An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. Angels typically invest their own funds, however a small but increasing number of angel investors are organizing themselves into angel networks or angel groups to share research and pool their investment capital.

Angel capital fills the gap in start-up financing between the "three F"s (friends, family, and fools) of seed capital, and venture capital. While it is usually difficult to raise more than US$100,000 - US$200,000 from friends and family, most venture capital funds will not consider investments under US$1 - 2 million. Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for more money invested annually than all venture capital funds combined (US$24 billion vs. $22 billion in the US in 2004, into 45,000 companies vs. 4,900 companies, according to the University of New Hampshire's Center for Venture Research).

Angel investments bear extremely high risk, and thus require a very high return on investment. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current 'best practices' as taught by the Angel Capital Education Foundation in its 'Power of Angel Investing' seminar series suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five to seven year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments might, in reality, be as 'low' as 20-30%. While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures.

Angel investors are often retired business owners or executives, who may be interested in angel investing for other reasons in addition to pure monetary return. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their experience and networks on a less-than-full-time basis. Thus, in addition to funds, angel investors can often provide valuable management advice and important contacts.

In January, 2004 the not-for-profit Angel Capital Association, and later the Angel Capital Education Foundation, were formed under the auspices of the Ewing Marion Kauffman Foundation, bringing together over 100 of the most active angel groups in the United States. The ACA and ACEF have an annual summit meeting each year in a different city, bringing together the leaders of the different groups to exchange best practices.