Angel investors -- those gracious individuals or informal groups who put their own money into business startups -- are slowing along with the financial markets, but they're still a viable option for small enterprises with solid business models and prospects for rapid growth.

Angel investors usually acquire an equity position and don't have a prior relationship with the entrepreneur, which would make them a friend or family investor.

"During the last three months of 2008, the angel market dried up just like a lot of the economy," says Steve Solomon, a partner at venture capital firm Accrue Sports and Entertainment Ventures.

"It's a difficult time to figure out the future, but I see strong investment opportunities because investors will have the ability to strike deals with lower valuations." In other words, entrepreneurs who value their companies at reasonable levels can still find angels.

The average angel investment in the first half of last year totaled $537,000, according to the latest data from the University of New Hampshire's Center for Venture Research. Total angel investment registered $12.4 billion during that period, with 23,100 businesses receiving money.

The angel investment market is about the same size as the venture capital market, but it is dwarfed by the friends-and-family market, which amounted to $139 billion in 2004, the latest period for which there is definitive data, according to Scott Shane, author of the book "Fools Gold? The Truth Behind Angel Investing in America."

Overhyped?
So, he says, "the angel capital market is important in that it finances high growth companies, but it's not a huge market."

Shane, a professor of entrepreneurship at Case Western University, says angel investing receives outsized attention because it is sexy, just like venture capital investing, and has helped launch some big name companies such as Google.

Given the riskiness of their investments, angel investors aren't willing to settle for moderate success. "They want a 20 percent annual return to make up for a lot of zeros in their portfolio," says Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research. "It would help entrepreneurs if they understood that mindset." Investors generally hold their positions for five to seven years.

Shane says business owners should realize it generally will be much easier for them to get money out of a bank or a trade creditor than an angel investor. "Typically, small businesses should focus on that. Most kinds of entrepreneurial businesses can't generate the kinds of returns that make sense to get external investors."

Moreover, angel investors may gain enough control of your company to push you aside if a dispute arises. If you just borrow money instead, you don't have to worry about that.

The importance of sector
The most popular industries for angel investors in the first half of last year were software, which accounted for 18 percent of money committed; health care/medical equipment at 17 percent; and industrial/energy at 10 percent, perhaps reflecting the current interest in environmentally friendly technology. Biotechnology, retail and media rounded out the top six.

With the Obama administration's massive financial stimulus package, entrepreneurs would do well to seek angel investors for companies that can benefit from the increased government spending, says Nick Robbins, chairman of the Angel Investment Forum of Florida.

"Infrastructure, technology, health care and energy companies could do well -- if you have a software program for road construction, for example," he says. "Your business model should be situated for the current economy."

Shane puts it in stronger terms. "You really have to figure out if your business is appropriate for angel investors. A lot of people are just wasting their time."

Stephen Sammut, a lecturer at University of Pennsylvania's Wharton business school who also has been an angel investor and entrepreneur himself, identifies several types of angel investors, explaining that more and more investors are teaming up with each other rather than investing alone.