneurs are navigating this situation, MaRS and Communitech surveyed startups in their portfolios in February and March and conducted a series of follow-up interviews. More than 175 companies from across the country responded, the reaction is clear: The strained trade relationship with the United States will have devastating impacts on Canada’s innovation ecosystem.
Those ramifications have much to do with our entwined economies: Canada and the U.S. have long been one another’s largest customer. Indeed, 70 percent of those surveyed reported having generated U.S. revenue last year, so it’s no surprise that a majority of startups — more than three-quarters of respondents — expect tariffs to have a direct or indirect impact on their businesses.
Because the proposed tariffs will apply to physical products and devices, it’s been an especially stressful few months for Canadian startups working in hard tech and manufacturing. “We sold $20 million in goods to the U.S. last year,” said one respondent. “So we expect tariffs will impact our sales, as customers will cancel orders or move to a U.S.–based supplier.” Ahead of any tariffs being implemented, slowdowns at the border are delaying shipments.
Many are playing out the potential impacts of worst-case scenarios. One senior leader whose company had been planning a U.S. launch says they now anticipate that American retailers could be reluctant to carry Canadian products. Another respondent noted that because “90 percent of our revenue has historically come from the U.S.,” their company is exploring how it might best pivot.
Even startups that have a large Canadian customer base are feeling the pinch. Montreal-based Sollum Technologies predominantly sells its advanced LED lighting solutions to greenhouses in Canada, but because many of its clients export to the U.S., the company is already noticing reduced demand as buyers defer discretionary spending, such as investing in new equipment. “It’s a completely understandable response, but one that ultimately impacts everyone involved,” he says. Brun is hoping that because Sollum is in the food industry, the company will be somewhat insulated against the worst effects. “You can postpone buying yourself a mountain bike or a car. You can reduce your grocery bill — you might buy three peppers instead of four.” he adds. “But you still need to feed yourself.”
The current uncertainty has led to hesitation in making new investments, notes Sollum CEO Louis Brun. “It’s a completely understandable response, but one that ultimately impacts everyone involved.”
“Uncertainty often proves more damaging than known challenges. If tariffs were already in place, businesses could calculate costs and plan accordingly. But the unknown causes hesitation, putting crucial projects on hold and stalling decisions. This indecision has real, long-term consequences.”
The hard work of scaling a startup could get even harder
In 2025, the core challenges involved in developing a promising idea and successfully bringing it to market haven’t fundamentally changed. The top concerns identified by startup leaders are familiar ones: securing capital, attracting customers and expanding to new markets. However, those issues are notably exacerbated by ongoing tensions with the country’s largest trading partner. Amid the chaos, it’s becoming far more difficult for startups to hit key milestones.
The economic disruption of the past few months cannot be understated. Within its first 60 days, the U.S. administration applied and then suspended universal tariffs on all imports from Canada — twice. Levies were slapped on steel and aluminum, which President Donald Trump threatened to increase before reversing course a few hours later. On March 26, President Trump signed an executive order to impose a 25-percent duty on all imported automobiles and car parts, and also indicated that a number of countries could be hit with escalating tariffs on a range of goods in the coming weeks. Because the details and dates of these potential measures keep changing, it is incredibly difficult to make business decisions. “Since President Trump began threatening to impose a wide range of tariffs on Canadian exports, uncertainty has increased sharply,” Tiff Macklem, the governor of the Bank of Canada said in a recent speech. “Depending on the extent and duration of tariffs, the economic impact could be severe. The uncertainty is already causing harm.”
Liquidity crisis
When two American investors pulled out of a deal due to the threats of tariffs, medical technology company Synaptive was unable to secure enough funding and entered into bankruptcy protection in late March. “The uncertainty around the tariffs leads to uncertainty in the minds of investors,” president and co-founder Cameron Piron recently told the Toronto Star, noting that 125 jobs are now at risk. “We don’t want to be a canary in the coal mine. So we need a wake-up call … to government … both provincial and federal, to say this is real, this is happening.”
With so much in flux, business leaders, corporate partners and investors are working to control what they can to minimize risk. Many are choosing to delay major decisions about purchases, deals, investments and hires, while simultaneously researching alternatives.
The need to find new markets
The vast majority of survey respondents reported that they had planned to generate new revenue from the U.S. in the coming year. Talk of tariffs has eroded trust and scuttled even the best-laid plans: 26 percent of startups said they are reassessing their international expansion strategies.
