Fueling a Nation of Builders - Capital Strategy 052425W2

A Unified Capital Strategy for a Resilient Innovation Economy

FUELING A NATION OF BUILDERS

A Unified Capital Strategy for a Resilient Innovation Economy

Our Vision To transform Canada into the world’s leading innovation economy by mobilizing early-stage risk capital at scale. Our Mission In partnership with our members and champions, our mission is to accelerate the availability and successful investment of angel capital into entrepreneurial ventures, positioning Canada as the premier global destination to launch and scale high-growth companies. By achieving this mission, we help build a more resilient, self-reliant, and prosperous future for all Canadians. Share your insights After reviewing this report, we invite you to share your insights using the feedback form at www.vision2040.ca or emailing us at vision2040@nacocanada.com.

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Fueling a Nation of Builders: A Unified Capital Strategy for a Resilient Innovation Economy

Report | May 26, 2025 | National Angel Capital Organization

Executive Summary Canada’s innovation economy is stalling at the early stages of funding due to fragmented capital supply. The result is a fragile continuum of innovation finance that threatens the long-term competitiveness and economic sovereignty of the country. This report presents an evidence-based framework to address the capital continuum, uniting the perspectives of Canada’s angel and venture capital communities. At the core is a policy recommendation to implement a National Investment Tax Credit (NITC) designed to unlock private capital, build national resilience, and complete Canada’s innovation finance architecture. To guide future policy, this report presents three practical frameworks—Access to Capital, Lifecycle of Capital, and Sustainability of Capital—that clarify how capital is accessed, deployed, and sustained throughout the high-growth company journey. 1. Introduction Canada’s innovation economy is at a crossroads. While the country has made major strides in scaling venture capital—demonstrated by record fund sizes, global LP participation, and the emergence of top-tier firms—the early-stage foundation remains underdeveloped. Without a robust and coordinated capital base, the full potential of our innovation ecosystem will remain unrealized. Addressing these early bottlenecks is essential to ensuring a healthy, investable pipeline for later-stage venture capital and institutional capital. This is a once-in-a-generation opportunity to modernize Canada’s capital infrastructure and position the country for global innovation leadership.

1.1 Addressing Federal-Provincial Fragmentation Current provincial programs, while effective individually, suffer from significant inefficiencies such as inter-provincial investment barriers, suboptimal scale, and inconsistent eligibility criteria. A harmonized federal credit would streamline administration, improve market efficiency, and broaden investment flows nationwide. The lack of harmonization not only limits capital flows but also creates uncertainty for investors and founders. 1.2 Context and Background: Strengthening Canada’s Full Innovation Capital Continuum Canada’s venture capital sector is a remarkable success story and has made significant strides in growing a vibrant innovation economy, supported by landmark initiatives like the Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI). Venture funds play an essential role in scaling high-growth companies, driving economic opportunity, and positioning Canada on the global innovation stage. Enhancing complementary early-stage mechanisms will further cement this success. Canada’s venture capital funds are world-class, led by highly capable general partners with deep domain expertise and proven track records, offering access to globally promising sectors. However, Canadian pension funds, given their large-scale capital pools and approach to fiduciary responsibilities, have historically prioritized established asset classes with predictable returns. Strategic policy incentives designed with institutional capital mandates in mind could unlock greater participation from Canada’s largest pools of capital, bringing scale, stability, and global reach to Canadian innovation. This presents a strategic challenge that straddles both the supply and deployment phases of capital: it underscores the importance of developing policy mechanisms that not only incentivize initial investment into early-stage ventures but also encourage greater participation by Canada’s largest pension funds and other major institutional investors, such as university endowments. Venture capital has scaled impressively in Canada, but to achieve globally competitive outcomes, we must proportionately strengthen the supply of capital. This means increasing the availability of capital at the earliest stages and across the entire innovation funding continuum. Given the urgent need for rapid implementation, a National Investment Tax Credit is the most effective policy lever to achieve a proportional and sustained increase in capital supply on an expedited timeline. This report proposes a unified capital framework for building a resilient, self-reliant innovation economy. It reflects the reality that capital investment is not just a transaction—it is infrastructure, and Canada’s long-term prosperity will be advanced by a more sophisticated understanding of investment capital.

