Instructure, the company that makes/hosts the Canvas LMS, recently announced an intent to sell to a private equity firm for about $2B. That’s a lot of money.

I don’t care about the business of edtech. I don’t care if a company buys another company, or what their reasons are. I care about how technologies are used to improve the learning experience for students. The business of edtech is a means to that end. But…

George Siemens¹ responded with something that made me scratch my head:

I don’t see it (the value) the longer I follow this thread. There is a fair bit of “what if” and “they could”. But nothing substantive. Nothing that would make a PE firm drop $2b. I think they bought software. Not data.

Folks that watch the edtech business space have been writing about the business side of things. Folks that write about edtech and data and privacy and business have been talking about this for years.

Ian Linkletter wrote a great twitter thread on what may have been a driving factor for the sale in response to George’s tweet - and how it’s likely significantly about gaining access to the data.

The way I see it, as a non-business finance type person, there are a few things going on.

A private equity firm just committed $2B to acquire a company. That company might give them value in a few ways:

1. assets
2. business

Assets

The stuff that makes up Instructure. I’m spitballing, as a complete outsider with no skin in the game. But this is likely made of a few things:

Brand - Canvas is still the new shiny in the learning management space. Its brand is probably worth a fortune to Instructure. But the brand is basically “we’re not Blackboard”. What’s the value of the brand to a private equity firm? Are they going to be licensing it? Maybe.

Intellectual property - this could include patents (but a quick look on Instructure’s website doesn’t list a huge patent portfolio so if they have patents they’re not bragging about it).

Software - they build an LMS, and maybe Johnny Bravo wanted to buy that. That’s complicated, since Canvas is nominally open source. Or “open source”, since the product they sell is essentially a fork of an open source project. So the value of Instructure’s software would be the delta between what someone would get “for free” by just adopting the originating open source project, and what Instructure has added by packaging/polishing/integrating/etc. That’s definitely got some value, but I’d bet I could spin up a company to do that for something considerably less than $2B. The software may make up a chunk of the value to the buyer. I’m guessing not a whole lot, though, given PE will be needing ROI and an exit strategy. If a private equity firm wants to give me $1B, I’ll be happy to build a new LMS based on the open source version of Canvas. Call me.²

Physical property - maybe Instructure owns a building or has long term leases for key strategic buildings? Possible. Worth any part of $2B? Unlikely.

People - maybe Bravo took a step back and said “boy howdy, the organization itself - we NEED it.” Maybe it’s the leadership team? Maybe the development staff? IT department? People are the heart of an organization. I’m guessing a private equity firm isn’t in the business of throwing a huge chunk of cash for heart.

Data - This is the big one. It’s what distinguishes Instructure from everyone else. They have made a strategic priority to amass what they claim is the largest database of information about students in the world.

Ian linked to a tweet posted by Sean Emory back in August:

Instructure CFO spoke today. $INST

He mentioned that they have the LARGEST database of student activity in the world. That they have over 1 TRILLION records of student activities.

They are using this to create value for students and universities with privacy at center.

A trillion points of data, about a significant chunk of all active and recently-graduated students in USA, and a bunch of data about students elsewhere. I mean. Golly. That’s a lot of data. Instructure launched their data collection project as a means to “create value for students” while respecting privacy. That’s cool. But privacy and intentions kind of go out the window with an acquisition. Unless they plan to detonate their datacentre upon finalizing the sale, that data is a huge target for the purchaser. Worth $2B? To have a list of 35% of all students in North America? Not a stretch to see a company pay $2B just for that.

Business

The business of edtech is built on relationships with client organizations. It’s a hard thing to get into, but as Instructure has shown in the last decade, not impossible. But the value of those relationships and the contracts that formalize them are incredibly significant. I’d be surprised if a private equity firm was trying to buy into existing relationships with postsecondary institutions etc.

ROI for Bravo?

So. From an outsider’s perspective, there are only a few parts of Instructure that might make sense to a private equity firm:

1. Software
2. Data
3. Contracts

Of those, only data - that massive largest-in-the-world database of information about 35% of active students in North America - would justify anything close to $2B. I think saying “golly I don’t know why someone would value this data” seems a bit disingenuous.

My take

The data has value, but not directly. It has value in building their platform to take advantage of it. So, Bravo likely isn’t interested in the data per se. There would be crowds of people with pitchforks and torches if they tried to repurpose data in a way that violated privacy of students. I hope.

I don’t think Bravo is going for any of those - the ROI just isn’t there for a $2B buy-in. That would be a colossal waste of that much money, if they were trying to profit directly from software, data or contracts.

They’re not going to be liquidating the company or breaking it apart to sell bits off. I think they’re betting on the company’s roadmap and there are things that will require not being a publicly-traded company. I think Bravo has an exit strategy in place, and that they’re planning on supporting Instructure through some work that would be seen as unprofitable to shareholders who are looking for immediate returns. Bravo is betting on a long game, and Instructure is likely going to be investing heavily in R&D and possibly acquisitions as they try to capture more of the market with Canvas and try to take on the corporate market with Bridge. I’d bet Bravo is looking for a return after, say, 5 years of development. They’re looking to try to grow the LMS pie, and try to take a bigger piece of it.

Updates

Kin Lane posted a breakdown of his understanding of the Canvas API and underlaying data model, and implications for the value of the data (perhaps going beyond direct monetization of the data):

This is why Ed-Tech is such a valuable industry. You get to groom and harvest the future consumer profiles each year. You also get to train your machine learning models based upon the behavior of consumers as they are growing, develping, and then ultimately becoming adults. If you can’t see the value that exists here and you don’t believe a private equity firm will cash in on the value that is present, I’m guessing “you don’t know how all this works”, or at least in denial about how it all works. I am guessing you fully know how this all works, you just don’t want everyone to know you know. Startups equipped with APIs make for an amazing virtual data mining vehicle that can penetrate our higher education institutions, and embed themselves into the lives of faculty and students–this is by design. All of this may have began with a strong belief in serving the student and schools with the best possible LMS, but there is nothing preventing this platform from being used to exploit schools and students in the future.

Jim Luke looks at it from an economist’s perspective:

So is Instructure worth $2b? We’ll find out if and when TB sells it. My guess is yes, TB will definitely flip this in a few years for substantial profit, assuming the bottom doesn’t totally drop out of the LMS market. (a small but real possibility).

and

Yes, Instructure has had decent growth numbers (not sterling by SV standards, but good) in recent years. But finance is all about how are you going to top that going forward. Finance doesn’t look back. Truth is, Instructure or any of the LMS’s are going to have a hard time finding big new sources of revenue. There just isn’t much left in the higher ed budget for their stuff. Even the data analytics for learning part has failed to take off revenue wise. That’s why data mining for AI/Algorithms, monetizing the data to non-education folks, is so tempting.

Yes, any of these LMS firms, or publishers for that matter, could have had decent solid, satble, modestly profitable businesses that were mature. But that’s not how finance capitalism works. Instructure isn’t an education tech company anymore. It’s just a software company and data processing service that happens to get its data from college and university students. It will likely be managed that way.