These findings were echoed in a recent survey conducted by the Canadian Federation of Independent Businesses. Close to half (47 percent) of its members reported that they no longer consider the U.S. a reliable trading partner and a third of them are already taking action — 32 percent are switching to local suppliers or markets.
For startups that are still developing their technology or navigating tenuous growth stages, it can be a struggle to quickly change course and establish new relationships. But with this seismic shift in trade policy, founders must be prepared to re-evaluate strategies and develop a range of possible approaches to various scenarios.
“Our supply chain is currently largely directed in Asia, with our own production facility in Vietnam supplying biomaterials to the footwear industry with distribution into China and Italy. We have been proactively diversifying to source most raw materials closer to where our products are manufactured, reducing the impact of logistics and tariffs in both European and Asian markets. Evoco was built on the ability to diversify and scale our supply chains and the trade war just expedited the process.”
Sollum, for instance, had been gearing up for a year of significant expansion. “We were planning to double our sales, and a big part of that increase would be coming from the U.S.,” says Brun. “So we’re rethinking our go-to market strategies and considering different geographies.” This diversification, he adds, will help ensure the company isn’t overly reliant on a single region’s trade policies. “While this shift demonstrates our resilience,” he says, “it also highlights how tariff tensions force us to divert resources that would otherwise be invested in our domestic market.”
Other changes made by the U.S. government, such as the cuts made by the U.S. Department of Governmental Efficiency, are affecting Canadian startups, particularly those in R&D. One survey respondent noted that their startup had received developmental funding from agencies backed by U.S. federal funds, which have since been put on hold. “We are now rethinking our strategy,” they told us.
In February, Novarc Technologies signed a partnership deal to open new distribution pathways in the U.S.
Vancouver-based Novarc Technologies, which makes AI-powered welding robots, is exploring a range of options. Rather than trying to find a single solution for its entire inventory, it’s taking a more granular approach. It has just signed a partnership deal with Wisconsin welding equipment company Miller Electric Manufacturing, which will open up new distribution pathways for different products. As CEO and co-founder Soroush Karimzadeh explains, although Novarc has a strong U.S. presence that was established to drive sales of the spool-welding robots that make up its traditional product line, the company’s newer tech — its NovAI smart vision and imaging systems — is targeted at a much larger market with new, as-yet-untapped segments. Partnering with Miller allows them to address that gap. “We’re taking an indirect approach for NovAI on cobots where we can leverage Miller Electrics market presence and their channels to reach customers,” Karimzadeh says. “So it’s the same geography, but two different go-to-market strategies for two different product lines.”
Key takeaway: It’s increasingly critical that startups diversify trade partnerships while also developing strategically tailored plans for continued business dealings with U.S. partners.
Funding downswing hampers growth plans
Last year was not exactly a banner year for early-stage funding. The Canadian Venture Capital and Private Equity Association (CVCA) noted that both pre-seed and seed-stage deals decreased precipitously from 2023 levels, with the former dropping to $99 million from $161 million, and the latter to $510 million from $958 million. “This isn’t just about investors taking a ‘wait and see’ approach — it’s a reflection of a shift in fund models,” says Hilary Kilgour, managing partner of Audaxa Ventures and a MaRS advisor. “With lower returns and fewer exits, many VCs have pivoted to focus on later-stage investments where the risk is lower and the path to liquidity is clearer.” In response to this shift, angels, family offices and alternative investors are stepping up to fill the gap, especially in climate and health, and there has been an increase in hybrid models that combine capital with operational support.
While growth-stage ventures fared better in terms of both the tally and the size of deals, their go-to-market plans have been directly affected by the ongoing trade wars. Nearly two-thirds of those surveyed planned to raise funds this year, and many are currently looking for ways to extend their cash runway and rethink business plans.
It’s also taking longer to close funding rounds. “What used to be a three-to-six-month process is now stretching to nine to 12 months in many cases,” says Kilgour.
The current chill in investment is affecting startups’ ability to grow. Polystyvert, a Montreal-based company that has developed technology to recycle polystyrene and ABS from contaminated plastic waste, is facing an uphill battle to build its first commercial plant in Canada. Given the uncertainties over tariffs, the company has faced challenges in generating sufficient pre-purchase support to secure funding. “A lot of people are sitting on their investments and waiting to have more clarity,” says CEO Nathalie Morin. “So it’s not an easy situation, but the fact that we were able to raise funding last year is helping us a lot. In the next couple of months, we’ll know if we can go ahead with our growth stage or if we have to have slower development.”
