NACO Canada, the national organization for angel investors, is recommending the federal government address the funding gap for early-stage startups with two programs costing $750 million.

The group – officially the National Angel Capital Organization – released a white paper last week with recommendations on how Ottawa should support smaller startups through its $1.75 billion venture capital strategy, announced in last fall’s budget.

Of that total, $1 billion is earmarked for later-stage and institutional-grade investment vehicles. NACO would like the remaining portion to be used for: a $500 million pre-seed and seed matching funds program; and a $250 million early-stage infrastructure funding initiative. (For the purposes of this article, we’ll use the term “early-stage” to describe pre-seed-stage, seed-stage, and Series A funding.)

“Pre-seed and seed investing is hyper-local, high-risk and relationship-driven – exactly the conditions where U.S. capital does not compete,” said NACO in a slide deck accompanying the white paper. “Early-stage investing builds companies that stay and scale from Canada, embedded in Canadian networks, funded by Canadian angels.”

NACO Chief Executive Claudio Rojas will host a national roundtable on the proposals Tuesday, April 7, at noon Atlantic time. You can register here to attend virtually. The matter will also be discussed at the NACO Summit in Ottawa May 5-7. You can find more information on this annual convention here.

The NACO white paper highlights a $323 million annual shortfall in early-stage funding across the country – a cumulative gap expected to exceed $1.6 billion over the next five years. This shortfall impacts the ecosystem throughout the startup lifecycle, says the report, resulting in 50 percent fewer Series B companies funded in Canada than in the U.S. The report also notes that this shortfall is taking place as 68 percent of Canadian founders with new companies are launching their ventures outside Canada.

To mitigate these problems, NACO is advocating that the federal government establish a half-billion-dollar fund to top up investments from approved investors in pre-seed- and seed-stage startups. This matching-fund program would encourage more private investments in young companies and prepare them for Series A funding rounds. NACO proposes that this public fund invest $2 for every dollar of private investment, which it says would assist 500 to 1,000 companies and mobilize $1 billion in private capital over five years.

The second recommendation is the creation of a five-year initiative to stabilize and professionalize Canada's pre-seed and seed ecosystem — angel networks, emerging fund managers, venture studios, and early-stage funds. NACO says the program could target five areas: human capital, diligence and governance, technology and shared infrastructure, angel activation, and regional growth.

“The five-year target is 5,000 companies funded, 10,000 net new active investors onboarded, and a 5x private capital mobilization multiple per public dollar deployed,” said NACO.