Online K-12 Education IPO In The Great Recession: Archipelago Learning Co-founders Cameron Chalmers, Dave Muzzo, And CEO Tim McEwen (Part 5)

SM: Let’s go over the terms of your transaction. I think that can be educational for a lot of people.

TM: It was basically a $100 million sale, and then Dave and Cam each reinvested in the business.

CC: We each put $10 million back into the business.

SM: So the two of you essentially took out $100 million from the business and then put $20 million back into it?

DM: Correct.

SM: Was that feasible owing to the fact that the business was quite profitable?

CC: We were operating with margins exceeding 50%.

SM: Which means that you didn’t need working capital financing or any other additional financing from the private equity firm, and you were able to focus solely on the sale?

DM: Yes, that was the situation.

SM: When you reinvested your $20 million, what ownership percentage did that give you?

CC: We got 20%.

SM: Then $100 million was the post-money valuation on the company?

TM: Yes.

SM: Tim, how did you fit in the picture? Did you find them or did they find you?

TM: I was the CEO of Harcourt Supplemental Publishers. I had worked with Providence in the past, knew of Study Island, and thought very highly of them. I had actually looked at their offering memorandum while I was at Harcourt.

When Providence called and said “If we get Study Island we are going to need a CEO,” I immediately started work with them on due diligence. I came up and met with Dave and Cam and liked them a lot. At that time Study Island was in 23 states. The plan was to ramp up business to all 50 states as quickly as possible and expand our penetration as well as product offering in existing states. That would allow us to continue to grow the business.

One of the things that worked really well was that the three of us don’t have strong egos. We just want to grow the business and be successful. Dave and Cam were very candid about the issues they were tired of dealing with and what portions of the business they were very interested in working in. Hiring all the people, training them, putting in place benefits and 401(k) programs, and talking to all the salespeople who were calling it every day were not things they wanted to do.

The first year they were very involved in the business as we put the management structure in place. That allowed us to put a structure in place to scale the business. We looked at the people and the processes, systems, and the controls. At Providence we always had an IPO as one of the potential exit strategies. At the same time we were ramping the business, we were also focusing on building the infrastructure that would support that type of decision if we decided to go that route.

The first thing we had to do was build up the content team quite a bit. It went from 18 people to just under 60 today. We can now build content quicker for each state. As we built out for new states, we hired new salespeople and expanded sales and marketing. It was all self-funded. In the fourth quarter of 2007 we entered 14 additional states, and in the fourth quarter of 2008 we expanded to the remaining 13 states.

This segment is part 5 in the series : Online K-12 Education IPO In The Great Recession: Archipelago Learning Co-founders Cameron Chalmers, Dave Muzzo, And CEO Tim McEwen
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