Venture capital is the fuel that powers the entrepreneurial startup companies that drive innovation, define new industries, and disrupt existing ones. While venture capital financed companies used to cluster in suburban tech enclaves like Silicon Valley, venture capital investment and startup activity are taking on an increasingly urban orientation.

Startup City Canada examines venture capital activity in Canada, identifying its leading cities and metros and mapping its urban orientation in the county’s three largest venture capital hubs: Toronto, Vancouver, and Montréal. This report is part of a larger, ongoing research project tracking the urban geography of venture capital and start-up activity.

Canadian startups attracted $1.9 billion in venture capital investments in 2013. While the country has seen steady growth in venture capital activity over the last decade, this figure remains significantly lower than its peak in 2000.

Software is Canada’s leading sector for venture capital investment, attracting over $600 million (30.9 percent) of the national total. It is followed closely by the industrial/energy sector with $530 million (26.9 percent). Together, these two sectors account for more than half of Canada’s total venture investment. They are followed by the financial services ($296 million), biotechnology ($158 million), and media and entertainment ($77 million) sectors. Taken together, these five sectors account for $1.7 billion in venture investment, 85 percent of the nation’s total.

The geography of venture capital investment in Canada is highly concentrated and spiky. Five leading metros — Montréal, Vancouver, Toronto, Ottawa-Gatineau, and Calgary — account for 86 percent of venture investment. Montréal leads with $633 million (32 percent), followed by Vancouver with $380 million (19 percent), and Toronto with $358 million (18 percent).

Venture investment in Canada is overwhelmingly urban, mirroring a broader global shift in venture activity. In the nation’s three largest metros — Toronto, Vancouver, and Montréal — more than three quarters (77 percent) of all venture investment goes to urban areas, mainly in and around downtowns and close to major research universities.

Yet, Canada’s venture capital industry continues to underperform compared to leading centers in the United States and around the world. The typical response has been for government to get into the venture capital business, by setting up or sponsoring venture capital funds in the hopes that increasing the supply of venture capital will lead to more startup activity and, in turn, to greater levels of innovation and economic development. Unfortunately, the research literature and historical track record of such government involvement suggests that this approach is both ineffective and misguided. Spurring more effective venture capital investment and startup activity in Canada requires a continued shift in focus from the supply side to the demand side, from providing venture capital to nurturing the underlying assets that can bolster its rapidly evolving urban innovation and entrepreneurial ecosystems.

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Appendix 1: Top five metros for venture capital investment

*U.S. million dollars