In this episode of Behind the Deal, Thoma Bravo Managing Partner Holden Spaht, and Partner, Brian Jaffee, sit down with Instructure CEO, Steve Daly.
AIR DATE:
June 18, 2025
LENGTH:
24:19
Transcript
Brain Jaffee:
The world was basically going into lockdown. I went back and looked. You know, the S&P 500 at the time we closed our deal was down 38% from the time we submitted our $49 per share offer. That was the situation that we were stepping into. You know, everybody was sending students home, everything was flipping to remote learning, but it turned out that we had actually just bought the most important piece of technology that was gonna basically power all of this remote learning in the pandemic. And on top of that, it was by far and away the best product for —
Holden Spaht:
Are you saying we didn't predict that?
Brain Jaffee:
It made us look probably a lot smarter than we are, but we'll take some credit for it.
DISCLAIMER:
This podcast is for informational purposes only and does not constitute an advertisement. Views expressed are those of the individuals and not necessarily the views of Thoma Bravo or its affiliates. Thoma Bravo funds generally hold interest in the companies discussed. This podcast should not be construed as an offer to solicit the purchase of any interest of any Thoma Bravo fund.
Scott Crabill:
Welcome to Thoma Bravo's Behind the Deal. I'm Scott Crabill, managing partner at Thoma Bravo. And that was Thoma Bravo Partner, Brian Jaffee, and Managing Partner, Holden Spate, discussing our take-private acquisition of Instructure. Instructure is an enterprise software company focused on the education technology market. Its core product, Canvas, is now a central hub for teaching and learning. Originally founded in 2008 by two BYU graduate students, Instructure has grown to serve over 4,000 school districts and 2,500 higher education institutions, capturing a remarkable 50% market share in higher ed and about 33% in K through 12.
Thoma Bravo acquired Instructure in March of 2020 for approximately $2 billion in a take-private transaction amidst the initial chaos of the global pandemic. Despite the S&P 500 being down over 30% between signing and closing, Instructure's business soon after boomed as remote learning became essential. Just over a year later, in July of 2021, Thoma Bravo took Instructure public again. Then in November of 2024, Instructure was acquired by KKR for just under $5 billion. So today, we'll uncover everything that went on behind the deal and explore the twists and turns of this investment, the strategic decisions made, and the unexpected tailwinds of a global event in a conversation between Holden Spaht, Brian Jaffee, and Instructure CEO, Steve Daley.
Holden Spaht:
So Brian –and I'm going to call you, for the listeners, Jaffee, since that's your last name and that's how we speak to each other.
Brian Jaffee:
That's what I go by.
Holden Spaht:
That's what you go by, but I'm excited to sit down with you and revisit Instructure, which I think is an incredible case study and an exciting one. So, I'm gonna ask you first for the background and the people listening, can you give us a high level overview of Instructure?
Brain Jaffee:
Yeah, so Instructure is an enterprise software company focused on the education technology market. Their core product is really an LMS, which stands for Learning Management System and this company was originally founded in 2008, actually by two graduate students at BYU, and they were essentially really frustrated with the LMS that they had at the time. And think of the LMS really as the central hub for teaching and learning. So, this is what students and teachers and parents are basically living in, both on the K through 12 side, all the way up through higher education and beyond.
And at the time, really in 2008, there was one kind of massive competitor in the market. It was a company called Blackboard that was a legacy provider. It was on-premise, and it, over time, had done a bunch of acquisitions that weren't very well integrated. And these guys saw an opportunity to create just a much better product that was born in the cloud —cloud native —much more intuitive, and that's exactly what they did. So they really started in the state of Utah and had a ton of success there. And then over time, we were able to blow it out really across the entire country and then globally, and they were able to do that both in terms of higher ed and in the K through 12 market.
So that's a little bit about the background. And if you look at the company today, they now have over 4,000 school districts as customers, they've got over 2,500 higher education institutions, and that represents like 50% market share in higher ed and about 33% market share in K through 12. Yeah, so, it was really an incredible story born out of necessity, and it really created an unbelievable company.
Holden Spaht:
Yeah, and I think most people, or at least people like me who have kids who are either in high school or especially in college, know their core product, which is called Canvas, right? And most people know the company by that product, and I remember at the time that we were doing due diligence on this company and it had the history that you described, which it came into a market and really had the best product in the market, and I remember at the time, I don't think they'd ever lost a North American higher education customer, right? And they had most of the Ivy League and a lot of the big schools. So can you maybe describe, based on that great background and history of the company, what was the investment thesis that we had at the time in terms of buying the company and what we were trying to accomplish?
Brain Jaffee:
We saw really an incredible franchise with unbelievable customers. I'd say a fanatical customer base. This is just a great example of a situation where we would go and do our customer calls and talk to all these different higher education institutions and K-12 districts and pretty much unanimously they would rave about how good the product was. And so that's always a really good telltale sign just in terms of the product quality and the stickiness of the product. So for us, that was really important.
