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Angels are returning

Angels are mostly entrepreneurs and former entrepreneurs that invest in bootstrap companies too young and raw to attract the attention and money of professional venture capitalists.

Unlike venture capitalists that manage funds of money raised largely from institutional investors like pension funds, angels put their own money at risk. Angels are in the vanguard of financing entrepreneurship and innovation and, when an investment pays off, venture capitalists come in to build up the company even more. Angels fund real companies. They don't create CDOs.

A number of well-known companies got their start with angel money. Perhaps the most famous angel stake in recent years was the $100,000 Sun Microsystems founder Andrew Bechtolsheim invested in Google. The money let founders Larry Page and Sergey Brin move out of their Stanford University dorm rooms and market their search engine product. Google's many newly minted millionaires are now trying their hand at angel investing, too.

Angel investing fell sharply with the downturn in the economy. The angel market contracted by 30% in the second half of 2008 and the first half of 2009.

But in the first half of 2011, angel investments totaled $8.9 billion, an increase of 4.7% over the same time last year. Over the same time period, a total of 26,300 entrepreneurial ventures received angel funding, up 4.4% from last year, according to the Center for Venture Research.

Over the long haul the revival in angel investing is good news. The company's angels back that succeed tend to be the kind of fast -growth job-creating ventures the economy needs. However, it takes time to go from initial investments to putting out the hiring sign for the firsm that manage to make it.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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