2. Angel Investment as a Leading Indicator for Venture Capital Canada’s innovation economy continues to face persistent challenges in securing sufficient capital at its earliest and most formative stages. In 2024, the country’s angel investment ecosystem demonstrated renewed strength, with $137.3 million deployed across 539 deals—a 19.4% increase in capital and a 30.2% increase in transaction volume over 2023. However, the average deal size decreased by 8% to $254,700, reflecting broader dispersion and investor caution. Despite this rebound, Q1 2025 data from the Canadian Venture Capital and Private Equity Association (CVCA) reveal that pre-seed and seed-stage funding have fallen to their lowest levels since the pandemic. Just 116 VC deals were recorded nationwide, and early-stage capital has declined sharply. The CVCA warns that these trends threaten the strength of Canada’s future innovation pipeline, as early capital is the foundation for later-stage success. While venture capital has grown impressively, its effectiveness is now constrained by gaps in the earlier pipeline. A fragmented funding landscape means that promising companies are struggling to reach Series A readiness, reducing deal flow quality and increasing perceptions of risk for institutional investors. Angel and early-stage capital are not separate from venture capital success—they are its precondition. Canada’s capital policy remains fragmented. In the absence of a federal-level incentive for investing in startups and innovation-driven small businesses, provinces have developed localized approaches. While valuable, these programs are fragmented and inadvertently discourage capital from flowing freely across provinces. As fund managers mature and look to invest nationally, they frequently lose access to these regional incentives, inadvertently disincentivizing scale. A federal National Investment Tax Credit would address this fragmentation by harmonizing incentives, removing capital flow friction, and supporting the free movement of capital across Canada. British Columbia’s Small Business Venture Capital Tax Credit, for example, has successfully extended tax credit eligibility to Venture Capital Corporations and investment funds, enhancing the attractiveness of alternative assets. Programs in New Brunswick, Nova Scotia, and Newfoundland and Labrador provide further evidence of the model’s viability. To drive growth-oriented capital formation, Canada should scale best practices nationally. Canada is falling behind other jurisdictions that have taken decisive action in mobilizing early-stage capital at scale, such as: ● United Kingdom : SEIS and EIS programs complement institutional VC by incentivizing early-stage investors. These tax credit programs have mobilized over £33 billion in private capital, demonstrating the ability of national-level incentives to significantly enhance early-stage funding.

● United States : The QSBS exemption and regional fund strategies drive innovation finance across stages. ● Israel : Public-private co-investment structures ensure seamless capital progression from ideation to scale, complemented by the Law for Encouragement of Knowledge-Intensive Industry (Angel’s Law), which provides targeted tax incentives for early-stage investors. ● Estonia : This relatively small country has outpaced much larger economies and leads Europe in per capita venture capital investment—driven by a zero tax rate on reinvested profits, and a highly networked startup ecosystem.

Canada’s policy framework must evolve to match this ambition.

3. Three Frameworks for a Unified Capital Strategy The Unified Capital Strategy Framework emphasizes the dynamic interplay and mutual reinforcement across three interconnected dimensions essential to fostering a resilient innovation economy: Access to Capital , Lifecycle of Capital , and Sustainability of Capital .

Figure 1: Unified Capital Strategy Framework. Represented through interconnected gears, this visual illustrates how strategic action and targeted policy interventions within any one dimension—whether supporting entrepreneurs through improved capital accessibility, enhancing the flow and effective deployment of investments, or ensuring long-term sustainability via informed investor networks—set in motion synchronized actions across the entire innovation capital continuum. In this way, deliberate enhancements in a single area produce reinforcing effects, collectively strengthening Canada’s capacity to innovate, grow sustainably, and compete globally.

3.1 Access to Capital: Follow the Entrepreneurs ● Availability of Capital : Canadian founders face a significant shortfall in early-stage capital, limiting their runway and competitiveness. ● Pathways to Capital : Funding is highly centralized and fragmented, making it difficult for entrepreneurs outside major hubs or without established networks to connect with capital providers. ● Time to Capital : Delays in capital access misalign with the timing needs of startups, especially in capital-intensive sectors. This also applies to emerging and established VC fund managers, who face long fundraising cycles and limited institutional participation. 3.2 Lifecycle of Capital: Follow the Investments Figure 2: Lifecycle of Capital Framework. This diagram illustrates the interplay between the supply, deployment, and momentum of capital reinvested back into new early-stage investments when capital is returned to investors and entrepreneurs.

