Behind the Scenes of a $140 Million Sale: Keith Schacht's Journey with Mystery Science

[Music] Well, welcome to episode one, the first one. Edit strategies, a podcast where

one. Edit strategies, a podcast where founders share their real stories behind selling their businesses, the good, the bad, the ugly. From tough decisions to unexpected wins. We dive into what does

unexpected wins. We dive into what does it take to walk away and what do they do next? It's the good, the bad, the

next? It's the good, the bad, the buyout. My first guest is Keith Shack.

buyout. My first guest is Keith Shack.

As it says on his website, he's one part inventor, one part explainer, and one part entrepreneur. And I don't know,

part entrepreneur. And I don't know, Keith, is that a third? A third? A

third?

>> I think so. Yeah. Equal parts.

>> Equal parts. He started many companies and sold a few. His first was in college. He sold it in junior year and

college. He sold it in junior year and then like every entrepreneur, he dropped out. His first love was a company called

out. His first love was a company called Inventables. It opened a lot of doors

Inventables. It opened a lot of doors for him speaking at TED, meeting amazing people and had a modest outcome. But his

visit success was selling mystery science who co-founded with Doug Peltz better known as Mystery Doug and P became one of the most widely used science curriculums in American schools.

I was privileged to be involved and sell that company to discovery education in 2020 which reportedly according to Wikipedia which means it's true for $140 million. So Keith welcome to the brand

million. So Keith welcome to the brand new show.

>> Thanks Barry. Happy to be your first guest and give this thing a shot. You

know, I've known you probably for over 20 years, I think, since you were in college. What made you want to quit

college. What made you want to quit school and now just have a career being an entrepreneur?

>> I think if I could have found the perfect job, I probably would have taken it. You know, it's a lot easier to just

it. You know, it's a lot easier to just let someone else create the create the jobs. But for me, my real motivation was

jobs. But for me, my real motivation was this I you know, I had all these ideas about what I wanted to do for a living, and those weren't jobs I could go get.

So, I had to create them. And so you created a bunch of businesses. This last

one, what was the one in 2020 was your biggest success story. What made you say this is the time to sell your business?

>> Um I think there's a couple >> timing. By the way, the timing could not

>> timing. By the way, the timing could not have been better.

>> Yeah. Well, well, you know, on the market timing, I had um my company before that, we were building social games on the Facebook platform. And I

remember experiencing sort of this frothiness of the space when lots of other companies that that that were my, you know, colleagues and competitors were selling to Zingga and Plato and and

I got reached out to by I I forget, you know, one or or multiple companies. like

I had I had some sort of preliminary interest to potentially sell and I was like no I'm going to hold out and build a big company and then a couple years later when I actually wanted to sell the option wasn't really on the table

anymore. It was it was hard to kind of

anymore. It was it was hard to kind of construct something and so I had this taste of what it feels like when the market is in a consolidation phase. Mhm.

>> And so I remember with Mystery Science COVID happened there there was a big spike in edtech and there was the beginning of of a consolidation phase.

And I remember saying to my co-founder, we don't have to sell now, but if we ever wanted to sell the business, now is one of those times when it it might be a good time to sell. Um, but we could say

no. And you know, there will surely be

no. And you know, there will surely be opportunities in the future if we ever wanted to. So I had a feeling of of what

wanted to. So I had a feeling of of what one of those kind of consolidation phases felt like that that was part of the impetus.

>> A lot of people like when I sold my last business back in 1999, I did it because it was the internet bubble and you could sell anything, Keith, right? It was

really easy. You can make millions of dollars. But one of the reasons I did it

dollars. But one of the reasons I did it was as the company grew, it got more and more difficult to manage the people side of the business. Did you feel that pressure?

>> Um that wasn't a big motivation for me.

