An angel investor directory is simply a list of angel investors and angel investor networks.  Entrepreneurs seeking angel funding find an angel investor directory to be crucial in their search for funding.  These directories are important because the first step of an entrepreneur in obtaining early stage angel funding is usually to contact any angel investors that s/he already knows.  After his network of contacts has been exhausted, an entrepreneur may consult an angel investor directory.  Most angel investors fund companies relatively close to their homes, so an individual who is seeking funding needs to find angel investors in the directory that are in his area geographically.  Because of this, most angel investor directories are arranged by geography.

Where else can you find angel investors?

One resource for finding angel investors is www.Invstor.com.  The Invstor.com Network connects investors, entrepreneurs, job seekers, advisors, and others from the startup community.  It allows individuals to search for angel investors based on their preferred industry, size of investment, and location.  You can then contact them directly through the Invstor.com system by signing up for a subscription. 

Alternately you can post a “Request” on the system indicating what type of investment you are seeking.  A request is like a classified ad in your newspaper.  Investors browse these ads when they are searching for deals. 

You should at least create a quick profile of your company which will allow you to indicate that you are looking for funding.  It is free and only takes a minute.  When you do this, investors looking through company profiles will have the ability to see the details about your company.

How does an angel investor group work?

National and local groups of angels meet, sometimes informally as well as formally, to discuss deals and learn about the best new business opportunities.  Most directories contain a list of angel investor groups rather than individual angels.

Many angels can receive a wide range of unsolicited deals.  However, many obtain their deal flow primarily through their social networks such as accountants, lawyers, investment bankers, and former colleagues.  Because of this, entrepreneurs may be able to contact angels through their social networks as well.

What is the process of raising angel capital?

Angel capital is sometimes referred to as seed capital when a company is in a conceptual or idea stage.  Seed investment is usually a small amount because there is a higher risk the venture will fail.  Potential investors in a very early stage company will want to perform a large amount of due diligence to make sure their risk is warranted.

Angels sometimes prefer to make straight loans at rates similar to or higher than current bank rates.  Others operate similar to venture capitalists in many ways.  Those in angel networks usually will be able to supply more funding than a single angel could and also tend to be more active in advising and helping a company.

Angel investors are in demand especially when venture capital or more traditional financing sources are not able to provide financing for a company.  Some angels focus on later stage financing such as management buyouts or bridge financing.  These angels usually have previous business experience with these types of deals. 

The required rate of return for a deal varies by individual.  Some angels do not invest only for financial return.  They may not be as worried about a quick return.  Other angels may ask for 10 to 20 times their initial investment within a specified period.  They require high returns because they are assuming high risks.  However, different ventures have differing amounts of risk.  Thus required returns are adjusted accordingly.

Term Sheets and Multiple Rounds of Financing

Though historically many angel investors provided only one round of financing, now some angels are financing multiple rounds.  “Multiple angel investment rounds represent a change from the 1990s, when angels typically invested in only one round. Now, however, angels need to invest in multiple rounds because venture capitalists impose "fee-to-play" provisions. These provisions require investors who financed earlier rounds to put in additional money to maintain their preferences and avoid dilution. As a result, the size of the initial investment round made by angels has shrunk so that they can reserve money for later rounds.”

 The key items on an angel term sheet relate to board representation, information rights, valuation, liquidation preferences, anti-dilution provisions, control rights, piggyback rights, and the investment instrument.  Many times sophisticated angels include negative covenants in their term sheets to limit what entrepreneurs can do with their money without permission. Angels include these covenants to protect their investments, particularly if they do not receive seats on the board. They may also maintain approval rights for any purchase above a certain price.  They also restrict the amount of money that entrepreneurs can be paid and require certain amounts of investment by entrepreneurs.

Sources: http://www.clevelandfed.org/research/regional/Features/2006/february/angel_investing.cfm#definition