No Sugarcoating the LMS: Q&A with Instructure CEO, Josh Coates

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What brings an entrepreneur who sold his company in 2007 for $76 million out of “a very fulfilling retirement,” filled with video games, volunteering and travel, and into the labyrinthine and litigious world of learning management systems (LMS)?

For problem solvers like Josh Coates, it was “a classic innovator’s dilemma opportunity,” as he describes to EdSurge. “In the LMS world, we’ve got this big incumbent that effectively owns the market. They’re bullies and not well-liked by customers.”

Coates doesn’t mince words when talking about his competition. As CEO of Instructure, he oversees a company of 450 employees that some consider a “dark horse” in the race to conquer the LMS market. Since publicly launching its product, Canvas, in February 2011, the company has captured an estimated 9 to 12% of the higher education market.

Were it not for his volunteering as an adjunct professor at Brigham Young University, Coates might still be on vacation. In 2008, he was approached by two graduate students in his venture startup class with a fledgling idea that would become Instructure. Skeptical at first, Coates saw potential after they shared transcripts from interviews with 17 university administrators, detailing pain points and the need for a better product.

Coates introduced the students to a venture capitalist friend, who was unimpressed. “He basically said, ‘If you think it’s so great, why don’t you give them 50 grand?’” recalls Coates. He did--and wrote a couple more checks that would total $750,000. Coates also brought in his friend, Cory Reid, to serve as the company’s first CEO in August 2009 “but it ended up not working out.” (Reid is now CEO of edtech startup, MasteryConnect, a mere 15 minutes’ drive away from Instructure’s Salt Lake City headquarters.)

In October 2010, Coates took over. A couple months later, Instructure won a bid from the Utah Education Network, a consortium of state colleges that was looking for a replacement for Blackboard. It immediately caught the attention of others: Desire2Learn, another bidder, filed a lawsuit against the network, saying it was “puzzled that the selection committee selected a vendor with very little experience and a small workforce for the project.”

The suit was shortly dropped. But it drew attention to Instructure’s coming out party. Shortly afterward, “we had over 3,000 inbound leads from people wondering who we were,” says Coates. “The first year [2011] we signed over 100 schools. Next year we signed another 200.”

Today, 8-9% of Instructure’s customers are companies, and the “nearly 1,000 schools under contract” are split between K-12 and higher-ed. The estimated value of all contracts, according to Coates, is close to $200 million. And there’s an even larger pot of money looming in the horizon: an initial public offering. “We’re operating to the plan and its going very well,” says Coates.

Coates shares with EdSurge more thoughts on the LMS landscape, dealing with growing pains and how the “new kid on the block” maintains a spirit of innovation.

EDSURGE: What lessons from the industry do you constantly keep in mind?

COATES: Blackboard really did a great job at capturing the market, but maybe took their eye off the ball on innovation. They focused more on capturing revenue, and growth happened not from trying to make customers happy, but from more acquisitions. That mistake helped create the perfect storm for us.

We have to be careful not to fall into that trap as well. A lot of feedback we’ve gotten is that people switch to Canvas because we’re easier to use. We’re enjoying a 99% retention rate with our customer base. We have to learn the lessons from the past, or we’ll repeat them.

EDSURGE: As you continue to grow, how do you keep innovating?

With broad technology platforms like learning management systems, there are generally two ways to grow. There is an organic, grassroots way to innovate. Then there is the bolt-on, acquisition method. Both strategies are valid and have their place.

Internally we have lots of mechanism for innovation; we have a Labs program and a research team. Both are separate from the engineering and product team. They do research on our data and try to figure out what’s working and what’s not.

The problem with growing through acquisitions is dealing with different technology stacks, user experience, product philosophies. As you pile them up, the features look and feel very bolted on. And that translates to bloat.

As our product matures, we will have to deal with our own feature bloat and complexity. But we’re able to attack that challenge internally. We made a small “acqui-hire” several months ago, but that’s it. We looked at over a dozen other companies that have approached us about an acquisition but opted not to do so.

Speaking of features, Canvas has done MOOCs featuring The Walking Dead and Minecraft. Where do MOOCs belong in your plan?

The MOOC phenomenon of 2013 created an international dialogue around opening education to people who normally wouldn’t have access. A lot of VCs paid a lot of money to start that conversation hoping that a business model would emerge. To date, no viable model has emerged. But it doesn’t mean it’s not a useful dialogue to be having.

Our contribution to the dialogue was the Canvas Network, which we launched in November 2012. We’ve had hundreds of thousands of students from 60-70 institutions involved. But we never intended for it to be a core business unit--it was more of a research platform to experiment.

I think the vision of MOOCs in the long term is a beautiful vision that someday will be realized in some way. But that might be five, 10, 20 years from now.

How do you approach the K-12 and higher-ed markets differently?

We have a separate sales force for the two because the processes are pretty different. In higher-ed the RFP and the budgets are pretty well-established. Universities have used the LMS for a decade because they have dedicated IT staff, data centers and can run software on premise. A contract runs three to five years.

It’s a little more like the “Wild West” in K-12 right now. They never really had the resource or ability to run enterprise software. Now, because of the advent of high-quality cloud software, they are really excited about technology that they couldn’t use before. But they’re also a little tentative; it’s not a foregone conclusion that they have to have an LMS--it’s more still an option. They’re discovering what a full-functional platform can actually do for them.

Sometimes K-12 budgets come from state or federal technology grants, so a lot of them are not ready to sign five-year contracts. They’re usually two to four years.

What three words would you use to describe Instructure in an icebreaker?

Open certainly comes to mind. Innovation. And...refreshing? Actually, it’s impactful. Impactful, open and innovative.

There’s some confusion and disagreement about what “open” means. How do you use the term?

Instructure is able to use “open” in a lot of ways. Canvas is open source in that anyone can see our source code. Accessibility-wise, you don’t need to pay us money to start speaking to our APIs. We also have a free-for-teachers platform. If you’re a teacher in an institution that is stuck with an older LMS, you can use Canvas for free for your classroom.

Our culture is open. We don’t really have a lot of walls in our office. Everything is physically open. There aren’t a lot of secrets here.

A lot of companies use the term “open.” Others think of a narrow definition and try to ride the coattails of openness which is a little disingenuous. We try to keep it real when we use the word.

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