Even in times of great economic upheaval, the strongest companies often find a way to survive. However, as the CVCA noted in its 2024 report, a sustained lag in early-stage funding “could result in a weaker pipeline for later-stage funding by 2026 and 2027, potentially slowing the growth of high-potential companies.”
“There’s a lot of startups, a lot of founders in my network — my friends — who are caught in this no man’s land. They’re wondering: ‘How will a U.S. VC look at me now?’ Some have manufacturing businesses — will they be viewed less favourably because of these tariffs? For founders who already have the deck stacked up against them, the tariff uncertainty has made it even worse. It’s a very, very challenging situation.”
Many Canadian startups have found it difficult to find a lead investor, particularly in the cleantech space. A MaRS analysis of recent cleantech investment shows that less than half of Canadian hard-tech climate pre-seed and seed rounds were led by domestic firms in 2022. The scarcity of leads on home turf can make it harder for startups to secure an international investor, says Leah Perry, the climate capital lead at MaRS. “But we find that as soon as they do find a lead investor, they’re able to close their round relatively quickly,” she adds. “A lot of VCs are looking to a lead investor not only to set the terms but to really understand the technical and scale-up risks.”
Summit Nanotech closed a U.S.$25.5-million round, led by Vancouver-based Evok Innovations.
There have been some recent bright spots, however, with several startups, including Dispersa, Sprout, Novarc and Summit Nanotech, closing rounds with Canadian lead investors in recent weeks. In the news release announcing her firm’s successful raise, Summit CEO and co-founder Amanda Hall didn’t mince words: “This funding comes at a pivotal time,” she said, noting that the proceeds of the Series B round will help the company transition from the demonstration phase to full-scale commercial design.
For Canadian founders looking to secure investors, thinking globally from the get-go is becoming more and more of an imperative. Kilgour notes that instead of looking stateside for funding, many startups are “seeking capital from diverse markets, including Asia, Japan and Korea, where there’s a growing appetite for innovation in climate and health.”
Michael Gryseels, the co-founder and managing partner of Singapore-based Antares Ventures, has invested in several MaRS startups over the last several years: he was an early investor of Summit Nanotech and has also backed Open Ocean Robotics, Genecis Bioindustries and Ayrton Energy. “It was never a deliberate strategy to invest disproportionately in Canada,” he says. “But the founders here are of higher quality, determination and grit and they have that global mindset early on. They’re refreshingly open to international expansion.”
Key takeaway: The drop in early-stage investment could have ripple effects for Canada’s innovation ecosystem for years to come. Canadian investors — VCs as well as angels and family offices — will play a key role in establishing a strong global signal for startups.
Layoffs as a last resort
Despite all the uncertainty and economic stressors, the majority of those surveyed reported that they aren’t planning to reduce headcount or new hires as a result of tariffs. That sentiment remains consistent even among startups that are currently generating revenue and/or running operations in the U.S. They might delay significant hires “to wait until there’s greater stability,” said one respondent, or they might, as another leader told us, “shift certain employees to the U.S.” if they need to move manufacturing there. But for many startups, their employees are crucial assets. If the company needs to quickly pivot to a new opportunity, success will likely depend on ensuring the necessary talent is in place.
Toronto-based author, investment manager and financial planner Shannon Lee Simmons echoed these sentiments when asked how Canadian businesses might consider preparing for imminent tariffs. “The most prudent thing to do is pump the brakes for a second,” she says. “What can we put off for four weeks without hurting our people and our business?” Simmons recommends avoiding layoffs, scaling back all optional spending and thinking of long-term strategy in short-term increments.
Nathalie Morin of Polystyvert is exploring various scenarios in case her company doesn’t secure the necessary funds for its commercial plan. But whatever happens, she says, staff are a key priority. “We’ll either get the money, build a plant and be well on the way to our growth potential, or we may need to be a startup for a while longer,” she says. “People think jobs are less secure at a startup, but they’re not. Startups are more inclined to keep their people. Share-revenue generating companies, however, will sometimes lay off people as soon as they see a grey cloud in the sky.”
Key takeaway: While startups may delay projects or reconsider new initiatives as they look for ways to preserve cash flow, preserving headcount and avoiding layoffs remain top of mind.