Um I you know I definitely felt the pressures of the people side of the business like we were about 50 employees definitely experienced growing pains along the way. You know many of them around people and management and goal setting and aligning 50 people to all

run in the same direction. Like those

are our set of challenges but I always felt it felt that the felt like these were trade-offs. Like I loved having

were trade-offs. Like I loved having multiple teams of people and we could have an idea and make so much progress on it by the end of the week because there were so many people that that that we we could you know break things into

pieces and nowadays and when I don't have a team I'm like man I wish that I miss the days I feel like I move slowly as like a one person plus a few contractors. So, it's all just

contractors. So, it's all just trade-offs I feel like with the teams. Yeah, you know, for for me the bigger motivation was I I really like building companies for in the consumer space, you

know, just for the average consumer. Um,

when we started Mystery Science, our goal was to go direct to consumer and we ended up pivoting our way into the school space. And both Doug and I

school space. And both Doug and I weren't super excited about schools as customers. like there's there's a whole

customers. like there's there's a whole sales process and there's some bureaucracy with, you know, how schools make purchasing decisions and districts and there's there's standards you have to align to and there was just a bunch

of stuff there. Um, and our and our goal was always to get back to the consumer space and so one of our motivations for selling was we just started working on a consumer version of our business and we

were really eager to focus on that. So,

a combination of like, oh, we want to focus on the consumer side of the business. The school side is it was was

business. The school side is it was was stable. Um, and then it was a market

stable. Um, and then it was a market opportunity. So, so we did something

opportunity. So, so we did something unusual where we took the company, kind of broke it into two pieces. We spun off this side project and then my co-founder and I got to focus on the side project

as its own new business and the school business is what we sold to Discovery Education. So, it was kind of a unique

Education. So, it was kind of a unique construction um that that made it all make sense for us.

>> So, why do you think Discovery Education paid all this money for what you had created?

>> I think we'd created a great product. um

you know our goal was to build uh you know what we thought was the best science resource out there um that would reach millions of children and and change their perspective on the world.

We spent I don't know you know I think we were 8 years into it at the time. Um

so we'd worked hard at that. We had a lot of traction in the market and we had lots of customer love and and it was just a it was a great asset um for for anyone who was in the school space and

and wanted to have a a a strong science curriculum as one of their products.

>> Well, I think one of the reasons that they were attracted to this was because you figured out from a viral standpoint actually how to sell the tool to teachers, right? You you had

teachers, right? You you had experimented with how to do it. Tell a

little about that process because I think that was incredibly valuable.

Yeah. Yeah. Um, so we were unusual. So

because I did not want to sell to schools, one of my criteria was we're going to figure out how to make this product sell itself rather than the traditional go to market strategy. And I

since I had a background with the consumer side, I knew a little bit about creating referral loops and encouraging incentivizing people to tell other people about the product. So, we kind of baked that into the science uh the signup flow for mystery science and it

worked. Like the vast majority of our

worked. Like the vast majority of our signups, you know, maybe 95% of our signups um were referred by other teachers who who had tried the product as well. And so that was attractive to a

as well. And so that was attractive to a lot of folks. Like we were known for having a unique go-to market strategy and and and Discovery Education thought, hey, this this go to market strategy

might actually be something that could apply to other products that we want to sell as well. Um the great thing about Discovery Education is is they were really a science focused company. So

there was a good culture fit there too.

Like our whole business was about science at the time. Um the company has since expanded to to having a writing product as well. But it was it was really nice for us to find a home with

another company where they they shared a lot of the you know just a lot of geeky people who like science as well. I

thought there was an other very interesting part of the value proposition was that early on you said I'm not going with the company, right?

And that's a hard transition for a lot of buyers because they want the founder to come with or at least have the illusion the founder is going to be there for several years, but you said, "Hey, this is part of the deal." And

they were you were able to get the thing done. Was was that a difficult part of

done. Was was that a difficult part of the transaction?

>> Yeah. Um, it I don't know that it was difficult, but yes, it was very important to me. I mean, I remember when you and I had the first call, um, I'm trying to remember. Oh. Oh, okay. So, so

a little bit of the backstory was Doug and I were really eager to work on the consumer product. And so, we'd spent

consumer product. And so, we'd spent about a year building up an executive team, hiring a few VPs so that Doug and I could pull out of a lot of the day-to-day. And we had largely succeeded

day-to-day. And we had largely succeeded at that. We were in the process of

at that. We were in the process of spending at least half of our time each week working on the new product in the new market while still continuing to run Mystery Science. Um, and then COVID

