CIBC Innovation Banking Podcast

[00:00:00] Tom What you do is important. Whom you do it with is more important. I have the unique opportunity to create the culture and bring in the talent. One of the things I think is really important in business is people should feel valued. People should enjoy their work. We all spend so much time working. 

[00:00:22] Michael Hello, I'm Michael Hainsworth. The CIBC Innovation Banking Podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. Shoreline is an education unto itself. Founder Tom Dretler created the company that matches international students with universities in the United States almost a decade ago, as a result of time spent at a diversified investment management company based out of Chicago. And Dretler had to go back to school, metaphorically speaking, when the worst pandemic in 100 years collapsed demand. And the economic and financial crises that followed COVID 19 has led Shorelight to revisit the way it funds its future. I began my conversation with Dretler by asking him to explain what Shorelight does, like he's talking to his mom. 

[00:01:18] Tom So what Shorelight does is two things. We help international students to get to the right U.S. University for them. And we call that enrollment management. And we manage the entire process and make it easier for them, for the student and for the university. And the second thing we do, as I would tell my mom, is that we help the students to perform better, to perform well. And performance for us means three things. We want the student to perform well academically. We want the student to have a good experience socially. And we want the student to get the right kind of job both internships when they're in school and then the right kind of job, either back home in their home country, maybe in the United States for a short period of time after graduation or both. 

[00:02:14] Michael That's an interesting point, that you're not just sort of leaving them to their own devices once they arrive in the United States. You're helping them with those internships, those jobs. The language barrier, I can imagine can be a thing. What are some of the biggest cultural hurdles that they face that you help them overcome? 

[00:02:31] Tom There are a few and they're significant. So one of the first is that in many cultures it is quite unusual to speak critically in the classroom. Critical thinking skills is one of the things that American higher education is geared towards sharpening. And part of sharpening your critical thinking skills is to sharpen your ability in a classroom environment, to engage with your peers and also sometimes with your professor and express an alternate view and back that view up with facts. And in many cultures, that's simply not done. So that's a challenge for international students if we don't prepare them in advance. So that's one. From a social perspective, many international students, partially because of the language barrier, but also partially just because they're not used to operating in an American environment, come to a university campus and feel like they're on the outside looking in. And so even if that student has a decent command of English and frequently they don't, but even if they do, they sometimes are more reluctant to engage in the social activities that are going to put them in touch with their American university colleagues and some of their colleagues from some other nations. What we see with international students is frequently they start to cluster with people from their home country if they have the opportunity to do that, which actually makes the experience of coming to the United States less rich. So those are just two examples. And we could discuss more if you were interested. 

[00:04:23] Michael Yeah, I could imagine. Just, you know, the all-American football game would be sort of a foreign concept to an international student entering the United States. I understand Shorelight came out of a one year executive residency at Sterling Partners. How so? 

[00:04:38] Tom So I had been a CEO for 13 years with a higher education research company called Eduventures. And I had a relationship with a number of the senior people at Sterling Partners, the best, in my opinion, private equity firm in the education space. When it was time for me, after 13 years to leave Eduventures, I was invited into Sterling. And the primary thing that we looked at together in the roughly 15 months that I was an executive in residence there was how could we help universities with a problem that had already existed, which was declining enrollments or increasing enrollment pressure? How could we do it in a way that would not just benefit students, but first and foremost would benefit students, but would also benefit every major stakeholder on campus? And so for me, as a career CEO, to not be a CEO for just over a year and to engage in an exploration where we were looking at ways to solve the enrollment problem, but we were doing a stakeholder analysis and making sure that whatever it was that we did would be consistent with the academic missions of the institution, would benefit all the major stakeholders on campus. And then in addition to simply generating incremental enrollments, we held ourselves to a high standard of fundamentally changing the financial profile of the university based on the work that we would do and through our investigation, which included interviews with 30 college presidents, then the creation of a council of five college presidents. It went into the creation ten years ago of a white paper called the Financially Sustainable University that I coauthored with one of the senior partners of Bain and Company. All of those things helped give rise to Shorelight. And in the end, what we knew with the creation of Shorelight is that, first and foremost, we were actually solving the world's higher education problem, which is that in the most populated countries in the world, except for the United States, those countries do not have the quality higher education capacity to serve their citizens who would want to go to quality higher education institutions. So we needed to make sure that people around the world weren't going undereducated. And at the same time, what we found was in the United States in particular, we had an oversupply of seats, of capacity, of quality, higher education. So the U.S. was the inverse of, say, India or China or Mexico or a number of other countries. And so we wanted to make that connection. And when we started to look at what was stopping international students from coming to the United States, because we saw that roughly 3.7 million students said they wanted to come to the United States, and only a fraction of those, about a million were actually coming. We knew there was a problem with students getting here. Secondarily, we saw that once students did get here, only 63 percent of those first year students with successfully make it to the second year. So we saw two problems. We saw an enrollment management problem. We saw a performance management problem. And we created a business model at Sterling that would address both. And then we launched the company. 

