Sale of Instructure to Thoma Bravo Now Complete

Private Equity firm Thoma Bravo has successfully completed the acquisition of Instructure, the company behind the Canvas LMS. What a wild ride this has been – if you’d like to catch up on the details, see these posts starting in November. ¹Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Bravo’s Revised, Successful Offer

Back in mid February, it was clear that Thoma Bravo’s offer to buy Instructure for $49 per share would not pass a shareholders’ vote, despite the early February 3% increase from $47.60. CEO Dan Goldsmith was forced to resign along with his sister, Chief Strategy Officer Jennifer Goldsmith, and SVP Strategy & Operations Amanda Buckley. The other change was that the Bravo offer was changed to a two-step tender, meaning Thoma Bravo offered to buy a percentage of the company’s outstanding stock in step one and then allow other investors to sell their stock to Bravo at that offer’s price in the second step. For the sale to proceed, more than 50% of shares had to be tendered in the first step. Yesterday Thoma Bravo announced that they had obtained 64% of shares, and today they completed the second step and took the company private. As described in the SEC filing yesterday:

As a result of its acceptance of the Shares tendered in the Offer, Purchaser has acquired sufficient Shares so that the Merger can close without the affirmative vote of the stockholders of the Company . . .

Executive Interview

Since the departure of Dan Goldsmith, Instructure has been run by an “Office of the CEO” that included outside advisor Charles Goodman, who previously was Interim CEO of Frontline Education (another Thoma Bravo acquisition – analysis here). With the acquisition complete, Charles Goodman has been named Interim CEO of Instructure.

In an interview today, Goodman described the CEO search as likely taking three or four months. Ideally they would hire someone with direct EdTech experience, but the chosen executive must have software industry experience at a company with comparable scale and growth as Instructure. In addition, Goodman stressed the importance of finding someone who fits the Instructure culture and aligns with the broader higher education culture. Goodman said there would likely need to be compromises made to find the best candidate, not a perfect candidate.

At this point Thoma Bravo does not have immediate changes planned for the Instructure executive team, but I would expect some new faces once a new CEO is named.

Value of LMS

Dan Venedam asked a good question on Twitter yesterday.

Any thoughts on how with the world spinning out of control the "value" of the @ThomaBravo offer has stayed at $49 per share for Instructure (@CanvasLMS) while the Dow has gone down 30% in less than a month? #EdTech https://t.co/cdkVUVbvTT pic.twitter.com/OxLru6qRKw

— Dan Venedam (@DanVenedam) March 23, 2020

To which I replied: “Bravo is flush with cash ($12b raise last year) and playing the long game. Markets will come back, LMSs are becoming more important.”

Where we find ourselves is that the LMS is becoming even more important for educational institutions during this COVID-19 transition to remote learning. We don’t know yet what the new normal will look like, but rest assured that schools will need much better control over contingency planning using online education, and centralized approaches to address student privacy, course organization, ability to address accessibility, and basic administration of the virtual campus. The non-learning stuff that the modern LMS addresses. There will be a great demand to not leave basic e-learning infrastructure decisions up to individual faculty, as schools will need a baseline of online functionality for all courses. This move will have positive and negative impacts, but I would be shocked to see any scenario where the LMS becomes less important.

Operational Challenges

What will be difficult in the short term, however, is managing the operational costs of increased load due to the COVID-19 transition to remote learning. It costs money to deal with the storage and bandwidth increases of a platform (the lawn maintenance at Jeff Bezos’ recent LA purchase doesn’t come cheap, after all). The irony of many EdTech licenses is that they are often priced by the number of students at an institution, regardless of actual usage. With the COVID-19 usage spikes, costs go up but license revenue does not. EdTech platforms just became more expensive to operate.

During the interview, Chief Product Officer Mitch Benson described his team’s work to keep the Canvas platform available and solid. In just the past week, the number of concurrent users on the Canvas LMS increased 40%, and the number of videos uploaded per second on Canvas Studio (the video tool originally known as Arc) has increased 800%. This increase corresponds to the spikes noted in Sunday’s post in the number of schools fully transitioning to remote learning.

One of the benefits of private company ownership over publicly-traded shares is the ability to not have to deal with public quarterly earnings releases and focus on longer-term financials. Instructure, and by extension most of the LMS market, will likely have a difficult short-term but an increased importance and value long-term. I’ll deal with the LMS market more broadly in future posts.

Benson described that the tougher scaling problem that Instructure faces is around customer support. The technology has a challenge, but the human element of services is more difficult to scale, particularly with all of the “non-native” users who have not been used to EdTech usage or online delivery.

Benson acknowledged that the financial operations around this scaling of usage is a real challenge. Their primary job is customer success, but the business has to be durable and profitable.

Data, Data, Data

I asked both Goodman and Benson about the self-inflicted wounds of Instructure’s description of DIG (now known as Insights), the “growth initiative focused on analytics, data science and artificial intelligence” I first described one year ago. Benson refuted Goldsmith’s descriptions of doubling Instructure’s available market and having tons of prediction-ready data ready to be monetized. I plan cover this topic in more detail once I get the product demo offered by Benson.

While this story of the Instructure sale has taken a back seat to the COVID-19 transition, this sale will have a real impact on EdTech markets moving forward. It has been remarkable how much the Instructure executive team has changed since Goldsmith’s departure. Quite honestly it’s been night-and-day in terms of being open with analysts and with with proactive communication. I doubt the company can fully repair the damage to reputation that’s occurred over the past year – it will need to be a new company with new standards.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.