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Howard Gwin on Desire2Learn and the Canadian VC Landscape

Howard GwinDesire2Learn’s $80-million financing deal may have caught many people by surprise given the Kitchener-based company enjoyed a low profile, even though it’s playing in the fast-growing cloud-based education market.

The size may also be a shocker because it’s the biggest VC deal for a Canadian software company, although we see these kind of deals in the U.S. on a regular basis. There is no doubt that Canada needs to be able to write big checks if we want to build large, scalable businesses that can compete globally.

After the deal was announced yesterday, I had a chat with Howard Gwin, managing director of OMERS Ventures, which, along with New Enterprise Associates, invested in Desire2Learn.

How did this deal happen?

It got to be known there was a really successful SaaS company operating out of KW, making inroads in learning. Desire2Learn CEO John Baker was the prettiest girl at the dance who everyone wanted to dance with but couldn’t. He has attracted inquiries from tier one venture firms over the last three or four years. In this circumstance, the right thing for Desire2Learn was to have tier one valley funding in addition to tier one Canadian funding  The conversations we had over the last year or so was why does the company need VC because it doesn’t need to raise any money. John is proud of his Canadian heritage but pragmatic to know if they had a big announcement of funding, it would be good to have a north-south perspective.

So how did Desire2Learn decide that $80-million was what it needed?

It is a subtlety because given they were cash flow positive, what is the right amount? The question for the team was let’s raise once and create what we will call a “consequential” event where the firm gets great publicity and enough cash so if it wants to be aggressive in the market and with product, it has the dry powder to do that.

In the U.S., we see these size of deals on a regular basis? Is this the new normal?

Andreessen Horowitiz has promoted the fact in the U.S. every year, there are a dozen companies that really matter and will make a significant difference. The AH model is we will make sure we get money into those firms, and those firms will get enough money that they will not worry about raising more money 18 months from now. It is an incredible distraction for management to raise money at a software firm.

What happens with the tier one VC firms is they are going out and picking the category winners, and putting enough money for them to be globally dominant firms, and that is what we are doing here with Vision Critical, Hootsuite, Build Direct and Desire2Learn. If we are writing $20-million checks, it’s our belief they are the leader.

OMERS has made some big investments this year? How does this compare with its original vision for the fund?

The mandate was seed you to grow you. It really comes down to the company, whether it’s the young kid who will the next Mark Zuckerberg or John Baker, who already has a growing concern. It just so happens in the last eight to nine months, the opportunities to get into great opportunities were later stage. It could be the next opportunities are intermediate stage. I’m a later stage guy so I’m revelling in it.

Why aren’t there more Canadian VCs writing large checks? 

The VC community was supported by global pension funds and other funds. From 1995 to 2010 in Canada, they did not see returns. The Canadian venture community as it goes to raise money is better, but not where it needs to be.  It is getting walk before you run money. The checks being written now are given in a very measured fashion because Canadian venture for a decade or longer has not performed  well. While Silicon Valley has mega funds, that has not been the case in Canada. Until we have proven we have broken through that cycle, we should spend a lot on a few, later stage companies. We should put enough money in companies so they can absorb headwinds that will come with scaling companies.

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  • http://startupcfo.ca/ Mark MacLeod

    Wise words as usual from Howard. Great to see Omers writing huge cheques.

    Howard, I got some great companies for you! :)

  • http://engag.io/ William Mougayar

    That’s a very insightful interview! It’s like having coffee with Howard…which reminds me that we’re due for one :)

  • http://www.engag.io/Abdallah Abdallah Al-Hakim

    The ability of OMERS to write these big cheques and its obvious commitment to growing these Canadian emerging companies is fantastic to see. It is a very positive step for Canadian entrepreneurs to start thinking big when these types of stories come out

    • http://www.markevans.ca/ Mark Evans

      Someone has to be writing big checks, otherwise all the big deals will be snapped by U.S. investors, or startups will be bought before they can really grow.