[00:08:19] Michael How did you build the business model with the help of all those big brains at Sterling Partners and elsewhere, to build a company that's capable of scaling on a global level. We talk here in Canada, where I am, that, you know, Canadians are great at starting companies, but scaling companies to a global capability is a very difficult thing. How does a startup entrepreneur do that? How did you do that? 

[00:08:45] Tom One of the things that we benefited from coming out of a private equity firm was that we knew that we had capital. Having capital doesn't mean that you will achieve scale or that you'll be successful. But it may be gives one a little bit more permission to anticipate getting to a point where scale might be possible. If, alternatively, you know, you and I created a business in a garage. We were maxing out our credit cards and those kinds of things. We may not have started with this idea that we may be working with hundreds of thousands of students in a relatively short period of time. But as Sterling, we anticipated that. And given the magnitude of the problem, the numbers of students that actually wanted to come, we knew we were going to be operating in the hundreds of thousands if we were at all successful, potentially even in the millions. So we designed a model that very deliberately to ensure that incentives were aligned that would allow for scale. And so I will give you an example. We wanted to make sure that no matter what happened, we were always focused on helping the student to get where they were trying to go, which was to graduation successfully and then to a job. We designed our business model so that our profitability would be driven by student outcomes. And the way that we did that is we knew there was significant cost that would go against bringing a student to a university on enrollment management side. But we decided to put our money where our mouth was and say that where we really wanted to make our money was based on student outcomes. And so for virtually every relationship that we have with the university, our profits are really only coming from when we see student success. That allowed us to develop long term relationships with universities where fundamentally we knew that we were creating harmony between what the student would want, what the university would want, and all the ways that we were measuring ourselves as a mission driven business, but also as a business that would have shareholders. And we need to succeed financially. So we never had to toggle back and forth between mission and margin because of the way we designed our model. And from a scale perspective, what I've seen in my career is the more success you have, the bigger you get, the more you bring in outside capital, the more it can in a corporate environment become about the financial returns. So we built in through long term contracts, a situation that no matter how big we got, no matter who came to the table, that the way to drive the best financial returns, even at scale, was to focus on student outcomes. 

[00:11:57] Michael When we spoke to the folks over at Expensify about this, one of the points that was made was that they didn't see scale. If every time you wanted to add a new customer, you had to have an additional sales person making that possible. You sound like it sounds like you built out a system that allows you to scale without requiring adding more bodies in the back office. 

[00:12:20] Tom It's a great point and we know you design things almost in a theoretical way to say, what if there were no human beings involved? How would we do? How would we do things? I mean, you're going to have to have a certain number of people involved in your organization. But if we were to go from X to five X in terms of the volumes of students that we were supporting and the numbers of universities that we were working with, could we do it with no additional people? And of course, the answer is no, you will have additional people. But if you if you start with, we're not going to add more people to increase by five X and you work backwards from there, it really helps. And we have a whole division at Shoreline that's focused on automation. In the beginning, we didn't need to think about automation as much, but now that we're getting hundreds and hundreds and hundreds of thousands of applications, it is critical for us that we automate in two ways. We automate A enrollment management process and B the student services process. 

[00:13:33] Michael COVID 19 changed everything for most technology companies overnight. Those that could not pivot would not survive. But Tom Dretler is a survivor and managed to keep the company above water. While seeking higher ground during the global pandemic, the business model relied on international students coming into the United States. So how did Dretler pivot? 