I'd say the other thing that was a really important part of our investment thesis is we saw this company, which had been public since 2015, really go on an amazing journey. You know, like we said from the beginning of 2008, and they raised a series of venture financing rounds, went public in ‘15, had a great run as a public company, but it became clear to us that they were not a very good operational company and so that, that created a big opportunity for us. And then I'd say the third thing was, you know, there was a big opportunity to really transform this business into something more than just an LMS. And so that was a big part of our thesis and that's exactly what we set out to do when we bought the company in 2020, and it was a really fun journey.
Holden Spaht:
Well, part of it specifically, and I'm going to ask you a question here, but as they grew in education and had the market-leading product —and we see this a lot in enterprise software —where a company comes into a market, they take market share, they have the best product, it was cloud-native, which was not true of the incumbent provider, Blackboard, as you mentioned, but at some point, the law of large numbers, growth starts to decelerate a bit. You know, you still have plenty of market, but maybe not as much as you had in the beginning so the comps get harder and harder, and as a result, you try to enter into a new space where you think public market investors really want big TAMs and they want other things and so maybe describe —there was a pivot that the company made as a public company to do that —and it was a big part of I think of our investment thesis in terms of refocusing on education, but I want to totally lead the witness. So maybe describe that, that journey also.
Brain Jaffee:
So, as a public company, I think they found themselves in that exact situation. It was a great IPO, great public company story, but as the business began to decelerate —as they took more and more share —they had to decide, what are we going to do for our next leg of growth? And they came to the conclusion at the time that they were going to move into the corporate LMS market. And they decided to do this by actually building a completely de novo product. They called it Bridge, and where Canvas was focused on the education market, this product was focused on the horizontal corporate market.
And as we knew from just tracking that part of the market for a really long time, that market was definitely a big TAM, but it was a highly, highly competitive market. Those products aren't as sticky in that horizontal part of the market. And they were building something from scratch, so they were way far behind a bunch of incumbents in that market that were already pretty well penetrated with pretty good products. And so, as we started to look at the business, we saw that they had created this product. It had created an incredible amount of just operational complexity inside of Instructure as a public company.
And financially, it was really struggling. And actually, one of the things that they did as a public company is they weren't very forthcoming around what the financial profile of Bridge looked like. No matter what questions they got from the analysts or from public market investors, they always kind of skirted around it, and I think ultimately that led to—
Holden Spaht:
–was that because they were not forthcoming or do you think it was a data issue and maybe they didn't know exactly how much money Bridge was losing relative to Canvas?
Brain Jaffee:
It was probably a little bit of both. I think they certainly had a decent understanding of what the top line looked like. But to your point, they didn't have a really clear product P&L. And so I don't think they appreciated at the time that that business was like $20 million of ARR and losing about $20 million in cash flow, and again, just creating a ton of complexity inside of the organization. They were basically trying to incubate a startup inside of a vertical market enterprise software company, and I think it's a really hard thing to do. I don't know that we've ever seen that done very successfully. And so that was another big part of our thesis was that we would actually double down on the education market, divest that Bridge business or even potentially shut it down and really focus the business on its core, which is exactly what we did.
Holden Spaht:
Perfect.
Brain Jaffee:
So Holden, we completed the acquisition of Instructure in March of 2020 for about $2 billion. And nothing about buying Instructure was easy. It was not a linear process, super interesting how it played out. Maybe walk us through that process of taking the company private and how that worked.
Holden Spaht:
Yeah, well, this is going to take a minute. As you remember, there were a lot of twists and turns. So I'm going to do my best, keep me honest, and jump in if I forget something. But I always like to think that people who watch Wall Street movies and things like that and think there's this deal-making is super cool and fun, and awesome, and all these twists and turns, that's not really the reality that we live typically. But in this case, it felt kind of almost movie-worthy in terms of how this all came together. I remember it started, of course, with our outreach, like we typically do. We identified that this was a special company that we wanted to own, [a] public company, that was losing a lot of money and a piece of its business that it probably didn't belong in. We could refocus it on education, improve the margins, make acquisitions, and it was a classic kind of vertical market franchise with a lot of margin improvement, which is typical of our investment theses.
So we kind of put the company in play, and I remember there were some other competitors who were very interested in the company, but I remember in late 2019, the deal at the time, the board was looking to sign an LOI and exclusivity and we and one other group had outpaced everybody. And we were trying to kind of win the sprint so that it wouldn't be quite so competitive, but another group paced right with us, and I remember we had submitted our final bid and it was probably 24 to 48 hours before we could sign a definitive agreement. I think the other group was in the exact same position, but the board really wanted to go exclusive with one party just for certainty and to get the deal done, and I remember that the deal had already leaked a bit, and so the stock had run above where people could buy it, including us. We love the company, but this stock had run north. So we were already kind of managing the bankers' expectations that this would probably be a takeunder, and I don't think we were alone in that.
