John Baker would be forgiven for getting spooked days before Halloween in 2022, when his company’s stock bottomed out at $5.08. The value of the Kitchener, Ont.-based online-learning firm, D2L, had plunged 69 per cent from a year earlier, when it debuted on the Toronto Stock Exchange at $16.49 a share amid a wave of Canadian tech IPOs.
It’s a decision many companies that went public in that frothy market came to regret, with several now retreating and going private. But Baker remains convinced that taking D2L public was the right move.
The company has since recovered much of the losses, with the stock closing at $12.89 on July 29. “That feels good to climb back up,” said Baker, but, he added, “we’re nowhere close to where we should be in terms of value.”
D2L—which delivers online learning tools for K-12, post-secondary and corporate clients—reported US$190.3 million in annual recurring revenue in its latest quarter, up 11 per cent year over year, and has a market cap of about US$500 million. (Privately held legal-tech firm Clio, by comparison, has a similar ARR and was valued at US$3 billion in its recent US$900-million raise.)
Closing the gap between D2L’s stock price and what Baker believes the company is truly worth motivates him to stay the course, he said. As one of the longest-serving CEOs of a Canadian tech company (Baker founded D2L as a university student in the dot-com boom), he knows something about the patience needed to see an idea through. “I still feel like we’re just getting warmed up, even though we’ve been at it for 25 years,” he said.
In a recent interview with The Logic, Baker spoke about adapting to shifts in online learning, what he really thinks of the capital gains changes, and why he’s reluctantly starting a new company.
This interview has been edited for length and clarity.
You went public during the 2021 IPO boom. Markets have softened since then, and many companies that went public around that time are reprivatizing or already have. Is that something D2L has considered?
We definitely got dragged down from where we were with our IPO, but less so than many others. The stock is actually up significantly year over year. But there is a big value disconnect. That’s probably what’s motivated some folks to leave the market—either they went down and never came back up, or they still see a disconnect between what private companies are valued at versus public companies.
I’m seeing all of our competitors leaving the market. PowerSchool just got sold, Instructure is going through a sales process, Blackboard got sold. Going private is a path that can be taken, but it’s not a path that I want to take. I’d much rather look at this as sort of a blip, and that the market can sustain a world leader in learning.
D2L made a big acquisition of its own recently, buying H5P Group for US$33 million. Are you planning more M&A?
“I couldn’t think of anything bigger than transforming the way the world learns, because learning is the foundation for solving all problems.”
We’ll be generating significantly more than US$20 million in cash this year, and we expect that to continue to tick up year over year, over year. We also have a lot of cash on the balance sheet. We want to use some of that to do M&A that’s aligned to our strategy, that helps us accelerate growth, improve our gross margins and also our EBITDA [earnings before interest, taxes, depreciation and amortization] story.
Online learning has also changed since students were stuck at home. You’re shifting more towards corporate education. How much focus are you putting into that?
It’s the fastest-growing part of our business. Upskilling is approaching 25 per cent of our business, whereas three years ago it would have been around 20 per cent. We’re trying to connect our corporate clients back to our education clients. These things reinforce each other.
What we’re seeing with SkillsWave [D2L’s corporate education spinout] is clients like Walmart embracing it. They are investing many, many millions of dollars per year in upskilling their people through SkillsWave. It makes it easy to get the right catalogue of courses from our academic clients like McGill University, University of Waterloo or the Northern Alberta Institute of Technology.
Tell me about the decision to spin out SkillsWave from the main business, and why you are personally buying the company.
To be honest, I wasn’t excited about taking it as a spinout. I wanted it within D2L. But we’re trying to do this balance of growth and profitability to create a cash-flow engine, which allows us to buy a whole bunch of other companies that roll into solving bigger and bigger problems for our education and corporate clients. I was convinced by the board and my management team that spinning this out would allow us to have a better shot at focusing on that. Why I bought it was, I didn’t want to see it fumble out of the gate.
“It’s about putting in place policies that take the knives out of the backs of entrepreneurs.”
You hear all the time that entrepreneurs are good at starting companies in Canada, but not great at scaling them. What have you done differently to grow D2L and keep it here?
The key is having the vision to go after a big enough opportunity versus getting into something and you find that the market’s only a million dollars globally. When I started, I couldn’t think of anything bigger than transforming the way the world learns, because learning is the foundation for solving all problems.
The other piece is, you’ve got to really be in it for the mission if you’re going to see it through all the way to the end. It’s easy to take the money and go sit on a beach, but actually doing the work to build something really meaningful that’s going to have an impact on the world around you, that is hard work.
And there are things we can do as a country to have more companies cross that chasm from small scale-ups to world-leading companies.
What could help build more “world-leading companies?”
It’s about putting in place policies that take the knives out of the backs of entrepreneurs. There’s no secret the capital gains issue is front and centre. It’s not really the capital gains tax, per se, that’s the biggest issue. It’s the message from government saying, “We don’t want entrepreneurs. We don’t need you to help solve these problems. We got this.” That doesn’t feel great. I think the government’s got good intentions, but they should do it differently.
We gave [the federal government] the path in 2020 with the Industry Strategy Council report. [The government commissioned a group of industry representatives to create the innovation growth plan.] We interviewed over 1,000 CEOs, we talked to all the key politicians. We estimated the plan would increase GDP by $235 billion to $310 billion. The government is funding a lot of things that came out of the recommendations. But they missed the key thing, which is investing in digital is how you pay for it all. You need to create an economic engine that covers the costs of these other investments.
How do you see AI impacting your business?
It’s a tailwind for us. We’ve been harnessing AI technologies for over a decade. We integrate 1,800 technologies, some of which are AI, into the platform to enable better learning experiences. Examples of what we’re doing include automatically creating assessments based on content you’ve uploaded as a professor, or aligning content to outcomes, so you can actually track whether students are progressing against the outcomes for the program, or take a video and turn it into an interactive exercise for students.
The second way is that our clients need to upscale the entire workforce, not just prepare the next generation. There’s a big investment in terms of courses that need to be built that our teams are helping them with. We see that as a growth vector for us.