[00:13:57] Tom So the business model didn't pivot. And I'll explain that. And then I'll I'll share just briefly what we did have to do. So from a business model standpoint, we already were creating a company that wasn't reliant on more bodies to serve more students. From expense management situation in 2019, we started to notice between Uber, Lyft, We Work and some of the companies in our education technology industry that high growth companies that didn't have a clear path to profitability were having some challenges. We in 2019 started taking a significant amount of fixed cost out of the business. And that really served us well because when most of your costs are variable costs, your business is protected because when the time comes in or the tide goes out, your expenses adjust accordingly. And so we were protected there. But it doesn't sound as strategic as it is. But we had in 2017, it started with a project with the University of Massachusetts Amherst, where we created a very sophisticated product called Shorelight Live. And it was a way of serving students without the professor there. The students would all be physically together in a in a classroom environment. Professors would be in the studio on the other side of the world. We did a modified version of Shorelight Live to serve lots and lots of students during COVID. The modified version was because of the the virus we couldn't put those students physically in a classroom where they'd be shoulder to shoulder. So we shipped hardware to their homes, so they weren't just going off their own devices. We were creating a richer online experience than you would get typically. And even with great tech that we had already created, we still saw drop off. We still saw some students who said, my interest in American education is in physically coming to the United States. So I'm going to take this as a gap year. I'm going to hold off. And so those were hard times, just like they were for the airline industry. Just lucky for us, we had already taken so much fixed cost out of the business that yes, revenue declined a little bit, but we actually improved our margins during that period of time, got to profitability. And now, you know, we've always traditionally been a mid-to-high thirties grower and we're once again, I mean, we'll be higher than that will be mid-forties growth this year. And we're a profitable company and we have nice flow through the margins on every incremental student. So we're in a very strong position now. And you know, COVID was a major challenge. You know, again, if you were to explain to your mother what needs to happen for Shorelight to be in a good position, we're really only two things because we have such great universities. The country needs to be open and universities need to be open. So in the fall of 2020, the country was essentially closed and universities were essentially closed. So in the oversimplistic world, that's bad twice too bad. You know, country closed, universities closed, but now country open, universities open, huge demand. I mean, we're seeing demand across the world unlike anything that we've seen before. And it doesn't just seem like a post-COVID rebound. We're seeing sustained demand through multiple intakes. So it's really an outstanding time to be at Shorelight. 

[00:17:48] Michael So it sounds like what you're saying is you built this online capability with all of this technology that you can still apply in a post-COVID world. So you're not only getting kids who want to come to the United States, but those who don't necessarily leave their home country. Is this the first fiscal school year where you're seeing a ramp back up, not just in normalcy, but beyond it? 

[00:18:10] Tom Last year, last fall, we had more students than we've ever had in a fall and take. This fall is a 50 plus percent growth over last fall. So it's significant. I mean, we're seeing a major ramp. And you are correct. We do have the ability in a hybrid format to leverage the technology. So especially at the graduate level or with younger students. Sometimes in the world that we live in today, parents might want their younger students to maybe start at home, then come to the United States. So it's great for us because we can let the technology serve the student. And we just want to make sure the student gets the education they want, gets the experience they want, gets the degree they want. And if they're doing all of that in-person, all of it online or some combination, we can offer all of those options. We're indifferent. We just want to make sure it works for the students. 

[00:19:12] Michael So where is that additional demand coming from? Is it across the board? Is it India? Is it China? 

[00:19:17] Tom So we're seeing 40 percent plus growth in every region of the world right now, and we break into six regions. But we were already really high in terms of demand from India. So in total numbers, Indian student demand is the most significant demand for US education right now surpassing China. 

[00:19:43] Michael What does that tell you? 

[00:19:44] Tom It tells me a few things. One, it's affirmation for something that we've known for a long time, which is the US has not just the best higher education in the world, but we have more high quality universities than any place in the world. And India having so many, you know, such a large population and so many students who can't be served by, you know, what India has to offer from the higher education system is just one of those emerging markets. And we think India is going to be a massive growth driver for US higher education for a generation. What we've seen in China is a shift. And while our Chinese numbers are growing over 40 percent, overall Chinese visas to the United States are down. We're seeing demand from China down because of US-China relations. Chinese students are opting either to stay in China or go to places like the UK and still with Shorelight because we have excellent schools. We can outpace the market so the market can go down and we can go up by 40 percent. But we are seeing a different kind of demand. We're seeing more graduate than undergraduate. And some of that is because of older students versus younger students. And the students level of comfort of the parents level of comfort of, you know, during this time where health is a concern and other things are concerns. How comfortable are you with your child going to the other side of the world? So we're seeing more comfort at the graduate level. And India has just a larger graduate student population than any other country in the world. 

[00:21:36] Michael The financial crisis triggered by the post-pandemic economic crisis of rising interest rates and falling tech company valuations, has hit most growth stage companies hard. Valuations, previously set at 100 times, fell to as low as five. And that makes it difficult to fund growth coming out on the other side of the worst financial crisis since 2008. Going into the pandemic, Shorelight was on track to IPO. But Dretler tells me that's off the table for now and probably forever. But the way he built that company for scale has made it most likely unnecessary he'll ever go to the public markets. 