● Supply of Capital : There is untapped potential in mobilizing private wealth, family offices, and institutional allocators toward early-stage innovation. A National Investment Tax Credit can unlock this dormant supply. ● Deployment of Capital : Programs like VCCI and VCAP, along with targeted angel supports, channel capital effectively into high-growth firms. Strengthening the supply side makes these deployment tools more impactful. ● Momentum of Capital : Liquidity events and capital recycling are essential. Policies that support secondaries and reinvestment—like capital gains reinvestment deferrals—can reinforce the investment cycle.

3.3 Sustainability of Capital: Follow the Investors ● Locality of Capital : When early-stage investment is local, companies are more likely to stay, grow, and reinvest within the Canadian economy. ● Sophistication of Capital : Investors with strong training, experience, and incentives make better deals, reduce founder burden, and accelerate success. ● Connectivity of Capital : Syndication networks and cross-regional partnerships are underdeveloped. National-scale coordination is needed to ensure risk-sharing and full deal flow coverage. 4. Policy Recommendation: A National Investment Tax Credit We propose the creation of a 30% federal investment tax credit for qualified investments in Canadian-controlled innovation companies. This would: ● De-risk early-stage investments for individuals and institutions ● Drive participation in angel and seed-stage rounds ● Support national investment syndication and increase pan-regional capital flow 4.1 Key Design Elements: ● Eligibility for Canadian-controlled private corporations (CCPCs) engaged in R&D and innovation ● Annual cap to ensure fiscal discipline with room for expansion based on uptake ● Stacking compatibility with provincial programs ● Delivery through CRA with real-time verification and tracking 4.2 Expected National Outcomes Over Five Years: ● Based on British Columbia’s program, where companies generated nearly $3 in tax revenue for every $1 in tax credit, a similar ratio at the national scale could deliver a strong return to the public treasury. ● 35,000–72,000 high-value jobs created . This estimate draws from BC’s actual job creation experience, where companies supported by tax credits added about 2.4 jobs annually per firm. On a federal scale, this would represent a major employment boost. ● 6:1 private-to-public capital mobilization ratio . In BC, every dollar of tax-supported capital drew in about $3.76 of additional private equity and $1.15 in debt. This level of leverage is well within reach based on real-world Canadian experience. While this is based on BC’s historical experience, ongoing monitoring will be needed to ensure similar results nationally.

4.3 Conservative Scenario (0.1% wealth management allocation) Mobilizing just 0.1% of Canada’s approximately $2 trillion in wealth management assets—a figure supported by recent industry estimates and projections—would unlock $2 billion in investment. Based on job creation rates observed in comparable early-stage investment programs, this level of capital deployment could generate an estimated 6,000 to 8,000 new jobs. If this allocation were successfully scaled to a more ambitious 0.5%, Canada could realize substantially greater economic and employment impacts, potentially mobilizing $10 billion in investment and supporting tens of thousands of additional jobs. From a portfolio diversification perspective, a prudent allocation to early-stage Canadian investments typically ranges from 2–5% of an investor’s total assets. By encouraging even a modest 0.1% allocation across Canada’s wealth management industry, the system can efficiently channel significant private capital into high-growth sectors while maintaining sound risk management at the individual investor level. As more investors adopt this approach, the cumulative effect can catalyze transformative growth in Canada’s innovation economy, demonstrating how responsible, diversified investment strategies can scale up to deliver broad national benefits. Ongoing evaluation and adjustment will be important, given the dynamic nature of innovation ecosystems in a highly competitive global environment. 5. International Evidence International evidence from Israel and Estonia highlights the role of strong networks and institutional support in amplifying the impact of capital. International benchmarks underscore the transformative potential of well-designed early-stage capital policies. Israel, for example, mobilized $28,000 in venture capital per capita in 2021—28 times the US average—through a combination of robust public-private co-investment, targeted innovation authority programs, tax incentives for angel investors (Angel’s Law), and strong foreign investor participation. Estonia leads Europe with €1,056 in venture capital invested per capita and VC investment reaching 3.59% of GDP in 2022—figures enabled by its digital government, zero tax on reinvested profits, and a compact, highly networked ecosystem. Boasting more than 1,000 startups per million inhabitants, Estonia has produced an outsized number of €1 billion-plus companies and consistently attracts both local and international capital. The US Qualified Small Business Stock (QSBS) program, which allows investors to exclude up to $10 million in capital gains from federal tax, has significantly increased the attractiveness of early-stage investment and improved after-tax returns for investors. These examples highlight that coordinated, well-designed policy can rapidly transform a nation’s

