What Are Angel Investors?

Scott Shane is an angel investor with the North Coast Angel Fund, and a professor of entrepreneurship at Case Western Reserve University.  In his book Fool’s Gold: The Truth Behind Angel Investing in America he draws on hard data from the Federal Reserve and other sources to pain the first reliable group portrait of the lionized angel investors.  Below is an excerpt from the beginning of the book which gives a simple explanation of what angel investors are.

…An  angel investor is a person who provides capital, in the form of debt or equity, from his own funds to a private business owned and operated by someone else, who is neither a friend nor family member.

Business angels are far from the only source of external capital that entrepreneurs can tap.  The entrepreneurs’ friends and family, venture capitalists, banks, trade creditors, credit card companies, and a host of other entities provide capital to private business.

To minimize the confusion about which capital sources are angel investors, I’m also going to defne some other sources of funds for private companies:

• Institutional investor: A corporation, financial institution, or other organization (e.g., venture capital firm) that uses money raised from another party to provide capital to a private business owned and operated by someone else.
• Friends and family investor: An individual who uses his own money to provide capital to a private business owned and operated by a family member, work colleague, friend or neighbor.
• Informal investor: An individual (not an institution) who uses his own money to provide capital to a private business owned and operated by someone else.

These definitions make it clear that the term “angel investor” is not synonymous with the term “informal investor”.  Rather, angel investors are a subset of all informal investors, which include friends-and-family investors.  That is, every angel is an informal investor, but not every informal investor is an angel; and individuals who make angel investments can, and do, make friends-and-family investments as well.  Translated into more common parlance, informal investors encompass the three F’s-friends, family, and fools (angels).