How VCs Evaluate Startups

Three people seated at a table with laptops and documents review a printed chart with blue, yellow, and gray bars. Two hands point at the chart with pens. Additional charts and pens are on the table.

From a founder’s perspective, it can feel like VC decision making is a big black box, but in reality they’re following structured internal frameworks to assess whether your startup is a good bet. Each fund has its own thesis, processes and personality, but across the board, VC decisions are driven by one essential equation:

Risk vs. Reward
And with that equation in mind, are asking themselves several core questions:

“If this works, how big could it be?”
“How likely is that outcome?”
“How long will it take to get there?”
“How much capital will it consume?”

Even at early stages, these questions are top of mind, guiding every meeting, memo and term sheet conversation. It helps to understand how VCs model it, both quantitatively and qualitatively, so you can meet them where they are and tell your story with clarity and confidence.

The Quantitative Framework
In later stages, VCs will use structured financial models like a risk-adjusted Net Present Value (NPV) to estimate the theoretical value of your concept product. For early-stage teams, these calculations are usually directional at best, but understanding the logic can sharpen how you think about value creation.

To build a risk-adjusted NPV, you need to estimate:

Forecasted Cash Flows: Projected revenue, development cost, regulatory cost, operating expenses, milestone payments
Risk adjustments: Probabilities of success across the development stages (e.g. Preclinical: 10 – 20%, Ph1: 45%, Ph2: 35%, Ph3: 55%, Regulatory approval: 80%)
Discount Rate: Time value of money (usually 10 – 20%)
Time horizon: ~10 years for biotech

Formula

CFt, cash flow in year t (revenue – costs)
Pt, probability of success for that year
r, discount rate
t, time period
n, total number of years

Helpful tools:

Bioheights.com for quick calculators
Downloadable tool for purchase

Early-stage investing relies much more heavily on qualitative signals and conviction. That’s where the next layer of evaluation comes in.

Line chart showing R&D composite success rates and average phase success rates (Phases I-III, regulatory) from 2010–2023, with composite success rising to 10.8% in 2023 driven by increases in Phases II and III success rates.

The Qualitative Framework
Most VCs do not trust in numbers. It’s a vibe game until later investment rounds. Many posts state that early stage investors are only looking at market and the team – more specifically at the eccentricities of one or more founders. This is partially true, but in biotech in 2025 – it is also all about the stage. In reproductive health, and especially contraception, investors either get the market or they don’t. You will rarely get an intro call with someone who needs convincing that the world needs and wants better and more accessible contraception options for everyone (VCs will still ask you these questions though, just to hear your answers). After that, it is all about the stage (this is true at the time of writing, in mid-2025, driven by the current private investment climate). Followed third by the team.

You have a Development Candidate, better yet, you have a DC that has de-risked CMC and tox and is ready for IND-enabling studies – “game on”. Phase 1 data in hand… “Why didn’t you call us sooner – we’re happy to invest now though” (Narrator: they wouldn’t have invested sooner).

Market, Stage, Team. The rest takes care of itself assuming you are building on a solid scientific base and have a clear target profile for your product.

A Deeper Dive on Key Risk Areas

Most early-stage diligence focuses on a qualitative understanding of five core risk dimensions. Strong signals in these areas give VCs confidence that your company can generate significant value, even if timelines are long or technical pathways are complex.

Market Risk
Regulatory Risk
Financing (Stage) Risk
Team/Execution Risk
Scientific Risk

Market and Commercial Risk
VCs will want to dive into the market and understand the commercial risk. Even if a product works, will anyone want to buy it? Do you plan to take the product to the market? With or without a partner? What could potential returns look like? The events that provide return on investment (ROI) to early-stage biotech investors in today’s world include an asset partnership/license, company acquisition, or transitioning from a private to public company via an Initial Public Offering (IPO). These exits are very likely to occur prior to the approval and commercial launch of a product, Intellectual property risks could be their own category, but are fundamentally related to the ability to partner and successfully protect the commercialization of your assets. Be ready to present a solid IP strategy to VCs.

However, belief in the eventual market is key for upfront VC investment. It is usually expected that you will focus these numbers on the U.S. market. The contraception market is unique and global, but you need to have a very concise plan for how to convey your idea of the market to VCs. Some common metrics include:

Total Addressable Market (TAM): The maximum potential demand of a specific market.
Serviceable Addressable Market (SAM): The size of the addressable market that you can reasonably target and market to as your product launches, factoring in inherent limitations of your business model, which might include your specialization or geographic limitations.
Serviceable Obtainable Market (SOM): The size of the SAM you can potentially convert to use your product.

