An angel investor, also called a “business angel” or simply an “angel”, is typically a private individual who provides capital for a private startup company.  This capital is usually offered in exchange for partial ownership in the form of stock issuance or instruments convertible into shares.  Many times an angel is an entrepreneur who has become wealthy, frequently in technology-related industries. 

An angel investor is affluent and preferably an accredited investor.  They usually invest in business areas of familiarity.  Because of this, angel funding exists in virtually all industry sectors.  Similarly, from a geographic perspective, angel investing is not limited to major financial centers.  Typically an angel will invest in companies located within several hours of his home so that communication is unhindered.

What is your exit strategy?

Angel investments are high risk.  Thus an angel investor may require a return of 10-20 times the original investment within 5 years.  To generate a return of this magnitude, and entrepreneur typically employs one of the following exit strategies:

1. Initial public offering in which the company becomes publicly traded
2. Acquisition
   

Angels usually provide the bridge in startup financing between the typical initial investors (family, friends, and fools) and venture capitalists.  Since most entrepreneurs have difficulty raising more than several hundred thousand from friends and family and venture capital firms do not consider deals under $1-2 million, they must turn to angel investors for intermediate financing.  Sometimes angels invest in the seed stage or in later stages, but this is less common.  Though the amount can vary, angel rounds are usually between $100,000 and $1,000,000.  Without an angel round, entrepreneurs may have greater difficulty in securing venture capital.

How is an angel investor different than a venture capitalist?

Unlike venture capitalists, an angel investor does not normally manage the pooled money of others in a professionally managed fund.  Sometimes a group of angels will form a syndicate to share research and pool their investment capital in order to fund a larger deal, but normally angel investors invest personal capital exclusively. 

Many times angel investors also have different investment criteria than institutional investors.  Specifically, they may be interested in more than pure financial returns.  Because many are former business executives or owners, they may want to keep abreast of current developments in a particular sector and mentor the next generation of entrepreneurs.  They may want to make use of their ability and network without working on a full time basis.  Sometimes angel investors attach funding on the condition that their experience and management ability be utilized.  Entrepreneurs must recognize this can be very useful and can warrant relinquishing some control.

Due diligence is done by both parties in evaluating the deal.  Many angels will be able to provide much more than just funding.  An angel investor can help an entrepreneur revise the business plan, help find management personnel, locate additional sources of financing, and obtain key contacts for partnerships.  Some large companies have benefited immensely from angel investors.  An angel investor provided $91,000 to Apple Computer and guaranteed another $250,000 in credit.

Do you have a realistic shot at angel funding?

At http://en.wikipedia.org/wiki/Angel_investor it is noted that “According to the Center for Venture Research, there were 225,000 active angel investors in the U.S. last year. Beginning in the late 1980s, angels started to coalesce into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. Angel groups are generally local organizations made up of 10 to 150 accredited investors interested in early-stage investing. In 1996 there were about 10 angel groups in the U.S.; now there are over 200. In January, 2004 the not-for-profit Angel Capital Association was formed under the auspices of the Ewing Marion Kauffman Foundation, bringing together over 100 of the most active angel groups in the United States.

In 2004, according to the Center for Venture Research, 18.5% of deals that got through the early screens of angel groups and were presented to investors attracted funding, up significantly from 10% in 2003, which is about the historical average. On average, each firm that received angel money in 2004 got $469,000. The lion's share went to high-tech companies, and the single biggest category within high tech was software.”

With time, the term “angel investing” is coming to include some corporate investors.  Sometimes it is applied broadly to include any company in the early stages of development.  A corporate angel attempts to gain strategic synergy through an investment.  This may be through advantages from distribution changes or access to information or technology.  Because of these interests, a corporate angel is often not interested in exit strategy.   They can provide ideas that typical angels cannot.  However, an entrepreneur must do due diligence in order to ensure that the fit is right.  Corporate personnel can change and relationships can be affected so that a partner today may be a competitor tomorrow.

Sources: http://hbswk.hbs.edu/item.jhtml?id=1829&t=finance  "Angel Investing: Matching Start-Up Funds with Start-Up Companies: The Guide for Entrepreneurs, Individual Investors, and Venture Capitalists"