private capital landscape. Canada risks falling further behind unless it adopts similarly ambitious, coordinated policies. 6. Complementary Measures While this report emphasizes capital supply, it’s crucial to recognize complementary measures that address other dimensions of innovation finance, notably on the demand side. Initiatives such as strategic public procurement play a significant role in helping startups scale, commercialize innovation, and achieve market validation. Additionally, existing government matching fund programs, notably the Venture Capital Catalyst Initiative (VCCI) and Venture Capital Action Plan (VCAP), complement efforts to mobilize private capital. Expanding these successful deployment-focused initiatives to further support pre-seed and seed-stage investment would strengthen the overall capital continuum. Strategic enhancements to established programs, including the Scientific Research and Experimental Development (SR&ED) tax credit and the Strategic Innovation Fund (SIF), represent important complementary mechanisms. Aligning these initiatives more closely with Canada’s innovation-driven sectors would amplify the effectiveness of an NITC by improving the environment into which this newly mobilized private capital flows. Additional capital supply tools—such as Flow-Through Shares (FTS) adapted specifically for startups—could further increase the pool of private capital available, despite potential complexities in implementation and longer timelines. These complementary measures together ensure that the NITC integrates seamlessly into a cohesive ecosystem strategy, significantly enhancing Canada’s innovation financing landscape. Further, existing and proposed mechanisms would be strengthened by addressing increased national coordination, information flow, and market discovery in regional innovation ecosystems. 7. Conclusion Canada must act with boldness and clarity to secure its place in the global innovation economy. Implementing a National Investment Tax Credit is a necessary next step to ensure the sustainability of Canada’s innovation ecosystem. Evidence from provincial programs demonstrates significant fiscal returns, robust job creation, and increased international competitiveness. Canada now has a clear opportunity to strengthen national economic resilience and innovation leadership through immediate, targeted policy action. By strengthening the capital foundation and uniting policy support across the continuum, we can enable a Nation of Builders to emerge—one that is self-reliant, resilient, and globally competitive. The moment for bold leadership is now. Canada’s innovation economy won’t wait—and neither will the intense global competition for economic dominance. Share your insights and feedback using the form provided at www.vision2040.ca or emailing us at vision2040@nacocanada.com.

Appendix 1: International Comparison of Investment Incentives

Jurisdiction

Type of Incentive

Tax Relief/Benefit Level 30% investment tax credit

Eligibility Criteria

Canada

Proposed National Investment Tax Credit (NITC) Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) Qualified Small Business Stock (QSBS) exemption Angel's Law (tax credits for angel investors); Public-Private Co-Investment (Israel Innovation Authority)

Canadian-controlled private corporations (CCPCs) focused on R&D and innovation

United Kingdom

SEIS: 50% tax relief; EIS: 30% tax relief

Early-stage startups, UK resident investors

United States

Exclusion of up to $10 million in

Investments in qualified small businesses; must hold stock for at least 5 years Early-stage R&D/high-tech startups; qualifying private investors and local/international co-investors

capital gains (federal tax)

Israel

Tax credit equal to capital gains tax rate on investment (up to ILS 4 million); matching grants and co-investment structures No tax on reinvested profits

Estonia

Zero corporate tax on reinvested profits

All Estonian businesses reinvesting profits domestically

Appendix 2: References and Additional Resources

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Atomico. (2022). The State of European Tech 2022 . https://stateofeuropeantech.com/2022/

Build Canada. (2025). https://buildcanada.com

Business Development Bank of Canada. (2023). 2022–23 Legislative Review Consultation Paper . https://ised-isde.canada.ca/site/bdc-review/en/consultation-paper-business-development-bank- canada-legislative-review

Business Development Bank of Canada. (2025). BDC Capital Overview . https://www.bdc.ca/en/bdc-capital

Canadian Venture Capital and Private Equity Association. (2010–2025). Annual reports and market overviews . https://intelligence.cvca.ca/reports/

Canadian Venture Capital & Private Equity Association. (2024). Policy & Advocacy . https://www.cvca.ca/advocacy/policy-advocacy/