You will certainly receive advice on your pitch deck to include the TAM, SAM, SOM. In reality, the VC sitting across from you in a pitch will rarely believe your analysis, and presenting too many details in the pitch deck may open the door for criticism. SAM and SOM categories are particularly difficult to accurately define without an established market, which is the case for novel male contraceptive drugs/devices. VCs will have their own team determine “the market.” However, you do need to have a defensible way to think about the market when asked.

MCI has funded several market demand studies that we recommend you build your market case on. These studies have already been adopted and referenced by VCs thinking about this space (e.g., Amboy St. Ventures’ Women’s Health Ghost Market Report). One effective strategy to consider when presenting the market is to calculate a reasonable total addressable market, and then estimate what percentage of the market is needed to reach $1B sales/year. Alternatively, you could define the floor of a specific go-to-market strategy, and calculate the annual sales if your drug or device were priced similarly to an equivalent product.

These are some examples of questions you may encounter:

“How will men know that they are sterile while on therapy? Do you suspect routine semen analysis will be an important part of long-term usability?”
“How do you envision positioning your approach compared to competitors? How do you demonstrate meaningful superiority and secure buyers?”

Regulatory Risk
All therapeutics and diagnostics face a complex regulatory landscape and the path to regulatory approval of contraceptives, particularly male-use products, is perceived to be challenging for good reason, since male users are presumed to be otherwise healthy and the physical risk of pregnancy is borne by the female partner.

However, there are many clinical development guidelines already in place and precedence exists for designing male contraceptive efficacy trials enrolling couples. Depending on the mechanism of action, secondary endpoints of efficacy can be ascertained in early-stage clinical studies. In addition, MCI is spearheading efforts to develop additional and more specific regulatory guidelines for consideration by health agencies – LINK HERE – so stay tuned for publications in this space.

What VCs look for:

VCs may want to dive into questions around the regulatory path and how long the approval process will be. They may look for answers to questions such as:

Are there existing precedents for this product class, or any products with similar characteristics that have been approved by regulatory agencies?
Are the clinical endpoints measurable and achievable?
Have there been any pre-IND or regulatory engagement?
For contraceptives: Is there couple-based trial design precedent?
How will you demonstrate both safety and efficacy?

Strong preclinical packages and thoughtful trial plans de-risk programs. We encourage you to work with a regulatory specialist to prepare your regulatory strategy early, and be prepared for questions from VCs around this topic.

These are some examples of questions you may encounter:

“What’s the regulatory engagement plan, and when will FDA/EMA/etc feedback be secured? How are you de-risking the clinical path ahead of formal feedback?”
“Who will help you with the development of your regulatory strategy? Will you have an in-house person or team for this, or will you have an external partner?”
“How do you stay up to date with changes in the regulatory landscape that may affect your product and development timelines?”
“Do you have a global regulatory strategy, or a more localized one? What was your rationale in identifying your early target markets for regulatory approval?”

Financing Risk
VCs will analyze a startup’s forecasted burn rate, funding needs, and runway. They will consider whether the company can attract follow-on investment or partnerships. Overreliance on a single funding round or misjudged milestones will be a turn off. Successfully obtaining non-dilutive sources of funding (grant awards, program-related investments, etc.) can help alleviate these risks to some degree, as well as showing that other leading organizations in the field support your work.

The milestones that you will need to hit to drive value creation (and therefore – what you will pitch) for each priced equity round can move around depending on market dynamics. Based on conversations with hundreds of investors in 2025, asset-driven therapeutic companies should try to align milestones roughly as outlined below (or better) to be consistent with investor expectations:

Pre-Seed – Validation of the scientific premise, core IP is established
Seed – Selection of the Development Candidate, early CMC de-risking, additional IP strengthens your position
Series A – IND and phase 1 clinical safety (potential early efficacy readouts on secondary endpoints)
Series B – Phase 2b readouts
Series C+/Crossover round – New Drug Application (NDA) with regulatory agency

These are some examples of questions you may encounter:

“What’s the projected use-of-funds and timeline for the current raise? What is the current status and timeline for demonstrating the project’s next milestone? What are the risk-mitigation plans if challenges persist?”
“Would you consider taking more or less capital in this round to reach different milestones from those you’ve proposed?”
“What are the key milestones or data readouts that prospective BD partners have indicated would trigger formal diligence or partnering discussions? Are there clear signals from any of these groups around preferred deal structures?”
“How solid is your IP and freedom-to-operate position? What is the roadmap for securing exclusive rights, and how confident are you in avoiding overlap with future academic filings?”

