Silicon Valley's finest firm give their advice on investment criteria. From Wen H. Hsieh - General Partner at Kleiner Perkins:

I actually think about 5 key criteria - not just 3 - when considering a venture investment opportunity.

These are listed below in relative order of importance (higher to lower) to me:

  1. Does the market exist and is it large? This is a very important first-screen  because it’s hard to suddenly create new and large markets if it’s  small now or if it doesn’t exist at all.
  2. Is the technology and/or business model of the startup differentiated - and likely sustainably so. This is important to create barriers-to-entry, ideally long-term ones.
  3. Does the founding team understand well the market that they’re going after (1. above) AND the technology and/or business model they’re creating (2. above) ? This is a fundamental assessment of how well I feel the team can have insights into AND execute on what they aspire to accomplish.
  4. Are the terms of this investment conducive to allowing me to generate venture returns? This is also very important because a great market/technology/business model startup and a great team, but with terrible investment terms (e.g. unreasonably high valuation thereby severely capping my potential  returns) may not be a good venture investment opportunity.
  5. How passionate am I personally about the founding team and the technology/business - assuming the market is in fact large and exists.  This last criteria is important because as an early stage investor, I’m going to be in the trenches with the entrepreneurs for many years to come, so I better really like them, as well as the product/business they’re pursuing. A seasoned venture capitalist once told me: “you can  divorce your wife, but you can’t really divorce your portfolio  company… so you better make sure you really like the startup and the founders before you invest!