In February 2020, The Cheeky Panda completed a hugely successful Secondary share sale on Seedrs, with over £2m of shares being purchased by more than 1200 investors. Afterwards, we sat down with Co-Founder Chris Forbes to chat about his goals and motivation for the Secondary sale, and how they ran a successful campaign with Seedrs.
Why did you want to do a secondaries? Where did the motivation come from?
Typically the cycle of most entrepreneurs is that they have certain exit expectations at the 5 to 10 year point. You work hard and build a business so you don’t want to wait 10 years to get some cash.
However, the most traditional ways of getting some form of part exit is to either take some institutional investment where you would get private equity money. The institution would offer you to buy maybe max 20% of that ticket at a discount or you can choose to sell your business in its entirety. But even if you sell your business, there might be a 3 year amortisation.
When we looked at the Secondary market, we saw that The Cheeky Panda had been one of the most actively traded, so we knew there was a massive demand for our product. The shares were trading at a 30% to 50% premium on the last valuation of £36 so we could see the shares were in high demand and there was a liquidity issue as most shareholders were holding the stock. So we decided to release some extra shares into the Seedrs market at a 20% premium which we felt was good value.
How did your investor community react when you told them about the plan for a Secondaries campaign?
Over the years we’ve built trust with our investor community and earned respect from them because of our good performance. When we discussed the idea of secondaries with our community, they were in favour of us offering shares. In our communication towards them, we’ve always made clear that we were only looking to offload 3% as a maximum so in the end it’s not a significant percentage, it’s just providing a bit of liquidity. The consensus was that, if we felt like we needed our personal financials sorted, it would essentially make us perform better as entrepreneurs on behalf of the business. My co-founder and I are still the largest shareholder group, so we’re still going to do things in the best interest of ourselves as well as the business.
What are the benefits of Secondaries for you as an entrepreneur and CEO?
The benefit of us not requiring to offload equity via an institutional round, but instead having a Seedrs secondary option, is that we’re not boxed in a corner and that we kept control. Many entrepreneurs are desperate for a bit of cash and might be more inclined to do a deal that wouldn’t necessarily be correctly aligned just to try to get some cash off the table. They sign up to bad terms and shift the control of power to an institutional investor just to get money off the table. A lot of institutional investors know this, and have leveraged this tactic for a long time to get an edge over the deal, but by separating the two of primary and secondary you maintain the power of negotiation on your side. And this is probably the most important part of why a secondary transaction puts the power back into the hands of the entrepreneur and why you shouldn’t be tempted for a big cheque after investing a lot in the business.
The second benefit for us is that the Seedrs secondary product gave us more personal financial stability. We were only selling 3%, which gives us around £1.5M, so that’s a nice life, no debts, a nice house and comfortable living. We are not very interested in selling to a P&G or Unilever, but instead we’re trying to get The Cheeky Panda to the public market. The Secondary sales means even if a big company comes along and waves a huge cheque we don’t have to sell as we don’t need the money and an IPO is more attractive than being consumed by a big conglomerate as post IPO the share price can keep rising, but on a trade sell you only get one price and no future value.
What would have happened had the Secondaries product not existed?
I don’t think we would’ve waited until IPO to get some liquidity we probably would’ve done a slight discount deal with an institution on 80% primary and 20% secondary. Basically, I would have agreed on terms that provide some kind of cash and that also provide the comfort to go to the public. View it as when you are in a casino and you have made a lot of chips from your initial investment, always take some chips on the table and let the rest ride to a bigger payday. I think this is a good way to look at doing businesses and life in general.
How do you think that investors view Secondaries in general?
The investor obviously wants the entrepreneur that is running the business to be comfortable and not to worry about his personal bills, but on the other hand he also needs to know that they have enough skin and motivation in the game. This is a difficult balance for early-stage businesses to make.
What Secondaries does, is bringing the possibility of doing a secondary in an earlier stage of the life of the business. It’s actually very similar to an IPO. Nobody in the IPO would like to see founders sell all their shares at the IPO stage because they’re basically saying to the market that they don’t believe in the future of the company and that they’re using it as a pay day. I think that any secondary that would disproportionately affect a founder/shareholder percentage wouldn’t work and that there would be a backlash from the crowd on it. I think The Cheeky Panda is quite lucky with this, in the stage of the company that we’re at. Look at the market cap that is £66M, there are not many entrepreneurs who still own more than 50% at this stage, as a lot of them have given up more than that already. So offloading 3% is not really a problem for us, because we’re still in a really good position.
What was the process like on Seedrs? How did we make it easy?
We eventually decided that our approach would be similar to a standard primary campaign pitch. We made a new video and a presentation deck pitching our round. It was quite good for the business in general, as you focus on the achievements of last year and the directions of where the business is going. It kind of creates a natural sort of reflection and goal setting exercise.
Doing a secondary campaign (or any campaign in general) is also a good way to communicate with existing shareholders and it is really good PR for your business, even if people are not investing. We initially did a sort of pre-round, the notification that went out had 1800 people that signed up to it and we eventually ended up with 900 investors in the private round. Secondaries is a great brand awareness tool and PR exercise. You go from pre-round to the private area and that sort of allows you to make the campaign and the funding of it exciting so that when you go to the public, the crowd follows the crowd.
One piece of advice that I would give, is the importance of managing your available shares. One of the things that we did for our secondaries round was that we planned that it would be released in £1M chunks. The total availability of shares was around £5M, but if we had gotten to the platform with the full amount of £5M shares available, then we would have created too much liquidity which would have discouraged retail investors to invest.
To find out more about The Cheeky Panda or their Secondary round, visit their business page.