Team and Execution Risk 
The strength and experience of the founding team and management are probably the most important aspect of raising Venture Capital. VCs need to be convinced that you have assembled the winning team around you, that has the right expertise for your space and stage.

What VCs look for:

VCs assess whether the team has the expertise to navigate the biotech space—scientific/technical chops, preclinical/translational R&D experience, clinical development know-how, and business acumen. You don’t need to be an expert at everything, but you need to recognize what skill sets are missing and have a plan to fill in the gaps at the appropriate level with consultants, advisors, or hires. Be clear about the roles.

The execution risk of a startup depends on how the work is going to get done and what operational processes you put into place to manage the work. What capital expenses and/or overhead costs are tied to research facilities? Are there supply chain risks? Are you outsourcing R&D work, and what are the risks involved with that strategy? Do you have experience managing these risks?

These are some examples of questions you may encounter:

“What will be your first hires after receiving funding, and why? Do you already have the right people in mind?”
“How will you leverage your existing network, advisors and mentors to identify and attract outstanding talent?”
“How do you decide on hiring vs partnering/outsourcing? Which positions are important to have in-house in your opinion?”
“What values are you looking for when hiring people? Who are the people that will be thriving in your organization?”

Scientific and Technical Risk
VCs will want to create an in-depth understanding of your scientific and technical risks, with diving into topics such as these: Is the underlying technology based on sound, reproducible research? Are the scientific foundations strong enough to support a product? Are you building on validated biology or speculative hypotheses?

What VCs look for:

Target Validation and Feasibility (if applicable)

Is the target validated in animal models, showing complete infertility with genetic knockout?
Is there human loss of function data supporting it?
Is the mechanism of action well-characterized?
Is the biological target druggable? The definition of druggable is rapidly changing, but is it known that the target can be modulated in the way that you envision?

Translational Risks

Are there risks that preclinical models will not translate to clinical validation based on your target product profile and use case?
Is the mechanism of action guaranteed to be reversible?
Are there biomarkers of your pharmacodynamic effect?
Are there challenges in scaling production of the product or launching it?

These are some examples of questions you may encounter:

“What is the current understanding of {the Target MoA’s} normal function in the body?”
“What are the major liabilities or risks of your lead program today? [If you are still modifying your lead program in R&D], can you walk us through your plan to a clinical-stage molecule/device/etc.?
Specifically, what are your go/no-go decisions and timeline? What is the “bar” for selectivity if developing a pharmaceutical?”
“What gives us confidence that we shouldn’t be concerned about side effects with either short-term or long-term inhibition?”
“What are your translational assay workflows? How do you assess blood-testis barrier penetration capabilities?”
“How are you mitigating manufacturing and CMC risks, especially for scale? What are the near-term formulation, solubility, and scale-up risks, and when will you start addressing GMP readiness?”

Notes on Valuation
Your company’s stage, the quality of the data you have, your IP position, and how much perceived momentum the company has will dictate its valuation. In practice, pre-seed valuations are calculated by working backward from the amount an investor is willing to pay for a stake in your company. They will offer X dollars to own Y%.

Ideally, your valuation is high enough such that you don’t give away all of the equity in the current raise, but low enough so that you can realistically increase the company’s value by the time the next raise is required (accomplished by hitting the milestones agreed upon in the raise). You should model your capitalization table over time, and develop an acceptable range for your financial plan, but in 2024-2025 most pre-Seed startups in biotech are estimated to have valuations between $5-10M.

Here are four relevant data charts published by Peter Walker of Carta on LinkedIn
*biotech included in the deeptech category

A data table lists 25th, 50th, and 75th percentile benchmarks for US deep tech startup fundraising rounds in H1 2025, showing median valuations, round sizes, and dilution across pre-seed to Series C rounds.

Bar chart showing the rise in median pre-seed valuations across sectors from H1 2021 to H1 2022. All sectors—hardware, fintech, pharma/biotech, SaaS, and consumer—saw increased valuations in H1 2022.

A scatterplot titled SAFE Valuation Cap Benchmarks shows median valuation caps for different sectors, with data points grouped by round size and sector. Notable sectors include Cybersecurity, Hardware, Renewables, Fintech, Marketplaces, and SaaS.

Bar chart showing median ownership percentages of founding team, employees, and investors in software and deep tech startups at each funding stage, from Preseed to Series E. Founders’ shares decrease while investors’ shares increase over time.

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