Venture capital firms use a mix of qualitative judgment and quantitative analysis to decide whether to invest in early-stage tech startups. Below is a concise, practical breakdown of what they look at, how they evaluate it, and what founders can expect.

1. Core investment criteria

• Team: founder quality is usually the top factor — domain expertise, technical ability, prior startup experience, coachability, cohesion, and commitment. Single-founder teams are possible but must compensate (e.g., clear hiring plan).
• Market: size (TAM, ideally large and growing), dynamics, and defensibility of the opportunity. VCs prefer markets where a meaningful company can scale.
• Product & technology: product/market fit potential, uniqueness of the technology, roadmap, technical risk, time-to-market, and whether the technology is proprietary or easily replicated.
• Traction & signals: revenue growth, user growth, engagement, retention, pipeline, letters of intent, pilot results, or compelling early KPIs. For pre-revenue startups, evidence of customer need and rapid learning is crucial.
• Business model & unit economics: monetization path, pricing, gross margins, CAC vs LTV, payback period, scalability.
• Competitive landscape & defensibility: moats (network effects, data advantage, partnerships, IP), switching costs, and how the startup can maintain advantage.
• Financials & runway: burn rate, runway months, use of proceeds, and fundraising history/terms.
• Exit potential: plausible acquirers or IPO path and time horizon to a meaningful liquidity event.
• Team traits for VC fit: founder temperament, clarity of vision, ability to attract talent, and alignment with investor timeframes.

2. Quantitative metrics & benchmarks VCs commonly use

• Growth rate: month-over-month (MoM) or year-over-year (YoY) user or revenue growth.
• Retention and engagement: D1/D7/D30 retention, churn rates, DAU/MAU.
• Unit economics: CAC, LTV, LTV/CAC ratio (healthy often >3), gross margin.
• Runway and burn: months of runway at current burn; runway after proposed raise.
• Conversion funnels: activation and conversion rates.
• Net revenue retention (for SaaS): >100% is strong.
• Cohort analysis: improvement or deterioration over time.
• Payback period: how long to recoup customer acquisition cost.

3. Typical evaluation process

• Sourcing & screening: quick initial check against thesis and stage (deck, intro).
• First diligence: deep dive into team, product, KPIs, market, competitors; often 1–2 calls + deck review.
• Reference checks: customers, ex-employees, cofounders, investors, and mentors.
• Technical due diligence: code review, architecture, security, IP ownership (especially if tech-heavy).
• Commercial due diligence: customer feedback, sales pipeline, contract review.
• Financial/legal due diligence: cap table, incorporation, equity grants, contracts, outstanding obligations.
• Investment committee: partners present findings and vote.
• Term sheet & negotiation: valuation, ownership, board seats, liquidation preferences, anti-dilution, protective provisions.
• Closing: legal docs, wire funds, post-close onboarding.

4. Valuation approaches for early-stage deals

• Comparable rounds (market comps): what similar startups raised.
• Scorecard or checklist methods: adjust a baseline valuation for team, product, market, traction.
• VC method: estimate exit value, required ROI, then backsolve to current valuation.
• Convertible notes / SAFEs: used to delay valuation until next priced round; terms (cap, discount) are critical.

5. Common red flags that often derail deals

• Poor founder alignment or frequent cofounder disputes.
• Unclear or tiny market; no credible path to scale.
• Weak or deteriorating unit economics.
• Bad legal hygiene: unclear IP ownership, messy cap table, undisclosed liabilities.
• Lack of focus or product-market mismatch with no clear iteration plan.
• Overly optimistic or unverifiable traction claims.

6. How VCs think about risk & upside

• Early-stage investing is asymmetric: VCs accept high failure rates if winners generate outsized returns. They look for potential to be category-defining with meaningful upside relative to the capital risked.
• Round sizing and ownership targets: VCs often model needing to maintain ownership through follow-on rounds (e.g., initial ownership targets depending on stage: seed → often 10–25% post-money; Series A → 15–25% pre-money dilution planning varies).

7. Practical tips founders can act on

• Tell a clear, data-backed story: market size, defensible position, early signals of demand, and a realistic plan to use funds.
• Demonstrate traction in the metrics investors care about (retention, growth, revenue even if small).
• Clean up legal/IP and the cap table before active term-sheet negotiations.
• Prepare referenceable customers or pilots and be ready for technical due diligence.
• Know your unit economics and milestones you will achieve with this round.
• Be realistic about valuation and dilution; focus on investor alignment and value-add.

8. Example diligence checklist (quick)

• Team bios, org chart, hiring plan.
• Deck, product demo, roadmap.
• KPIs & growth charts, cohort analysis.
• Financial model, burn, runway.
• Customer references, pilot agreements.
• Cap table, option pool, outstanding convertible instruments.
• IP assignments, patents, NDAs, key contracts.
• Codebase access & technical docs (if applicable).

9. Timeline & expectations

• Seed stage: initial interest → term sheet often within 1–4 weeks of active conversations; full close in 2–8 weeks depending on diligence.
• Series A and later: longer, more institutional diligence and legal review.

If you want, I can:

• Create a tailored checklist for your startup stage (idea, pre-seed, seed, Series A).
• Review a short pitch deck or list of KPIs and suggest what VCs will focus on.

Which would you prefer?