Why U.S. investors are turning to Canada – and how the flywheel is  already at work in Quebec

As policy tailwinds fall away in the States, Canadian currency becomes increasingly attractive, and valuations climb, U.S. climate tech investors are turning to Canada for deal flow.

Not just for cheaper valuations and policy changes, but also to tap into the potential in Canada’s climate tech flywheel.

Canada’s climate tech flywheel

Canada’s climate tech ecosystem is built around a flywheel that brings together structural advantages → policy → talent → capital → markets.

Versions of this flow drive tech innovation around the world, but what makes Canada’s climate tech ecosystem distinct is the way our resource base, policy structures, technical talent, and capital reinforce one another.

Natural resources – abundant forests, agricultural land, coastlines, hydro, and critical minerals – create structural advantages and opportunities to deploy clean technologies in major industries.

Policy sets the rules of the game: Canada’s industrial carbon pricing system creates an overarching incentive for low-carbon investment, combined with compliance regulations on methane or clean fuels, incentives like Clean Economy ITCs, and programs like NRC IRAP or NRCan’s Energy Innovation Program.

Talent sees the opportunities and markets that policy shapes, and builds new solutions. Canada is home to globally-recognized universities and research institutions, and Toronto-Waterloo, Montreal and Vancouver rank in the top startup ecosystems.

Capital backs talent at the earlier stage (especially through access to grants, non-dilutive funding, subsidized research centers and infrastructure), providing the fuel to turn ideas into startups.

Canada punches above its weight on climate tech, ranking third globally – behind only the U.S. and China and raising almost $1.3B in venture funding. But the domestic capital pool remains shallower and access to funding is a recurring challenge.

It’s not perfect, but the building blocks are there for Canada to be a strong climate tech contender.

Quebec’s ecosystem at work

Quebec illustrates what a functioning climate-industrial strategy can look like with provincial policy, infrastructure, and finance pulling in the same direction.

Climate x Industrial Policy: Quebec treats climate as part of its industrial strategy, leveraging its low-carbon, low-cost grid (99% powered by hydro and wind) to give local companies an advantage in low-carbon manufacturing, materials, and electrification.

Linked to California’s cap-and-trade system, Quebec’s carbon market covers 85% of industrial emissions, creating a financial incentive to decarbonize while funding Quebec’s 2030 Plan for a Green Economy – a $10B initiative to electrify transport, reduce industrial emissions, and decarbonize buildings.

The Plan also backs climate innovation with non-dilutive funding through the Technoclimat program and ecosystem support via Cycle Momentum, which has helped over 145 startups over the last 10 years.

This isn’t a nice-to-have set of policies unattached from the rest of government policy or the economy. There’s an explicit link between climate action and economic success.

Talent: Quebec is home to some of the country’s top universities and research centres, and the province is capitalizing on it with innovation zones that make it possible for startups to leverage expertise across the value chain as they design for scale-up:

• Energy Transition Valley Zone – focused on clean energy, EVs and decarbonization technologies, and partnered with Cycle Momentum and the Lab2Startup Consortium.
• Technum – focused on next-gen semiconductor manufacturing, microsystems and photonics, anchored by global players like IBM and Teledyne Dalsa.

Montreal is also a powerhouse in AI with world-class research groups like Mila.

Capital: Funds spanning pre-seed to growth stages have local footprints in Quebec.

• Cycle Momentum’s Origo matching program leverages a network of 90 partner funds to support pre-seed and seed stage startups, while the Lab-to-Startup program in partnership with 2 Degrés accelerates IP transfer to create new climate tech startups.
• Venture studios like Diagram, TandemLaunch and Hard Climate focus on venture creation, commercializing IP and pre-seed.
• Seed stage investors like BoxOne Ventures and climate-focused funds like Cycle H2O in water tech provide early capital and strategic guidance to help startups move from proof-of-concept to market entry.
• Experienced growth stage climate investors like Cycle Capital and MKB bring deep expertise in scaling climate-focused technologies. Cycle Capital alone deploys over $350M across North America and Europe through its two active growth-stage funds.

The Quebec ecosystem complements this with institutional support and climate focus from Fonds de solidarité FTQ, Fondaction and Desjardins Capital, and the new Fonds Impulsion from Investissement Québec.

Quebec shows what’s possible when the flywheel is aligned. But there’s more work to be done to make the gears catch and the flywheel hum.

Building the first crucial steps

Great ideas and strong R&D aren’t enough on their own. Early stage capital and commercialization support make the flywheel spin faster. But pre-seed and seed activity is slowing and deal size is declining. Even with a supportive policy environment, Quebec is under-represented in new climate company formation – 17% vs 22% of population.

In my conversations with Cycle Momentum, we hit on two key opportunities:

Venture formation

Venture studios address the cold-start problem for regional economies: investors don’t see enough investable startups so they back off, and the lack of early capital discourages founders from starting new ventures.

Studios can seed the pipeline, working hands-on with promising founders to get new ventures off the ground and giving investors concrete opportunities to engage with.

Canada has more than 23 venture studios, but just a handful focused on climate tech. More efforts at this stage could increase the pipeline of new ventures.

Early-stage bench depth

As local ecosystems are seeded with new ventures, access to capital becomes the next hurdle.

Rounds under $5M are mostly financed by Canadian investors (according to Pitchbook, 28% of climate tech investments in Quebec are from local investors, 24% elsewhere in Canada, and 47% internationally), and international investors are only getting in at more advanced stages.

Cycle Momentum is taking a networked approach to solve this problem. They have put together an investor community, the Circle of Partner Funds, representing 90+ investors interested in dealflow from the region, including VCs across Canada and the U.S. like Active Impact Investments, Nadarra Ventures and Clean Energy Ventures, as well as corporate VCs like BMWi Ventures, Dow, and BASF.

Closing this early stage gap doesn’t require reinventing the whole system. It means scaling what works: venture studios to build teams around breakthrough research, building strong startups that have been de-risked through venture building processes (go-to-market, cofounder team creation and initial funding) and creating networks to draw investors into early-stage deals.