First a comment — no where in this discussion did I see/hear anything related to the amount of wealth that was lost by “friends and families”. Prior to the economic downturn a lot of startups were able to get funding for their startups from friends and family. Many of the people who lost wealth have yet to recover. A number of them may never recover given the growing inequality that exists. This was further complicated because many spent money and incurred debt to get education they thought would help them get back to work or start companies. The result is a significant source of funding at the earliest stages being lost. Then angels and VCs moved upstream and the gap widened. Especially true in “middle” America.
A solution — Look to existing organizations (Montana Certified Development Corporation is a great example) to expand the availability of seed money. Help them expand their reach and risk tolerance with low or no interest capital. Years ago SBICs and BIDCOs were created to address this issue but over time criteria and fund amounts were increased to a level that only higher level angels and VCs could get licensed. Any government effort seems to favor these same groups. You need groups that want to help start and grow businesses NOT just make money. There is great value in having lots of companies that are making one to 20 million a year. And most of them require relatively small amounts of capital.