When traditional venture capital firms refuse to lend, a startup turns to individual private equity investors known as "angels". In addition to moneys, angels also bring expertise and experience to a startup and may serve on the Board of Directors or provide guidance through consulting or mentoring. Angels risk their capital based on their experiences and instincts. They tend to invest together with trusted friends and associates or on the recommendation of lawyers and accountants. They are capable of investing quickly (30-60 days to a closing) and their due diligence can be less rigorous than venture capitalists or strategic investors. Angels may buy into concepts of a startup and be forgiving on valuation. A single angel's participation in an investment usually ranges from $25,000 to $250,000.This informal investment market tends to be regional – Ottawa, Toronto and Waterloo. Individual angels are not listed in directories and they are hard to find, thus, raising this type of capital involves a costly and time-consuming networking process for entrepreneurs.
Unfortunately, it is precisely the non-institutional nature of angel investing that creates the obstacles that entrepreneurs in search of capital must overcome. First, the angel market is highly fragmented. Angels do not operate as investment companies. They operate as sole proprietorships. The angel usually invests his or her own capital in one or two investments at a time. Second, most angels restrict their investments to industries they are familiar with or have competed in. As a consequence, the more innovative the product or industry, the less chance there will be of finding an angel willing to invest. Third, angels usually like to keep a close personal watch on their investments, and they typically will not invest in a company that operates too far away from their home. This can pose a difficulty for startup companies that are not located in major urban or investment centers such as Ottawa, Toronto and Waterloo.
In the late 1990s, angels began to depart from their longstanding mode of informal, secretive operation and moved into the open by creating angel groups. Angel groups differ in their precise modes of operation, but they have common traits. Unlike traditional angels, angel groups are not difficult to find; most have websites providing information about the organization for potential members and entrepreneurs. On the other hand, the members' identities may be guarded carefully. In terms of membership, some angel groups require only that members be accredited investors. Others require technical expertise (e.g., in engineering) and therefore exclude most lawyers and accountants. Industry-specific angel groups, unsurprisingly, require substantial knowledge of the industry.
Like traditional angels, angel groups primarily fund start-ups in their earliest stages. Angel group investments often fall within the same $25,000 to $250,000 dollar range as traditional angel investments with probably more investments on the lower end of that scale. However, the increased opportunities for pooling also may facilitate larger investments, and those larger investments may come at a slightly later stage of startup development than traditional angel investments - either before or in place of early stage venture capital investments. With most venture capitalists today attracting more money from fund investors and moving to even later stage investments, where larger sums can be put to more efficient use, a new capital gap from $250,000 to $5,000,000 dollars is emerging. Some angel groups able to invest larger sums and be able of filling this gap, although this is still on the high side for most angel groups.
In addition, while angel groups still rely on references to find investments, they also employ more formal mechanisms for bringing investment opportunities to members. First, there is a pre-screening process to determine whether an entrepreneur will be evaluated by the angel group's full membership, which can include review of an online application, a favourable recommendation from an angel group member, and even the satisfactory completion of initial due diligence. Next, the pre-screened entrepreneurs are invited to present to the full angel group membership. The presentations usually run twenty to thirty minutes and are followed by a short question-and-answer session. These often occur over lunch or dinner meetings. If any angel in the group has an interest in moving forward on a particular start-up, the process progresses further with more meetings, more diligence, and finally an investment.