And so we submitted our final bid. We didn't hear much. We started getting nervous. It turns out somebody had gone around the banker to the chairman of the board, who was the founder, and we got kind of one final look –thank God I hadn't gone to sleep that night because I got a call and we had to work through something with and make a concession to existing management. And ultimately, we ended up getting our LOI signed well after midnight, and I think we prevailed in the proxy —as showed later –we prevailed by 10 cents a share, which was like $3 million on a multi-billion dollar deal. So, it was really stressful, but we got it under exclusivity and about 24 to 48 hours later, we signed the definitive agreement. So normally, when we sign a definitive agreement for a public company, it's very exciting, exciting time. And in this case, I think the market had a really tough adjustment period, because as I remember, the price was $47.60 per share and the stock was in the low 50s, and there were activist shareholders in the stock.
So obviously, the stock kind of adjusted down, maybe still above our deal price. But immediately, it became clear that the large shareholders who were these hedge funds, and they were unhappy with the price, to put it mildly. And they started to come out publicly, and I think that they were talking to each other, and they represented about 18% of the stock –they were talking to each other —and pretty publicly saying bad things about the deal. And so we had certain restrictions on what we could say publicly and what we can do publicly, but we were immediately in kind of this PR war to see if our deal could get through. And we all know that this was a competitive auction that the board ran. We won by the narrowest of margins. We priced it very efficiently. We tried to convince these shareholders of all of these things, but I'm not sure they were that interested in our point of view.
Next thing on a take-private is like Glass Lewis and ISS, these agencies that tell other institutional investors and retail investors whether to vote yes or no and you know, I don't know 96-97% of the time, especially if there's been a good process, the answer is, you know vote yes for this deal. And so, to the lead independent director the board goes and we help prepare these materials for the board so they go to present to these agencies to say this is the process we ran, this is why this is a fair deal, that's why it's the right deal for all shareholders. And maybe the only time it's ever happened in my career, they said to vote no. Basically, now we're totally in limbo, and it's really frustrating because we worked so hard to sign this deal at a price that, frankly, was on the edge.
Brain Jaffee:
It felt uncomfortable.
Holden Spaht:
It felt uncomfortable, it was on the edge, and now we pretty much know our deal's not gonna get done because shareholders are against it, merger arbs are now in the stock, ISS and Glass Lewis have said to vote no. I think people started to speculate the stock price was still hanging above, thinking maybe Thoma Bravo was gonna come with a revised offer, and it was just a really unusual set of circumstances.
Brain Jaffee:
Yeah, on that, maybe, so we've got two options really. We can let the clock run out and walk away and then all that work we did, we basically lose the deal. Or we can try to come back to the board and raise our price and see if that's enough to get the activist shareholders to support it, and so that's the conundrum that we were in.
Holden Spaht:
That's well said, and I just kind of naively thought that, you know, people would actually start to realize like, this is the best deal for shareholders, the one that we had presented, but that was incorrect. And so we wanted to get the deal done still. We had a little bit of price, maybe as we kept sharpening our pencil, but not much, not enough to probably assuage the shareholders. And so I kind of remember, we kind of looked at our sources and uses and you know in a take-private, you have a lot of vendors on both sides and without saying too much, our partner and friend, Orlando Bravo, even got involved. And it was kind of a pass the hat situation where we asked everybody to be commercial and said, if this deal is gonna get done, you're gonna make a little less, you're going to make a less, you're gonna make —so I kind of think about it as we raised our price ultimately with the board support from $47.60 per share to $49 per share. And I would say Thoma Bravo paid for about half of that and then some great partners of ours who were involved in the transaction also contributed.
And so we got comfortable that we were playing roughly the same price, but other people were very commercial, and the other big thing that happened was the chairman of the board, who was the founder, who was a very important constituent, a great entrepreneur. I don't think in the beginning of this process, he was convinced that A, that we are the right partner, or B, that take-private even made sense. I think he felt a lot of pressure from the activist shareholders. And at some point during this period between sign and close, he converted to us. And that was hugely, hugely helpful. So, he's like, let's get it. So we re-announced our deal to the public. We also went to a tender offer so that we could avoid ISS and Glass Lewis. We need 51%. We go right to the shareholders, and we had somebody kind of helping us identify who the shareholders were at that time. So a new deal, $49 per share after all this work, and at that it was like February of 2020.
Brain Jaffee:
That's right.
Holden Spaht:
Right? So LSU had just won the national championship.
Brain Jaffee:
You had to bring that up.
Holden Spaht:
That's a side note, that’s a side note. So we were all excited, even though it'd been very stressful that finally we're gonna have a deal that's gonna get done but because you have to leave the tender outstanding for a certain period of time, the close date was now late March 2020. And we all know what happened in early March of 2020. So just when we thought we were out of the woods, and we had been so brilliant deal makers, COVID happens. Every stock is off like 30% except for Instructure because these bozos at Thoma Bravo had to buy the company, and I think even in this time, other peers of ours and other people were evaluating, is this a MAC? Is this a material adverse change? The company was still performing fine. So even though we looked pretty silly for having the stock price at that level, we did the deal. I remember some of these shareholders were kind of all bragging to us that they had sold stock as the thing went up and they were out of the stock, and so we had to kind of swallow it, but we bought the company for $49 a share, like two weeks after COVID had really, really started.
