By Phil Hill
Desire2Learn has been around since 1999, and John Baker, CEO and founder of the company, has made it a point of pride that the company has grown to over 500 employees without external funding. From a financial perspective, however, the Canadian company just reversed its long-standing approach and raised $80 million in venture capital (VC) funding. From a strategy perspective, there are no changes – rather a plan to accelerate the corporate growth based on the existing strategy. This might seem to be a large investment for this situation, but Desire2Learn’s two VC investors clearly think the possibilities are just now emerging.
The two venture capital firms behind the investment are OMERS Ventures, the VC arm of a Canadian pension fund, and New Enterprise Associates (NEA), one of the lead investors in Coursera and Edmodo. The $80 million is the 5th largest north american series A VC deal and the largest ever VC deal for a Canadian software company.
As reported in BusinessWeek and confirmed in a subsequent phone interview I had with John Baker:
Desire2Learn plans to use the money to hire more staff and step up its marketing and research spending. [snip]
Desire2Learn is already profitable, Baker said. The cash injection, its first round of funding, will allow the company to ramp up its expansion, he said.
“We didn’t raise the money because we needed it but because we wanted to accelerate our growth,” Baker said. “We were a profitable high-growth company prior, and we’re hoping to remain a profitable high-growth company going forward.”
As recently as this Communitech interview in February 2012, Mr. Baker publicly indicated no interest in outside funding,
Q – Have you had trouble scaling up in that way, or have you been able to retain that early success at funding your own growth?
A – We haven’t been looking for outside capital because we have good cash flow and good capital in the organization already.
We’re not against it; we just haven’t done it and haven’t had a need for it.
Q – I guess inviting outside capital could also mean surrendering some control, too, right?
A – Control is not the main issue but it could hinder us from executing on our vision. We’re really interested in building a great, lasting, durable company.
Building a durable company is a really good challenge. It’s not easy.
When asked why the change to now accept VC funding, Mr. Baker answered that the big factor is the momentum in this space. Desire2Learn had added about 210 employees in past 8 months, and from their perspective there is a huge opportunity building in education and educational technology. Blended learning, online programs, movement to personalized learning, and even open online courses through MOOCs are all taking off.
To give some perspective, it might be useful to look at the company before and after the patent wars from 2006 – 2009, which ended in a painful victory for Desire2Learn over Blackboard. Although Desire2Learn is privately held, they have given key data points through the years via press release and sales presentations (numbers are approximate).
- From the initial patent lawsuit in July 2006 through the point where Blackboard dropped all appeals in November 2009, Desire2Learn grew from roughly 65 to 140 employees and more than doubled their clients from under 200 to almost 400 – a period of 40 months;
- In the subsequent period of 33 months, Desire2Learn grew from 140 to 560 employees and from just under 400 to more than 700 clients.
Plans for Investment Spending
Given the continuation of the current strategy within a profitable business, there is an obvious question of how Desire2Learn plans to spend the money. In my phone interview, Baker said that the key for Desire2Learn in terms of investment is to focus on continuing development of a cloud infrastructure, increased investing in R&D, expanding their international markets, continuing the pace of new hires, and improving customer support.
As further described in The Globe & Mail:
As for the $80-million financing, a sizable round in Canadian technology, Mr. Baker says they will spend it on research and development, in terms of building a richer portfolio for the company’s nascent push into corporate software, but also to bolster the company’s global sales and marketing offices in Singapore, London and Australia.
Mr. Baker, who says there are no plans “at this stage” for an initial public offering, adds that he chose to partner with NEA and OMERS Ventures because of their “commitment to ongoing growth” as education shifts increasingly from bricks and mortar institutions and textbooks to online learning and digital materials.
Cloud / SaaS Infrastructure
NEA is a VC firm that believes strongly in cloud-based disruptions,the software-as-a-service (SaaS) model, and educational transformation. In a company blog, Jon Sakoda gave strong indications of the investors’ view of Desire2Learn.
Today we announced our investment in Desire2Learn, one of the largest and fastest growing cloud learning platforms for the education industry. The $80 million financing is the first ever for the company and is one of the largest investments we’ve made out of our new $2.6 billion fund. Over $1 trillion is spent on K-12 and higher education globally, and schools are in the midst of a technology renaissance that is reinventing the classroom as we know it. [snip] These enabling technologies are fueling a fundamental transformation in education, particularly among many of the world’s largest and most influential universities and school districts, and Desire2Learn is at the forefront of this shift with its leading software-as-a-service (SaaS) learning platform.
NEA has a long history of investing in great SaaS companies who have disrupted client-server incumbents by offering more innovative cloud-based solutions, such as Salesforce.com and Workday. Desire2Learn is that disruptive force in the education industry, offering a unique alternative to legacy offerings and focusing specifically on the needs of the largest and most demanding customers in the industry. [snip]
This substantial round of funding will enable Desire2Learn to grow its cloud infrastructure to meet customer demand, expand into new emerging markets, and continue to provide the most innovative products for schools undergoing this important transformation.
The terms cloud and SaaS, as used in Desire2Learn’s and NEA’s descriptions, tend to blur the distinction between Desire2Learn’s enterprise software virtualization model and multi-tenant platform models. Desire2Learn has made great strides in developing a virtualized cloud hosting model that is not multi-tenant (where all or most clients run on the same defined application instance on the same version). There are arguments that this issue only matters to the provider. I’ll write more on this subject in a subsequent post, but for now I’ll just point out that the cloud model used by Desire2Learn has significant differences with the model used by Instructure’s Canvas LMS, Pearson’s OpenClass, Lore’s platform, and the majority of new learning platforms coming out.
Same Strategy, More Money
Long and short, there is no change in strategy. Through the investment, Desire2Learn is bringing in significant cash and a new set of partners to bolster current initiatives. There are plans to add one or more investment-team members to the board of directors, but the details are not yet public.
Given the LMS market’s history of takeovers, I asked John Baker about the potential for increased acquisitions of other e-learning companies. Previously Desire2Learn has acquired Metranome, a mobile apps developer, and Captual Technologies, a lecture capture platform, so the company is willing to acquire when needed; however, John replied that increased M&A activity is not part of the agenda for this investment.
What does it take to get the attention of the higher education press? Given the significant size of this funding for educational technology, I was surprised to find zero coverage from Inside Higher Ed and the Chronicle yesterday.
Despite the well-documented shortcomings of the LMS market and the walled-garden approach to legacy systems, I believe there is no other system that has as great of an impact on faculty and students as does the traditional LMS. What does it mean for the second largest commercial LMS provider – with over 8 million learners – to raise such a large amount of venture funding? I believe this question deserves more discussion.