How to research a Secondary deal before investing

Secondary investments offer a way to access promising startups, usually with lower risk than early-stage deals. Instead of betting purely on future potential, you’re working with real traction and tangible performance data - often at a discount compared to future valuations.

Still, lower risk doesn’t mean no risk. While secondaries reduce some of the speculation, thorough research remains crucial, especially since liquidity is not instant once you make a purchase. Whether you’re a savvy investor or exploring this market for the first time, here’s what to look for before committing to a secondary deal.

1. Start with the fundamentals

Your first priority is to assess the company's fundamentals.

• Performance metrics: Look for revenue growth, profitability, and customer acquisition rates. Focus on late-stage companies with robust financials.
• Market position: Does the company dominate its niche, or is it battling strong competitors? Evaluate its competitive edge and market share.
• Leadership: Research the founders and leadership team. A strong track record often signals stability and better decision-making.

Pro tip: Use publicly available reports, investor updates, and market research to gather insights into the company’s trajectory. The company’s Press Room is a great starting point.  

2. Understand the share class

Not all shares are created equal. The type of equity you’re buying determines your rights and protections.

• Preferred Shares: Offer liquidation preferences and potential anti-dilution protections, reducing risk.
• Common Shares: Lack preferential rights but may have higher upside potential.

3. Assess valuation and pricing

Pricing is a critical factor in secondary investments.

• Check if the shares are priced at a discount or premium to the company’s most recent valuation.
• Discounts can signal value or risk—an unusually steep discount may indicate underlying problems.

4. Evaluate the  market context

The broader economic environment can significantly impact a startup’s prospects.

• Economic conditions: Consider how factors like inflation or interest rates might affect the company or its sector.
• Sector health: Look at the startup’s industry. For instance, climate tech may face regulatory risks, while health tech often benefits from stable demand but requires heavy R&D investment.

Action: Research industry-specific trends and macroeconomic factors that could influence the company’s performance.

5. Verify the deal terms

A secondary transaction’s structure can make or break its attractiveness. Carefully review the deal terms:

• Transfer restrictions: Can you sell your shares later?
• Tax implications: Understand potential capital gains or other liabilities.

Action: Work with a legal or financial advisor to evaluate the fine print and avoid surprises.

6. Consider liquidity prospects

Secondary investments often appeal because of their relatively shorter time to liquidity, but it’s essential to assess this carefully.

• Exit timelines: How close is the company to an IPO or acquisition?
• Past secondary activity: Startups with a history of liquidity events are often more investor-friendly and transparent.

Action: Look for evidence of a clear path to liquidity and analyze the startup’s potential for achieving exit milestones.

Red flags to watch out for

Be cautious of:

• Lack of audited financials or incomplete company data.
• Overly complex or restrictive deal terms that obscure risks.

Conclusion: do your homework before investing

Secondary investments can unlock exciting opportunities, and are a great way to invest in high-growth startups while potentially shortening your path to liquidity. But success - as you define it - depends on your ability to thoroughly evaluate deals. From analyzing financial fundamentals to understanding deal structures and exit timelines.

At SeedBlink, we’re committed to helping investors navigate the secondary market with clarity and transparency. Explore our platform to discover vetted secondary opportunities that align with your investment goals.

Ready to explore secondary opportunities? Visit SeedBlink’s Secondaries offers today.