Council of Canadian Innovators. (2024). A Mandate to Innovate: Policy recommendations for strengthening Canada’s economy through innovation and productivity . https://www.canadianinnovators.org/content/a-mandate-to-innovate Council of Canadian Innovators. (2024). Building Winners: Strategic Procurement in the Age of Innovation . https://www.canadianinnovators.org/content/building-winners-strategic-procurement-in-the-age -of-innovation European Business Angels Network. (2024). Research Reports: Publications on angel investing trends and best practices across Europe . https://www.eban.org/research/ Estonian Startup Database & Startup Estonia. (2024). Ecosystem Statistics and Reports . https://startupestonia.ee/statistics

Hellmann, T. (2010). An evaluation of the venture capital program in British Columbia . https://www.mikevolker.com/Hellmann_Venture_Capital_Report_2010.pdf

Innovation, Science and Economic Development Canada. (2024). Reports on Innovation Policy and Capital Access . https://ised-isde.canada.ca/ Israel Innovation Authority. (2024). Annual Innovation Reports . https://innovationisrael.org.il/en/report/ Ivashina, V., & Lerner, J. (2019). Patient capital: The challenges and promises of long-term investing . Princeton University Press. https://press.princeton.edu/books/hardcover/9780691186733/patient-capital

Mason, C. (2024). Business angel research and case studies . University of Glasgow. https://www.gla.ac.uk/schools/business/staff/colinmason/

Mason, C. (2024). Research excellence case study: High-growth firms and angel investing . University of Glasgow. https://www.gla.ac.uk/research/excellence/angel/ Mason, C., National Angel Capital Organization. (2010–2024). Annual reports on angel investing in Canada . https://www.nacocanada.com/research/ National Angel Capital Organization. (2020). Report on Angel Investing in Yukon and Emerging Ecosystems . https://www.nacocanada.com/research/2020-naco-report-on-angel-investing-in-yukon-and-eme rging-ecosystems/

National Angel Capital Organization. (2025, April 27–28). NACO Summit 2025: Roundtables with 560 participants [Conference]. National Arts Centre, Ottawa, Canada. https://nacosummit.com/

National Angel Capital Organization. (2025). Policy Consultation and Backgrounder: Strategic Incentives for Mobilizing Risk Capital in Canada: Updated May 14, 2025. https://digital.builtbyangels.com/view/894341565/ Professor Thomas Hellmann & Schure, P. (2010). Angels and venture capitalists: Substitutes or complements? European Corporate Governance Institute. https://www.ecgi.global/sites/default/files/working_papers/documents/finalhellmannschurevo. pdf UK Business Angels Association. (2024). Research Reports: Publications on the UK angel investment landscape and related topics . https://www.ukbaa.org.uk/knowledge-hub/research-reports/

About National Angel Capital Organization (NACO) Established in 2002, NACO is Canada’s professional association representing over 4,000 angel investors, serving as the national umbrella for more than 100 member organizations—including angel groups, venture funds, incubators, and accelerators. Collectively, NACO members have invested more than CAD $1.8 billion into over 2,000 Canadian ventures. Angel investors are individuals or funds deploying capital at the earliest stages of growth. They include limited partners (LPs) investing in venture funds, family offices backing pre-seed and seed-stage ventures, and individuals investing directly or through angel groups. High-growth companies backed by angel investment that went on to achieve significant global scale include Slack (British Columbia), Verafin (Newfoundland and Labrador), Wealthsimple (Ontario), Hopper (Québec), and Jobber and Neo Financial (Alberta). Recent standouts include CoLab (NL) and 7shifts (Saskatchewan). These successes illustrate how angel investment drives Canada’s pipeline of innovative ventures, fueling future global success stories. Learn more at nacocanada.com Vision 2040 is a strategic initiative by the National Angel Capital Organization accelerating a unified capital strategy to position Canada as the best place in the world to build and scale high-growth companies. To participate, get in touch at vision2040@nacocanada.com .

DISCLAIMER:

Please note that the information provided in this document by the National Angel Capital Organization (NACO) is subject to change. While every effort has been made to ensure the accuracy and timeliness of the data, unintentional inaccuracies may occur. Some information has been sourced from public records and third-party providers and is subject to ongoing updates without notice. Accordingly, NACO does not guarantee the completeness, accuracy, merchantability, or fitness for a particular purpose of the information contained herein.

This document is produced by the National Angel Capital Organization (NACO).

NACO members have invested $1.8 billion into more than 2,000 entrepreneurial companies. Incorporated in 2002, NACO is Canada’s professional association for 4,000 angel investors and the national umbrella for over 100 organizations including angel groups, venture funds, incubators and accelerators. Learn more at www.nacocanada.com.

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