Holden Spaht:
So Brian, after we close the deal on COVID, and we’re terrified that we had all this new equity going into a deal at the start of what nobody understood, but we knew it was bad, a global pandemic. Can you maybe describe what happened to Instructure's business after that?
Brain Jaffee:
Yeah, now I've got all this PTSD coming back from that, from that period of time, because you're right. I mean, nobody knew really what was going to happen. The, the world was basically going into lockdown. I went back and looked, you know, the S&P 500 at the time we closed our deal was down 38% from the time we submitted our $49 per share offer. That was a situation that we were stepping into. And, you, know, we all knew people that were involved in, in universities or sat on boards, and I'd say the overwhelming feedback we were getting was that all these universities were thinking they were gonna have to massively cut costs. You know, everybody was sending students home, everything was flipping to remote learning. But it turned out that we had actually just bought by far and away the most important piece of technology that was gonna basically power all of this remote learning in the pandemic. And on top of that, it was by far and away, the best product for what it—
Holden Spaht:
— Are you saying we didn't predict that?
Brain Jaffee:
It made us look probably a lot smarter than we are, but we'll take some credit for it. I'd say, like you said, we stood behind the deal. We knew we were buying a super, super high quality enterprise software company that was so important to its customers. And I'd said that's the one thing that really played out. And it turned out that as everything flipped to remote learning, Instructure and Canvas in particular became the mission-critical platform, the central hub for teaching and learning in this remote environment.
And I'd say the one really interesting thing that we didn't necessarily think about during our underwrite is the K through 12 market. But as we thought about our underwrite, and we diligence the company, we probably spent 90% of our time on the high ed market and 10% of time on K-12. Well, it turned out all of these K through 12 districts, both in the U.S. and then all of the international markets, had to figure out how to serve these students in a remote environment. And you had to have a product like Canvas, and so basically, our bookings went crazy in that first year. Certainly nothing like I've ever seen. I wish all of our first years would go like that.
Holden Spaht:
I remember, it was an absolute joyride. The emails every week were just one after another. Another state, another district, another this, another that. Just bookings were just exploding.
Brain Jaffee:
The fish were jumping in the boat, is what we were saying at the time. And Holden actually remembered the numbers cold. You know, our new bookings budget was roughly $58 million for the year, and we ended up doing $120 million of new booking. So that kind of a beat —110% beat in year one –you never see. And on top of that, our K through 12 business exploded and became a massive part of the business. And in that first year, we did the total billings in 2020 that we had modeled for three years out. So that was the kind of activity that we were seeing. Billings grew 38%, but we didn't just rest on our laurels. We had a big plan to restructure the company, really get it in a much healthier place from a margin perspective. So we took the margins from effectively 0 to 40%. We divested that Bridge business and we went on our way really creating a very special platform that was much more than just the LMS.
Holden Spaht:
Yeah, and I remember the dream in K-12 was always being, for me, is always statewide buying. I mean, that's what you kind of want, but ultimately, the districts are the adopters of the technology, and usually you have to sell district by district. So the fact that states had stepped in and said, hey, we need this, the products we have are not good enough for our students who are being educated. And when they stepped in and started buying, that was great, but it was a time unlike anything I've seen and super exciting.
Brain Jaffee:
So Holden, Steve Daly became the CEO of Instructure in July of 2020. So just a few months after we closed the deal. So maybe talk a little bit about how that opportunity even came to be and then how we ultimately selected Steve for that position.
Holden Spaht:
Yeah, first this business, while it was an exceptional product and a great market, it needed a lot of operational rigor. And it became clear between sign and close that the existing CEO at that time did not really want to run the playbook that I think needed to be run for shareholders and frankly even for employees for refocusing the company on education. And we happen to have somebody, Steve Daley, whom we'd worked with in the past, had a very successful investment with a long time ago. He lives five minutes from where Instructure is headquartered. He knew some of the senior management team and actually worked with some of them in a prior life. And he had just stepped down from a full-time CEO position shortly before we closed this deal.
So it was almost like too good to be true. We were thinking about him for the board. And so I remember calling and saying, “Steve, we're going to make a change here. We'd love to have you on the board, but would you like to be CEO?” And I remember him saying, “Oh, you know, really interesting, but I promised my wife to spend a year. So I've been really going at it really hard for a long time. Like I need some time with my wife.” I said, “I totally get it.” So then we ran a search. We put Steve on the board. We ran an independent search. We came all the way down to where we had focused on one candidate. And by this point, we'd probably had one or two board meetings. And Steve saw, to use your phrase, the fish jumping in the boat at the board level. He started, “Wow, look at all these bookings. What's happening?” And you know, I know he was really focused on spending some quality time with his wife, but we got all the way down with one candidate. We were ready to make him an offer and Steve called and said, “You know what? Maybe I do want to be CEO of this company. It's a little sooner than I was thinking, but this looks pretty, pretty good.” And so Steve is a, a smart guy, a smart guy.
