Silicon Valley

-based

startup

accelerator

Y Combinator LLC

’s recent decision to no longer back companies registered in Canada has worried some in the tech industry, but many investors say the impact will not be as bad as feared.

“It adds friction, but it’s not catastrophic for Canada’s startup ecosystem,” said Thomas Park, chief investment officer at InBC Investment Corp., who previously led the deep tech fund at Business Development Bank of Canada. “We can’t stop those startups who were already going to go (to Silicon Valley) anyway.”

But he said it should serve as a “wake-up call” for Canada to be more intentional in strengthening the tech ecosystem to better support startups, founders and investors.

John Ruffolo, co-founder of Maverix Private Equity and vice-chair of the Council of Canadian Innovators, said on LinkedIn that “every Canadian success story (is) domiciled in Canada with a Canadian parent. Almost all the greatest outcomes in Canada never went to YC (Y Combinator) either. This is not a slight at YC nor a disservice to those Canadian companies that went to YC. I still think it is a worthy program, but it is not required to attain success.”

Y Combinator removed Canada from its permitted countries of investment in November, as reported by the Logic. Canadian startups will now have to set up their businesses as a subsidiary of a parent company incorporated in the United States, Singapore or the Cayman Islands if they want to apply to the accelerator.

It has backed Canadian companies such as CoLab Software Inc., which makes artificial intelligence (AI) engineering tools, and textile manufacturer Srtx Inc., alongside tech giants like Airbnb Inc., DoorDash Inc. and Reddit Inc.

“We’re not saying Canadians should leave Canada,” Winnipeg-born Garry Tan, who has served as YC’s chief executive since 2023, said in a post on X on Tuesday.

“I love Canada. But don’t let that get in the way of making a huge startup. Where you are incorporated increases your access to capital. That’s it. In YC’s 20-year history, Canadian startups that reincorporated in the U.S. have (two times) the average valuation of those that didn’t. And the ones at unicorn (status) or near it all reincorporated in Delaware.”

YC did not respond to a request for comment.

Others said the move was disappointing since it could push more high-potential startups south, thereby benefiting the United States as the

Donald Trump

administration tries to keep the world dependent on American tech.

The move signals that there are “new rules in America,” Darrell Kopke, a University of British Columbia business professor and executive director of the Creative Destruction Lab’s Vancouver branch, said. “There’s obviously geopolitical tension (between Canada and the U.S.). Why should Singapore stay on the list and not Canada?”

Making it into YC unlocks prestige and opportunities for startups, but Kopke said the sentiment toward the U.S. might be starting to shift.

“You can’t ignore geopolitical and macroeconomic issues happening in America that may not lend to people (wanting to move) down south,” he said, adding that there are now major initiatives being introduced by the federal government aimed at keeping high-potential companies and talent in Canada.

Ruffolo said that U.S. venture capitalists (VCs) have historically encouraged Canadian companies to incorporate in Delaware in order to dodge a withholding tax under the Canadian Income Tax Act. But since Canada changed the law in 2010, “the problem was eliminated and the top U.S. VCs today know it doesn’t matter.”

Canadian companies that incorporate in the U.S. will incur “material downsides” by missing out on Canadian benefits such as the Scientific Research and Experimental Development (SR&ED) tax credit, said Scott Stevenson, cofounder and chief executive of Dialog Enterprises Inc. (Spellbook), which makes artificial intelligence-powered legal software.

“SR&ED is especially helpful for Canadian deep tech. There are corporate structures that can enable a U.S. entity to open a Canadian subsidiary, but to my understanding this only allows partial access to SR&ED,” he said. “After pitching over 100 investors, no U.S. VC has ever raised being a Canadian entity as a concern. Ten years ago, you would hear about it coming up, but not anymore in my circles.”

Still, many investors and analysts called YC’s decision unsurprising and one likely driven by practical considerations.

Only 165 of YC’s 6,204 investments are Canadian, according to Crunchbase Inc. data.

Charles Plant, a startup adviser, said Canada’s small contribution to YC’s portfolio likely contributed to its decision to axe the country from its list of accepted countries.

Citing Crunchbase data, he said none of YC’s Canadian investments have gone public, while only 20 have been acquired and 14 have reached Series B financing or beyond.

YC also works with a large number of companies, so it probably tightened its list of eligible countries to help streamline its legal and financial processes, Patrick Lor, managing partner at Montreal-based

venture-capital

firm Panache Ventures, said.

Lor said Canadian startups still fundamentally rely on the U.S. and other international markets as they scale, so the accelerator’s decision will likely prompt Canadian startups to begin looking at their legal structures earlier.

Another industry person, who declined to be named due to sensitivities around the topic, had a similar take.

“This is a simple matter of operational efficiency,” he said. “It’s touchy for Canadians right now. But the cost for an accelerator to invest in foreign companies is not negligible. You have legal costs at the time of investment and on an ongoing basis. From the perspective of YC, they are incurring costs for the companies they know aren’t going to be winners, but still have to deal with annual tax and legal implications.”

The move aligns with YC’s belief that the companies it invests in should stay in San Francisco, the investor said.

“They’ve been overt about that,” he said.

YC’s move comes at a time when the Canadian VC market is on a decline. Canadian VC funds raised $2.1 billion from limited partners in 2025, the lowest amount raised since 2016, according to a January report by RBCx, Royal Bank of Canada’s

tech banking and innovation arm.

Canadian companies raised $2.9 billion in venture capital in the first half of 2025, a 26 per cent drop from a year earlier and the lowest level recorded for the period in five years, according to Canadian Venture Capital Association data.

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