Angel investors are individuals who invest their own funds in early stage companies or startups, unlike VCs who manage the pooled money of others in a professionally managed fund.
Angel investors typically invest at the power-point or paper concept stage i.e. at the very concept stage of a company. In effect, they are taking a bet on the team and on their belief that the concept would work.
Angels would most likely invest smaller amounts, which is usually sufficient to cover the fund requirements for going past the proof-of-concept stage. Angel rounds will most likely be followed by rounds of institutional funding like VC and strategic investment or acquisition.
At the stage at which angel investors invest, the risk is the highest. This is because neither is the concept proven, nor the business model nor the team’s capability to deliver proven. Moreover, because angel rounds are usually followed by further rounds to fund the capital requirements for growth, angel investor’s equity in the company gets diluted in further rounds of investments.
Because their investments carry their highest risk and dilution, the valuation offered by angel investors will be the lower than those offered by VCs in the subsequent rounds when the business has been significantly de-risked.
Often, angel investors invest in domains they are passionate about, and therefore bring invaluable experience to the startup through their participation as advisors and/or board members. Angel investors, apart from capital, are expected to help startups with advice, networking & introductions and oversight of business. Some angel investors also go to the extent of representing the startup in PR or meeting important customers or in interviewing potential senior employees. Most certainly, angel investors are expected to assist the startup in accessing institutional capital for subsequent rounds of funding.