[00:22:16] Tom It sounds like a cliche. You always want to just build a great business. And when you create a business and we're nine and a half years old, so we're almost at our 10th anniversary and you bring on outside investment as we did. There's two ways to get those investors a return. Eventually, you're either going to go public or you're going to sell, right? Those are the only two ways because people are going to invest and then never get their money back. And so we have been open minded about ways to grow our business. We don't need outside capital anymore. We're cash flowing. We're profitable. But when is the right time for some of those early investors who invested in 2013, 2014, 2015? When's the right time for them to get a return? Well, it could be two years from now. It could be sooner. We were open minded as to when that might take place, and there was a period of time not that long ago might have been a little irrational, but there were there were lots of companies going public where it seemed like the water was warm. You could you could take a company with certain characteristics, public, you know, stay independent and create some liquidity for shareholders who have been in a long time. Our stakeholder base, there's openness for stakeholders and I think about them all the time. They're the students, the universities, the employees and the shareholders, and we've got to take care of all of them. And so whether it's IPO or sale and sale could be a partial sale. You know, at some point, we need to we need to create an opportunity for people who've been in since 2013, 2014, 2015. With that being said, the way the market is right now, our strong cash position, some of the things we see, we're more buyers and sellers. We're looking at acquisition opportunities and we see a lot out there. 

[00:24:14] Michael So for a listener who might be in a position where they were much like you, you know, looking at the prospect of an IPO, you're in a fortunate position where that's not your only option. You know, you could be swallowed up, have a giant golden handshake at the end of the day type of thing. But what kind of environment do you need before considering an IPO again, considering we've seen valuations previously, you know, 100 times fall to as low as five times. 

[00:24:41] Tom The environment for IPOs right now looks to be almost it looks so unattractive that it's much more likely that a business like ours will find a financial or strategic buyer at the right time, then we would look to pursue the IPO market. So you never you never say never. 

[00:25:09] Michael It's so bad you don't want to go anywhere near it. 

[00:25:11] Tom You know, I said before, the water is warm. It doesn't look warm anymore. And, you know, one of the things about our business is, except for that fall 2020 intake where the country was closed and campuses were closed, we've performed really well. We performed well during the Trump years, which weren't helpful for our business at all. We had a 38 percent revenue CAGR between 2016 and 2020, and we know who was president then. You know we performed really, really well. All that being said, when sometimes macro-economic or political issues can cast a pall over a company's prospects, even if the companies succeeding. And one of the challenges of being in in a public environment is, let's say, you know, mean take something that happened last February with Russia's invasion of Ukraine. Well, our business is growing by leaps and bounds. But in a public market context, maybe our stock would have dropped, which would have had no reflection on the performance of our business. But, you know, some of these exaggerated things, you know, we don't want our students, our universities, our employees and our shareholders subjected to things that are beyond our control. And so it just simply may be that the public markets aren't the best thing for a company like ours in the near future or at any time. 

[00:26:43] Michael Your CEO Glassdoor rating is 91 percent. How does that make you feel? 

[00:26:48] Tom You know, we we're lucky. We've got a great team of people. You know, we've had a number of if you run a company for let me back up. I've had two jobs since Harvard Business School, not including the Sterling job. I've run two companies that's 53 years old, run two companies. The first one was for 13 years. Did that short stint at Sterling. And now I'm coming up on ten years. The Dean of Harvard Business School had a coffee with me when I was a student. I can't believe he took the time I think he bought me a bagel as well. Tell me what you do is important. Whom you do it with is more important. And I think they're both businesses, Shorelight a little bit more than Eduventures, because I was hired by the CEO there. In the case of Shorelight I was employee one. But in both businesses I was I had the unique opportunity to create the culture and create and bring in the talent. We have outstanding people and we have outstanding rapport, which is not to say that we agree on everything. You know, I make mistakes all the time, but I think we have a good way of working together. And one of the things I think is really important in business is people should feel valued. People should enjoy their work, really think that, know they should feel like it's meaningful, but they should actually just enjoy the process of their jobs. We all spend so much time working. My rating for the people that I work with would be higher than 91 percent. So I'm just grateful that that I get to work with outstanding people. I think we've got a good thing going and perhaps dealing with some of the challenges together has helped for that because we've been through some tough times. And I think when you realize that you can get through those times together, it builds trust. 

[00:28:49] Michael Shorelight has received quite the education itself in how to remain nimble, focused and future ready for when the worst health crisis in a century and the financial crisis that followed is in the rearview mirror. By being flexible enough to pivot online, learning during the worst, and managing to incorporate that into day to day operations for the future, Tom has managed to keep his eye on the ball. He's managed to shepherd the company he's founded out of a one year residency into a powerhouse in education today. I'm Michael Hainsworth. Thanks for listening.