Mystery Science. Um, and then COVID happened and we paused the new product and focused all of our energies on kind of re-jriggering the business to to make sure we were ready for all the changes

that were happening with CO. And then as as that started to settle down a little bit, that's when when Doug and I were sort of facing this, I don't know, this decision of like, gosh, we spent a year getting to the point we could work on

this and look, something happened with the old business and then all of a sudden we had to give it all of our attention again. Are we ever really

attention again. Are we ever really going to get to the point that we can focus on this new market when when that's what we want? in that um you know I can't remember exactly the train of thought but I think a conversation with

you led to well let's just see if there's interest in the school business maybe there will be and maybe there won't but the whole motivation was so Doug and I could focus on this and so we felt comfortable sharing in the very

opening phone call I remember you know we had a very short deck that kind of explained the situation and the whole explanation for the situation is we've built up our executive team we want to focus on this the business is pretty stable at this point and we had lots of

evidence of that and We even told the potential acquirers like you'll meet our exec team and you can ask them like what role do we still play and and and that and some buyers that we pitched weren't

interested in even continuing the conversation because of that. But enough

were that we just proceeded in exploring it with the ones that were open to that.

>> I loved your pitch deck cuz to this day it's one of the shortest pitch decks I've ever had in selling a company because you had such great results. the

numbers really spoke for themselves. And

so you don't have to go into all sorts of fancy kind of stuff. But then after you do the pitch deck and of course we get the letter of intent, you got to go through due diligence, Keith. And I

always talk due diligence kind of like and I think you're still too young for this. Kind of like colonoscopy, right? I

this. Kind of like colonoscopy, right? I

mean, it's going to look at every single thing. They're going to call your baby

thing. They're going to call your baby ugly, right? How was that process for

ugly, right? How was that process for you?

>> Um, yeah. I remember what analogy you said is like this is the they get to play with your toy train now and you don't get to tell them how they get to play with it, you know, something like that.

>> Um, yeah, it was it was definitely a lot of work. I remember one of the

of work. I remember one of the challenging things was, you know, they have a lot of questions and they want to talk with a lot of people and you, you know, while running the company, you want to lean on your

team to help with that process. But

figuring out the right time to start to involve your team because if this isn't going to go anywhere, then it's just a big distraction for the company. But if

it looks like it's serious, then you want to involve your team and helping it go well. And so so that was one of the

go well. And so so that was one of the challenges, you know, and I remember we we looped in one person first, our our VP of finance, and then as it got more as we got further along, then we opened

it up to our two, you know, both I think we had a three person exec team at the time, our two or our two other VPs, and so sort of expanded it like that. Um, it

it was a lot of work. I that's the, you know, the main thing that I remember like we just it became my sole focus for for quite some time. um and on my VP of finances and you know other people's as

it got further along. That that was the hardest part was just that the time investment and you don't know whether it's going to it's going to fall through or not, >> right? And you could put all this time

>> right? And you could put all this time and it falls through and then you still have to run the business same time. I

know that you worked with a very high-end legal firm. Do you feel like the investment you made there was worth it?

>> I think so. Yeah, I liked the law firm a lot. Um, you know, the thing that was

lot. Um, you know, the thing that was that was a little bit of a a sort of wild card was, you know, I had a great relationship with my partner at the law firm. And so, you know, for that reason,

firm. And so, you know, for that reason, I was like, well, of course, we should just keep using the same law firm, but it's a different partner that runs M&A process. Like, you you know, the usual

process. Like, you you know, the usual partner you work with is sort of gen kind of a general counsel type of partner. Um, and so I just, you know,

partner. Um, and so I just, you know, had one phone call with this other person and I really was like, I I hopefully they're good. You know, I like my my main partner there. Um, and I I I was pretty impressed with them. I

thought, you know, it was definitely they're expensive, so you're you're paying a big legal bill for their experience, and it's like, does that experience end up end up mattering or not? Um, you know, I I don't really have

not? Um, you know, I I don't really have a counter like an alternate universe where I played this out with another another law firm. I think what's nice is is I could go to my partner when I when I wanted another opinion and she knew me

well and she knew the business well, so there's something valuable there. They

definitely had seen lots of M&A deals and so um you know when we're negotiating specific points they they would have a perspective on like yeah we've seen that play out badly before you should push on a point like that.

you know, they'd never done anything with discovery education before, so it wasn't any super specific experience we were leaning on. But, um, you know, a lot of it, if I recall, it's the reps and warranties, like that's the, you

know, I don't know, there's hundreds of things that you are representing XYZ about the business. And, you know, you there's lots of claims you have to make with really high confidence. You're

like, "Yeah, as far as I know, we've never had a customer who thought this or that, but I I haven't actually talked with every single one of my customers."

