I've been on both sides of the table - as an entrepreneur that has received external funds twice, and as an angel investor putting money into 8 early stage startups.
Best to break into 2 sections: a) the business itself and b) the actual investment deal on offer
You'll always find risks when running through it - but that's the nature of these things. They're trying to build and de-risk in stages which is why they often need the cash. Earlier you invest, the less that has been proven. So just bear that in mind. Things you want to look for:
1: Why does the business exist - is it a good enough reason and solving a real customer problem? (ideally a painkiller not a vitamin; nice to have)
2: What does the market look like (size and growth) and what opportunity have they identified within it? Is it a bit enough sector that they're addressing.
3: What's the product / solution they believe takes best advantage of the opportunity outlined in (2)
4: Why that team and now? What's so good about the team doing it and why are they the best people - do they have something special which gives them more of a chance than another team? Can they execute quickly and beat off the competition? Make sure they've got the right mix (tech, product, sales /biz) and that they're all fully committed and not half -arsed (doing jobs on side)
5: What do the business economics look like. Have a glance at forecasts but they will only really know the next 12 months and are guessing the rest. Look at the levers / drivers of growth instead and see if they are realistic... e.g. if revenue will grow 30% - what drives that revenue - higher order value for example.. if so how will that be increased and does it sound reasonable..
1: I usually expect that I'll get diluted by 1/3 and then 1/3 again at some point.. so I'm always asking "what if they grow to £X revenue over 5 years" - how much % would I have then and is that a decent return. Often you can say "I think they're 30% likely to get there and divide your numbers by 3 to factor in the risk"
2: Are you getting the same share rights as the other investors -make sure you are. Nothing is worse than a VC coming in and getting "preferences" over your stock (i.e. they would get their money back first in any sale event and only after that would it all be distributed equally)..
3: Are the other investors well thought off and highly sought after... if they've done their due diligence and believe in it - that's a very strong signal. Make sure a good % are following on if there has been a previous round too
4: Be careful with the valuation as a lot get hyped these days. The higher the valuation - the more risk the company should have reduced. If you see a high risk, very early company with a large valuation - be very wary.
Hope this helps - very happy to go into more detail over a call if you like.