Seizing the opportunity
Although the volatile North American trade landscape is causing tremendous upheaval, this state of flux also presents a rare chance to tackle long-standing issues in Canada’s innovation ecosystem. There is real incentive to help companies secure new trading partners, streamline procurement processes and reduce inter-provincial headaches — all with the aim of making it easier to scale impactful businesses.
MaRS and Communitech asked startups to identify government supports that might mitigate the fallout from this trade dispute. Here are their recommendations:
- Increase funding for business support programs (i.e., SR&ED, IRAP)
- Increase business supports for expansion into non–U.S. markets
- Increase government procurement of Canadian goods and services
- Remove internal trade barriers or accelerate inter-provincial trade
- Provide subsidies to impacted companies
- Export market development for non-U.S. markets, establishing collaborations, strategy development, funding to execute strategy
- Lower business costs (i.e., business taxes, funding or preferential tax treatment for exporters, supply-chain assistance)
- Increase funding of business supports
Canada’s to-do list is long. But there are promising signs that founders, investors, partners and policy-makers are eager to work together to find creative solutions.
Supporting local
One of the more optimistic developments in recent months has been the push to buy Canadian. Sollum’s Louis Brun would like to see that sentiment extend beyond customer choices in the grocery aisles to Canadian businesses supporting other Canadian businesses. “It’s probably the biggest opportunity to mitigate this crisis,” he says. As a serial entrepreneur, Brun has long been frustrated by the tendency of Canadian businesses to favour international products over homegrown ones, often choosing the slightly less expensive option from overseas. Embracing a local-first mindset in procurement, says Brun, will help our economy weather external disruptions more effectively. “I hope this actually makes people realize that while you might need to pay, like, 5 percent more for a fixture from us, you are supporting local,” he says. Domestic manufacturing and distribution, Brun notes, create even more jobs. “The same dollar is being reused again and again.”
3D printers, such as the ones produced by Toronto’s Mosaic Manufacturing, could be an important tool in expanding Canada’s production capacity.
There is also renewed interest in reshoring manufacturing. The impetus to develop local supply chains initially gained currency when the COVID-19 pandemic caused major logistical snags. . But in the wake of the Suez Canal blockage, contending with extreme weather events and various geopolitical conflicts, many business leaders are looking to develop a more robust solution, says Mitch Debora, CEO of Mosaic Manufacturing, which makes a digital system that allows companies to 3D-print machine parts or products on the spot. “When you manufacture locally, there is no cross-border trade. You do build a more resilient economy.” Mosaic has seen a surge of inquiries over the last few months — from both sides of the border. Some customers with factories in Canada and the U.S. that distribute to both countries are looking to set up separate supply chains, one in each region.
As Sollum’s Brun says, “choosing local isn’t just patriotic, it’s a smart economic decision that strengthens our communities and fosters growth.”
The power of procurement
Canada’s public sector plays a vital role as an early buyer of homegrown innovations. As the single-largest purchaser of goods and services, Canada’s three levels of government wield significant influence, spending more than $200 billion each year. This activity represents 13.3 percent of Canada’s GDP and is critical in creating market demand and de-risking new innovations — support that will be vital in the coming months.
“There is always some risk with innovators, but if we don’t have a government that accepts that risk, then we’re always going to be following the lead of other countries.”
In late March, The City of Toronto released a new plan to support Canadian businesses through procurement. “Canadians take care of each other, we have each other’s back,” said Mayor Olivia Chow. Under the proposed terms, only domestic companies will be allowed to bid on competitive contracts worth less than $350,000 for goods and services, and less than $8.8 million for construction. As well, the municipal government announced new supports for the city’s manufacturing sector to make it easier to find local suppliers, and pledged to form new partnerships to help Toronto exporters expand internationally.
Key takeaway: Canadian startups play an essential role in creating high-skilled jobs for the future. By making strategic purchasing decisions, Canadian businesses, governments and organizations can help support workers, build robust supply chains and strengthen the economy.
The way forward
A new normal for trade has yet to be established, and if the last few months are any indication, Canadian founders need to be prepared for anything. But they can’t do it alone. To weather this economic storm, renewed support and guidance from both the public and private sectors will be essential. “It’s imperative that we come together to help find creative solutions and remove barriers,” notes MaRS CEO Grace Lee Reynolds. “We need to remember that we are stronger together.”
Kathryn Hayward, writer
Sarah Liss, editor
Erin Hennessey & Vicky Chang, data and analytics
Sana Maqbool, research support
Andrea Teolis, designer
MaRS Staff