So there's just kind of this gray area of like how do I word this so that I am making a factually true statement that I can stand behind but also gives the buyer the assurance that they need in

order to to take over this business.

>> So we're roughly 5 years after the transaction has any of the legal stuff ever reared its head?

>> No. No. It was worth the investment.

>> Yeah. Yeah. It was worth the investment.

Um uh no you have zero regrets about about anything with the law firm. like

it it really worked out well.

>> You know, it's interesting because people always ask me, you know, what law firm should I use? And you can use a law firm depending on the size of the transaction that costs $50,000 or $250,000 or a million. And I go, well,

what percent of the job do you want done, right? For $50,000, you get 80% of

done, right? For $50,000, you get 80% of the job done. Do you want to take that 20% risk? For $250,000, you get 90% of

20% risk? For $250,000, you get 90% of the job done. And if you have a very large strategy, for a million dollars, you get 100% of the job done. What do

you want to do? So, it's just a massive risk kind of thing. And it's a little bit um you know it feels like you're buying an insurance policy. You don't

want there to be some skeleton that's buried here that you don't uncover until 2 years later you know like you're asking me. So um so I you know at the

asking me. So um so I you know at the time I felt like this was a really clean transaction and I and I shouldn't have to worry about anything and fortunately I didn't. So any horror stories and you

I didn't. So any horror stories and you think back pleasant surprises, really great parts besides getting, you know, once they transfer the money into your account, that was a really fun part, but anything they turn back and says, "Hey,

this was really difficult."

>> Um, no, nothing like that. I mean, one of the pleasant surprises was was not having to spend the next sort of two to four years of our life in a transition process, uh, you know, helping with the integration and whatnot.

>> Um, but we, you know, we've talked about that one. um

that one. um you know if I were to do anything differently in the future like um

I mean I mean there really it was it was remarkably smooth. Um I think you know

remarkably smooth. Um I think you know one of the things that was unique to me was was I was trying to architect this ability to work on the new business and so we did get to work on the new business. One of the things that I one

business. One of the things that I one of the sticking points late in the negotiation was um we always wanted to launch this new product and leverage all of the value we had created with mystery

science. So we had a great brand

science. So we had a great brand reputation and people knew Doug and um and all that. And when we separated the company, you you know, Discovery so

rightly had a lot of concerns about that, like, well, you can't use the same brand name because, you know, we don't have any control of what you're doing with the new company, and you can't reuse any of the video content because we're we're acquiring all the video

content. And so, that was a sticking

content. And so, that was a sticking point. And in the end, I decided, well,

point. And in the end, I decided, well, I don't think we'll need all that. Like,

having the freedom to work on this business is really the most valuable piece. we'll rebuild anything that we

piece. we'll rebuild anything that we need to. Um it was a lot harder to

need to. Um it was a lot harder to rebuild the momentum and market awareness that we had. Um that than than I anticipated. So Doug and I spent three

I anticipated. So Doug and I spent three years, you know, trying to build this new company, new direct to consumer product without leveraging any of the assets of of our previous business. And

in the end, we didn't succeed with it.

So So we ended up shutting that down after three years. And so that was unfortunate. I don't know what I could

unfortunate. I don't know what I could have done differently. Like I I there maybe there's some really creative joint marketing effort we could have negotiated. Like I like I I probably

negotiated. Like I like I I probably would have spent at least a little more time trying to come up with a creative solution to leverage what we had if I if I knew everything I know now in retrospect. Like it's going to be hard

retrospect. Like it's going to be hard to rebuild that audience. Um so maybe that's the number one thing. But um but I I I wouldn't change it. Like it was definitely the right time for me to

transition and start start a new chapter. Um and and it was great what we

chapter. Um and and it was great what we did and great to start something new.

>> You know, we'll talk about what came next in a minute, but I a lot of times some of the stumbling blocks are, you know, the shareholders, there's a hold out shareholder or the landlord has to give approval, right? Or some of the

employees don't go want to go with. I

don't remember in this case were any of those issues.