Brian Jaffee:
He's no dummy.
Holden Spaht:
He is no dummy, he's no dummy. So that's how it came together.
Holden Spaht:
So, Brian, look, in July of 2021, a little after –over a year after we took the company private –we IPO'd the company, which that's not a very long period of time to own a company and then re-IPO. What was the thought process behind IPO'ing it that early and in the investment horizon?
Brain Jaffee:
Yeah, you know, at that time, after the business had performed the way that it did in that first year, you know, like we talked about 38% top line growth, we had the margins at 40%. So it was nearly a rule of 80 company. We had completely transformed the operations of the business, we had brought in not just Steve but had really upgraded the team and the talent around him, and I think we all saw what was happening in the IPO market at the time, which is –it was, it was white hot. You know, we kind of said to ourselves, gosh, this would be a pretty interesting public story. You know it's a well-known company in the public markets. So everybody knew the name and the history, but we had completely transformed the business in a short period of time. It had a ton of momentum behind it. It had become an incredibly important platform globally for teaching and learning.
We thought there was just a totally different story that we could kind of bring back. To the public, especially around doubling down on education, again, the momentum that we were seeing in the business and the fact that the business had transformed from what was a really interesting product in a great end market with good top line growth to a real cashflow story. So it actually had both growth and profitability and all the transformation that it went through. And so it felt like the right opportunity to take it back out. And so we went through all the, you know, the testing the waters process and got some really good feedback and we were able to get it back out in, in July of ‘21 a little over a year after we, we had bought the company, and really for a, a long period of time it was actually one of the better performing technology IPOs, you know, of that, that class of of ‘21, which was a, a massive class.
Holden Spaht:
Yeah, it's also important to remember that an IPO is not a liquidity event. And so the earlier you start the clock, in many cases, the better. It takes a long time to sell down. In fact, we didn't sell down at all because we believed in the company. We didn't love the trading price after a while, and we liked holding it. So that was another, I think, reason to take it public when we did.
Brain Jaffee:
Yeah, that's exactly right. And in November of ‘24, we actually announced that we had sold the company to KKR for just under $5 billion. So it was a public company for a period of time. So maybe talk a little bit about why we did that and how do we know it was the right time to do that?
Holden Spaht:
Well, first of all, I think we had done a lot with the company. The value creation thesis that we embarked upon had largely been consummated, just like you said. We divested Bridge, we focused back on learning, we took the margins from single digits to —cash EBITDA margins were north of 40%. The company was a nice, organic grower. We had taken the product more into non-traditional learners and learning segments and vocational and professional learning. So we had achieved quite a bit and we had been approached by several different parties about it, right?
It's a very high quality franchise. As you said, it combines growth and high levels of profit and a good management team. Given that and also that our, you know, our limited partners, they're very focused on liquidity. It may not have been the best market last year, but we had a good buyer for the company. We had achieved a lot of what we wanted to achieve. We thought the market multiples for companies like that were fair, maybe not amazing, but I think realistic and good. And great companies can always be sold. And so we had that opportunity and we took it. And the other thing I would just say here, both you and Jamie Hutter, I mean, really we were making acquisitions with this platform all the way to the end.
You know, I think we always have this bias that we should always do what's best for the company in the medium term, not try to optimize for outcomes in the short term, and I remember we made a really strategic acquisition before KKR had our business under LOI that really enhanced the growth rate of the company by two to three points, even though we paid a little bit more for it and so we knew it wouldn't be accretive to us short term, but we said, if this is the right thing for the company, the next buyer is gonna see the same thing, that this is gonna help it sustain high levels of growth for another cycle. And then we even made an acquisition while I think we were under LOI or close to it. So I really wanna give kudos to the team for continuing the value creation all the way, literally, until the end. But an exciting transaction, a great new owner, and a great business.
Holden Spaht:
So Brian, we've talked a lot about Steve and why he made so much sense for Thoma Bravo when we made the investment. What do you think it is about Steve that positions him to continue to lead the company in the next phase under new ownership?
Brain Jaffee:
You know, Steve is a natural born leader. He understands this end market as well as anybody, and one of the things that I was really most impressed by with Steve was, you know, he came from a commercial background. And so when he stepped in as the CEO of Instructure, he really made it his mission to understand this end market and the customers inside and out, and I'd say he now knows that better than anybody. And then finally, you now, he is just a great partner to his investors. He collaborates really well and he understands his investors’ thesis and what it takes for them to make a good return. And I think that's really hard to find in private equity at scale, and he's phenomenal
Holden Spaht:
Up next, our conversation with Steve Daley.
