Like nature, capitalism abhors a vacuum, and Angel investors have been eager and able to capture the early stage space abandoned by venture capitalists.
California is America's most fecund cluster of entrepreneurs and innovators, but recently it has suffered a drought of financial irrigation. Since 2005, the amount of venture capital under management has fallen by 60 percent, and so the role of watering the best ideas in Silicon Valley and beyond has fallen to another class of investors: Angels.
As venture capital faltered, the number of Angel investor groups has more than doubled in the last six years. The reason is simple. Like nature, capitalism abhors a vacuum, and Angels have been eager and able to capture the early stage space abandoned by venture capitalists. As entrepreneurs seek initial funding for their extraordinary ideas, they've found the best way to get their technology to market is to seek out Angel Groups for early stage capital before they turn to larger venture capital firms who typically come in at higher thresholds of investment.
There are many definitions of Angel, but I define it as a serial investor of his or her own money in technology startups by unrelated people. (I emphasize that "his or her own money" point to highlight the single biggest difference between Angel investors and venture investors). While Angels are found throughout history, Angels really took off with the technology IPO windows of the 1970s and '80s. These IPO windows were the supernovae that scattered the elements of previous successful startups: hard-working entrepreneurs, engineers and scientists who have experienced the life altering impact of in-the-money stock options. Winners wanted to win more, and understood entrepreneurship and risk-taking, and therefore had a natural affinity with entrepreneurs. Success attracted the smartest and most innovative ideas and peoples, creating a never-ending runway of beautiful opportunities. So the fact that early investors in their original startup made great returns, and an empathy for the startup process and peoples engaged in that process, combined to create and motivate Angels.