When starting a business that requires significant amount of capital, owners typically look to four sources of funds: personal funds; friends and family; venture capital; and angel investors. Angel investors typically provide the first or second round of financing to help start the company before venture capitalist step in. (Typically, what an owner/owners can provide through personal funds and investments by friends and family does not equal enough to get through to the stage where a venture capitalist will invest as VCs invest at the third or fourth round of financing.) Unlike venture capitalists who typically use pooled money of multiple investors to fund multiple companies, angel investors use their own funds. Depending on the angel investor, the angel may fund one company or several.
An angel investor is not always a single person – it may be a trust, investment fund, or another business. Angel investors usually invest in high cost businesses such as software and information technology; healthcare services; medical devices and equipment; and biotech companies. Due to the high risk of the investments, angel investors will require a defined exit strategy to ensure a return on their investments.