Holden Spaht:
Steve, how are you, man?
Steve Daley:
I'm doing awesome. It's good to see you guys again.
Holden Spaht:
Good to see you. Life alright?
Steve Daley:
Yeah, life is great. Brian calls me every once in a while so I get my, yeah, I get my fix.
Holden Spaht:
Awesome. Well, look, we are —we talked a lot about you here, but we're so excited to have you. You've been an incredible partner to us now more than once and successful investments. You know, we're huge fans of yours as a firm. So we're excited to have you walk the listeners through the experience at Instructure. So, thank you for your time, and we were fired up to have you.
Steve Daley:
Yeah, thank you.
Holden Spaht:
Maybe to just do a quick background, but. You've served in leadership roles for over 20 years, companies like Ivanti, Soronti, and Avacyn. What do you think you learned in those roles that prepared you for the opportunity at Instructure?
Steve Daley:
Yeah, it's a good question. I mean, there's a ton of life lessons when you get as old as I am. But, you know, one of the things that I love to share is when I was doing Soronti, Soronti was a startup. We got seed funding. Our first round was traunched, so we didn't get it all up front, we had to hit a few milestones, like I think our second tranche was about getting letters of intent. So we were trying to OEM a product. And it looked like we weren't gonna get there, and I had worked probably for six months before we finally got this funding without a salary. I was kind of freaking out. I was thinking, we're gonna run out of money. I don't have any left in savings. I used it all up already, and so I started to get really, really nervous.
And so at the time it was back when Novell was around in its prior form. And they had brought in a new CMO. And I heard that this new CMO was looking to kind of revamp his team, and so I reached out and he set up an interview with him and he took the interview. And so, I was getting ready for that interview because I thought, “Oh man, I gotta find a way to get health insurance, and salary, and all that kind of stuff.” And right before I got on the call, I was just sitting there and I was thinking, you know what, I can't bail, right? I gotta be in or out, and I need to just see it through. So I got on the call with them and I said, “Hey, before I waste your time, we got to see if this is going to work. I might be calling you in three months looking for a job, but I got to stick it out.” So we ended up getting the traunched funding. We ended up, actually, selling the company about –we about 13 months in on the hold and we sold it to Avacyn. And so what it really taught me was look, you got to be all in or you gotta be all out.
Brain Jaffee:
Yeah, and Steve, that's a good segue actually to this next question, and it's interesting because we saw that behavior from you as you were on the board and thinking about whether you wanted to take this job or not. We were talking about that earlier, so now we understand the mental gymnastics you were going through. But before we get into Instructure more specifically, maybe talk a little bit about what it was like going from enterprise software companies with commercial-end markets where you are to Instructure, which is obviously an ed tech company, so just talk us through that transition and maybe the pros and cons of working in the education market.
Steve Daley:
People that go into education do it, I mean, they do it out of a sense of mission. I've seen that in our own company, as far as we hire a lot of former educators, that everybody feel —almost to the point when I first got on board, where one person asked me “Why we have to make profit?” And so I was like, “Okay, all right, we got some education here.” But there is this just intense focus on the mission of educating people. With that comes this kind of distrust of corporate America, to be quite honest. And so you have to kind of overcome that and you have really be authentic with educators. But when you do, they become super, super loyal, right? And so the good thing that I found is getting in and establishing that relationship is, your retention's really high, you know, they wanna buy more stuff from you. They really wanna do business with you, but it takes some work. You know, long sales cycles to earn that trust with the customer.
Brain Jaffee:
That's well said. And maybe just in terms of Instructure's mission and the problems that Instructure’s software helps its customers solve, talk a little bit about that. I mean, what did that look like when you first joined the company back in 2020? And then maybe talk about how that's evolved over time.
Steve Daley:
Yeah. So the company really was basically a one-product company. We came out with a Canvas learning management system with the whole goal of disrupting that market. It was early days in the cloud for education. The main competitor had 80% market share, was on-prem software. And really we came in and disrupted that entire market. Went from, you know, no market share to now we're the leading market share. And the opportunity that was there was that we could do more. We could just go faster. You know, the mission was then just become the best LMS. And as we went through the take-private, the company had lost its way a little bit in that they also wanted to go into corporate, I think, driven a lot by a big TAM over there when they were going public and things, I think, that kind of distracted them.
So, we went through the process of kind of shedding that business right out of the gate and really become focused 100% on education and then as we started to do a lot of work with y'all on the market and what educators were looking for, we recognized that the LMS really had become the platform for the digital transformation of education. It was the core foundational technology and 90% of all instructional workflows touched the LMS and so there was a lot of opportunity to try to bring all those pieces together and create more of a platform opportunity.
Now, in that process, we also had to get fit. So the company was losing money or close to break-even, but we really had to train the organization on how do you make decisions, right? Because the modus operandi of the company before that was “Oh, there's an opportunity. Let's go throw a dozen heads at it and go figure out what's there.” And there was all these little side projects going on and all this, there was really not a lot of focus. And so we went through a process with the help of y'all really to just put some laser focus and teach the organization how to decision-make, and make good decisions, and bet on the few things that are gonna matter to the organization.