>> No, there there weren't. Um, you know, Discovery did a good job sort of coming up with a new compensation package for everyone. I remember helping with that.

everyone. I remember helping with that.

Um, you know, we went back and forth on a few of those. Um, I mean, it's funny like in the months after the acquisition, there were a few things that the team

wasn't really happy about. Um, and it's kind of interesting to to see how those played out. Like one of them was just a

played out. Like one of them was just a small thing, but it was it was a big deal to the team was um, Discovery ran on the Microsoft platform. So they used

Outlook and and SharePoint and and all these various tools and we used Gmail and Notion and all all these kind of like startupy tools. Um and that was you

know people were upset having to move to to Microsoft and you know I get it from their perspective but I also get what why it's painful you know when you have a set of tools that you use every single day and you kind of live inside those

tools. Um, you know, one one interesting

tools. Um, you know, one one interesting thing was we had built this whole automated sales platform and Discovery wanted to rebuild that in the in their

own programming language on their own software stack. Um, and they spent a

software stack. Um, and they spent a while trying to do that. Um, and that was more challenging than than they anticipated because there's just a lot of code that we had built up in that process. Um, and I I don't know how they

process. Um, and I I don't know how they ultimately ended up resolving that, but I just remember that was something that the team had to navigate for a while. So

it was but but those are kind of normal integration things for for you know we had those kinds of challenges just naturally in the in the in the dayto-day of 50 people turning into 75 people you know if I would have kept running that

business >> you know it's interesting so five years later I know mystery science is still around I still get stuff from mystery Doug and I know they've also added some other spokespeople um what do you know about what's going on with Mystery

Science now or any of your original executives still there after 5 years that's a long time >> um are the the three executives, we had three VPs. They've all moved on. Um, but

three VPs. They've all moved on. Um, but

they all stayed for for for, you know, good length of time.

Like, I think our finance person was needed the least and he stayed the shortest time. The the other two were

shortest time. The the other two were needed quite a bit more and they stayed longer. And we're sort of excited about

longer. And we're sort of excited about the what some of the things they learned and some of the challenges they had in their in their role. Um, you know, there's a number of people that are still like a reasonable percentage of

the team is still there after all this time. And you know I've gotten updates

time. And you know I've gotten updates from people here and there. One of the things that one of the reasons a number of people stayed which I didn't anticipate was for them it was just a

new chapter in their career like people got to um take over teams on the discovery side and so it was a new growth opportunity for them in their career and um there were some things

like that which those got to happen sooner than they would have otherwise happened you know with the organic growth that we were having as a business. So those those were some kind

business. So those those were some kind of pleasant surprises for people.

>> And so you went off after this and you started this other thing which you said you closed down after three years. It's

hard to do it twice in a row, isn't it?

Be really really successful. People

think, well, I did it once, it's easy to do it again. But it's not.

>> Yeah. Yeah, it's hard. And you know, this was I don't know my fourth or fifth business depending on how I count. And

even after my first sort of modest success, it took me a few tries before I got to mystery science. And so I'm I'm a couple tries in now since Mystery Science. And you know, I I assume it

Science. And you know, I I assume it might take me two more, you know, before I finally get there again with something. Um I like the journey. So

something. Um I like the journey. So

>> Keith, why is that? Because it seems like you did it once. You You finally had an incredible success, one of the best success in edtech. Why can't you just keep doing it over and over again?

That's a question people are going to ask. Why is it so hard?

ask. Why is it so hard?

>> Some people do. Elon Musk seems to he seems to hit it out of the park, but even that, you know, people forget about some of the companies that that he started that that aren't doing as well.

I I mean, I think a friend of mine has a great analogy, which I love, is to make a business work, it's a little bit like one of those combination locks, you know, that's got five or six cylinders, and if you get four of the five numbers

right, the lock still doesn't open. You

have to get all of the tumblers turned right for the lock to open. And I love that analogy because I think that that is business. Like you you have to have a

is business. Like you you have to have a product that customers really love and you have to have a customer acquisition strategy that's economical and works and you have to have the market timing where

the the the market's actually ready to to switch to an alternative from whatever's out there right now. Like the

stars have to align. I think that when you're in the business, you are aware of two or three of the critical decisions that you make that help the business succeed, but there's always two or three

other things that really mattered for success which you weren't really aware of. Um, or maybe you're not aware of

of. Um, or maybe you're not aware of until hindsight, or maybe you are aware of them, but you couldn't control them because it was market timing or something like that. With Mystery

Science, for example, when we decided to pivot from consumers to elementary teachers, Doug and I didn't know a whole lot about the school space. Doug had

been teaching in a classroom, so he knew something about the teacher experience.