Holden Spaht:
That's a great explanation. Jaffee, I'm going to go to turn real fast because I know you have another question, but only because Steve mentioned TAM, which has always been a huge subject for this company. I think it's a good follow-up question to ask. You know, we had this thesis around refocusing on education continuing —we thought there was enough market to continue to gain. Of course, we made some acquisitions to expand into tangential areas that are important and also present some new market opportunities. But the reality is, I think, Canvas, you're probably half of all higher ed students, maybe a third of all school districts. How are you managing that? Is that a good thing, a bad thing? How do you continue to grow the company? How do you deal with those facts?
Steve Daley:
Yeah, yeah, you're right. So, you know, our success has kind of got us to the point where, you know how much, how much market share can you gain, and how quickly can you gain it? And so it is, it is a challenge. You know, our core market is North America, and those, you know, the market shares points are North America. We still are pretty untapped internationally. And so a big part of our investment thesis has been, you know how do we expand outside of, outside of the U.S.? But as I said earlier, the LMS is the core infrastructure for teaching and learning and the things that happen inside of the classroom. So there are a lot of adjacencies to really go after and dollars being spent, profit pools that we can kind of go after.
And I think AI is going to open up even more of those for us, things that technology couldn't touch in the past. So, so, we're really looking at how do we get a bigger share of wallet within education? And the reality is there's a lot of money being spent on education, and we're still really early in that digital transformation. And so it hasn't been without challenge, right? Figuring out how to cross sell, how to cross buying centers in the case where we have to tap into new budgets and things like that has been challenging, but that is the path forward. And the good thing comes back to, again, we're the acknowledged leader, and everybody looks at us and says, “Hey, do more for us. We love working with you.”
You know, I had, I think it was the University of Washington said [that] Zoom had come in and said, “Hey how do we work better with you?” And he said, “I just said, go talk to Instructure.” And so, you know, again, there's two sides of the coin: as you become the leader, you become the acknowledged leader, you know this is a very referential sale. It's very much about everybody, you know, wants to be with a leader, but it does post challenges. We've had to work on some new muscles as a company to try to figure out how to continue to grow.
Brain Jaffee:
And Steve, as a follow up to that, later in our whole period, gen.ai really started to explode. And so I'd say the first thing that we all kind of collectively started thinking through was, gosh, is this going to be like an existential issue for the company? I think we pretty quickly figured out it wasn't, and that it actually should be a really interesting tailwind for the business. But it was early, and we were starting to invest in it. Maybe talk a little bit about how the company has approached working with AI and utilizing it and where you are now?
Steve Daley:
You're right, we did go through that is this gonna be a bad thing or a good thing sort of analysis? And generative AI really is going to affect a lot of the content producers, right? What it does is it kind of democratizes production of content and anything that's really human intensive like tutoring and those types of things. And so for us, it actually opens up more opportunity for us to apply technology to some of these problems that had been pretty intractable in the past. But it also really depends on access to the data, and we have 15 years of data related to, you know, how people are using our technology, how it's being used in the teaching and learning environment. And so that kind of data mode that we have really allows us to train models in a way that's unique, you know that a startup that came into the space just wouldn't have access to that kind of data, and so for us, it's going to be a long-term opportunity. It kind of builds again on this idea of, here you are as a leader, they want you to be successful, they want to do more business with you as customers, and because of that, we've got a competitive advantage over somebody that might try to come in and disrupt us.
Holden Spaht:
Makes sense. Steve, you know, it's interesting. I've been doing this a long, a long time in my business, just like you have in yours, and I know selling a company is, is it one experience for the investors? It's a very different —can be a very different experience for the management team. So last year, last summer, you know, we announced the sale of Instructure to KKR. I'm curious what that experience was like from your perspective at the time and kind of having the benefit now of some time with that and some hindsight, you know, what it's like now?
Steve Daley:
You know, so I've been through a number of exits and the process is all very similar. You know what I think, particularly with this process, first of all, we're a public company, so I'd never been through a process like that, right? And there was a lot of caution about what you can and can't say, the data that's already out there in the public markets and what are we going to provide in addition. So there was some kind of nuances to do in the process this way. As we went through this process the thing that really —it helped me —the thing that I kind of hadn't had, and I hadn't realized in previous processes was I think Brian and I probably talked almost every day during this process. There was a lot of communication back and forth.
Holden Spaht:
Did you enjoy that? Did you enjoy talking to Brian every day?
Brain Jaffee:
You don't have to answer.
Holden Spaht:
Don't lie.
Steve Daley:
It was great. But no, it was great because I could call up Brian and say, “Well, how should I position this? How should we be talking about this with the potential investors? Or they're asking for this. Do you think that's appropriate?” So, what I kind of learned from the process was one, it was great to have that transparency between us. And that was from four years of relationship, talking on a regular basis. But it also helped me as a leader, because I recognized that a lot of my direct reports were going through a similar thing, not sure how they should be talking about this and caused me to kind of look back and be much more, maybe transparent, or just more communicative in the process because you get so bound up in this process, right? So when I look back, this was probably the least painful —I wouldn't say it was painless —but it was the least-painful exit that I've gone through. And even though there was a lot of unknowns that I hadn't dealt with in the past.
Holden Spaht:
I've done a lot of exits with Brian and I know he's very, very good at staying on top of it. And it was a time when there weren't many $5 billion deals announced last year. You both deserve a lot of kudos for that.
Brain Jaffee:
Yeah, Steve, thanks for thanks for not answering that question honestly. I appreciate it. You know, I'd say now that, now that you're six months in or so with a new owner, new strategy, maybe just talk a little bit about what you're seeing in the broader ed tech market. I mean, we know, you know, having, having lived it now with Instructure and actually another business we, we used to own called Frontline, how much innovation happens in this space, how many venture capital, you know, chasing companies at the lower end of the market. And so, for these these bigger scaled players you've got to be all over those those trends and where you want to invest in you know where the company's going. Maybe talk a little bit about some of the exciting things that that you're seeing a tech right now
Steve Daley:
It's — as a lot of the world is right now —it's, it's a little bit of crazy town going on, right? The Department of Ed's getting defunded, grant money is getting cut off. I mean, there's a ton of things happening in education right now, there’s a few things that we're seeing: one is, education actually, when they, when they look at what's happening, just from a federal level, most of the presidents that I talk to say, this is a good thing. That there was too much regulation, there was too much influence that the federal government was having. And then in the same breath, they say, “But yeah, you could have done this a little more gracefully than just kind of blow everything up.” So, I do think there's kind of a sense of optimism as far as maybe we can just go do our thing and not have to worry about some of this regulatory oversight.
The other thing that's happening is that, you know, there's been a real, probably in the last, probably since the pandemic, but you probably started it even before then, was this question about what's the return on investment on an education? And people are thinking about it differently. You know, I just got off a call just a few hours ago with a provost at one of the big online schools and they basically said, you know, whereas they used to be really focused on adult education and people that had some college, no degree. They're getting alot of kind of 18-year-olds that want to come in and just do their education online a hundred percent —want to work while they're doing it.
And so there is a need and an opportunity to really start to bring together not just the in-class sort of how do I do this? That deliver teaching and learning in class, but how do I do it in a in a hybrid manner? Historically, the way that you've evidenced that you're learning as you get a diploma right? Which is kind of right at the end. So how do you, how do you evidence along the way that I'm learning stuff, that I've got —you know, I get these certificates or these badges, and, and so the industry really needs somebody to kind of step in and pull that all together.
There's a lot of really cool stuff happening. And, you know, generative AI is just getting embedded, not as a separate product, but it just is, it's making those, those user interfaces so much more intuitive, making it so much easier for both teachers and students to interact with the technology and helping make them way more, way more effective.
Now, in the industry as a whole, there was a ton of VC funding that went into ed tech in the pandemic era, and they're not necessarily —you know, they're starting to get the tail end of their investment periods or they're willing to kind of re-up on them and so there's going to be an opportunity for somebody like us, a consolidator, to start to really roll this up over the next three to four years, and it's going be really exciting from that perspective.
Holden Spaht:
Well, that's great. Maybe that's part of the answer to this next question, but is, which is more general, but just what are your hopes for the company as you look out in the future?
Steve Daley:
Yeah, that is the great segue into, you know, somebody needs to do this. Somebody —this is one of those industries that hasn't had, you know, a platform emerge that's going to digitize, you know, the whole process and do it in a way that is integrated and doesn't require 450 apps. In fact, our latest research shows that a typical K-12 district uses about 3,500 different applications in the teaching and learning and education process.
And so what I hope is that we're skating fast enough to the puck that we are going to be the ones that the industry looks to, to be that consolidator, to bring everything together and to do it in a way that meets this idea that education isn't just going to high school, applying to college, getting a degree and getting a job, but gives the learners flexibility in the way that they want to learn.
Holden Spaht:
Well Steve, thanks for all your time. It's always great to reconnect and get [an] update and really learn more about the mission that Instructure represents. Really appreciate your time, it was an awesome conversation, thanks.
Steve Daley:
Thanks guys.
Brain Jaffee:
Thanks, Steve.
Brain Jaffee:
Thanks to Steve for coming on today. If you liked this episode, be sure to listen to next week's episode of Beyond the Deal, our mini series where we get to ask him anything. I'm Brian Jaffee, thanks for joining us.
Orlando Bravo:
Behind the Deal is brought to you by Thoma Bravo in partnership with Audacy’s Pineapple Street Studios. Join us next week for more stories behind the deal. Thanks for listening.