But building a a curriculum business that sells to schools is has all these dynamics. And one of the things I

dynamics. And one of the things I learned later was when we started Mystery Science, we just reached the point that classrooms in 80% of

classrooms in America had a high-speed internet connection. So consumers got

internet connection. So consumers got internet in homes way before teachers got internet in classrooms. And so so that kind of adoption curve lagged by maybe a decade or so, eight years or

something like that. And so in retrospect, I look back and it probably wouldn't have made sense to start mystery science even a few years earlier cuz half half of our customers wouldn't have had internet and we we relied on high-speed internet. But fast forward a

high-speed internet. But fast forward a few years later and lots of other people realized this and then launched companies. So that was probably a little

companies. So that was probably a little bit of fortuitous market timing that we just got lucky at and I didn't realize that at the time. Listen, there's

nothing there's a lot to be about luck and timing, right? I always say I'd rather be lucky than good. So, you know, uh so tell us, Keith, just in the end, what are you doing right now?

>> I'm working on starting a new business.

Um you know, I'm I have multiple I have lots of ideas. I always have lots of ideas. Um and you know, I spent three

ideas. Um and you know, I spent three years with Doug working on one of those ideas that we were really excited about.

That one didn't work. And so I've moved on to other ideas that I have. Um, you

know, some of them are real really driven by interesting technology.

There's a lot exciting that's happening with AI. I'm a programmer. I build lots

with AI. I'm a programmer. I build lots of AI tools just for myself and for my day-to-day work and and I'm thinking about turning one or two of those into products. I still like building for

products. I still like building for kids. Um, so I've I've I'm experimenting

kids. Um, so I've I've I'm experimenting with a a toy company where we're going to be selling physical products to to kids. We just launched that a couple

kids. We just launched that a couple weeks ago. It's too early to know if

weeks ago. It's too early to know if whether that's going to work or not, but I'm excited about that one. Um, I still like building explanations for for for people. So, I've started a a video

people. So, I've started a a video channel on Tik Tok and Instagram and YouTube and and had modest success with that. Like, we I've had a lot of videos

that. Like, we I've had a lot of videos go viral and built an audience just explaining technology to people just like mystery science explains science science to people. So, I mean, still circling around all my same interests

and and I get excited enough about a business that that I give it a shot. I love your YouTube channel where you explain how things work mostly because you're so excited about that. Right. Because, you

know, as one of my sons who met you a long time ago, he goes, "What I love about Keith is he's always still part kid."

kid." >> Yeah.

>> Right. So, it's like, you know, part inventor, part entrepreneur, but also part kid because I think you have the same excitement that your audience does.

>> Thanks. Thanks. Yeah. I I there's I definitely I think it uh you you know one of the pieces of advice I give entrepreneurs which you know played out with mystery science is like a lot of

times people try to pick a business I I don't know for some opportunistic reasons like I think this could be a great business but it just takes all day every day a full immersion to make a

business successful and if you don't really love what you're working on then two years in when it gets hard like you'll you'll stop working on it. Um,

and you know, even though I didn't want to be in the school space, Doug and I are both still deeply passionate about science. We love learning about it. We

science. We love learning about it. We

love explaining to other people. Sure,

you know, we did it in classrooms instead of for kids at home, but that was fine. You know, we figured out how

was fine. You know, we figured out how to navigate those challenges. And so,

yeah, you know, I still chase my interest and try and build things around what I love.

>> I love it.

>> Well, Keith, thanks for joining us for the very first episode. When we get to episode 1,000, then we'll know. We'll go

back to the very first episode. So,

thanks for joining us. Congratulations

on your success. Sounds good. I'll see

you on episode 1000.

>> All right. This is the the exit strategy. Remember, it's the good, the

strategy. Remember, it's the good, the bad, the buyout. Thanks for joining us.

>> See you.