Element AI CEO expected to leave as company closes in on US$100 million in new funding: Sources

Element AI CEO Jean-François Gagné speaks at C2 Montréal in May 2018. Element AI | Twitter

Element AI is close to securing a US$100-million investment that would see co-founder and CEO Jean-François Gagné leave the firm, The Logic has learned.

The round is expected to close in the next few weeks. It is being led by the Caisse de dépôt et placement du Québec, with participation from global consulting giant McKinsey & Company, the Business Development Bank of Canada (BDC) and the Quebec government, according to multiple sources with knowledge of the deal. The investors are putting money in at about the same valuation that the Montreal-based artificial intelligence (AI) company raised US$102 million at over two years ago.

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Talking Point

Gagné’s expected departure follows a difficult period for Element AI, including struggles with getting products to market, a shrinking staff and a lack of revenue.

The deal’s finalization has been delayed because of complications around the negotiation of Gagné’s compensation package, multiple sources told The Logic. Anne Martel, Element’s co-founder and SVP of operations, who is Gagné’s spouse, is also expected to leave the company. Neither replied to multiple requests for comment. 

Element has had a difficult time recently, struggling to get products to market and facing a shrinking staff and minimal revenue. 

Before this latest round, the company had raised about $140 million from investors including Intel, Microsoft, Tencent and the National Bank of Canada. McKinsey and Caisse would be first-time investors in the company. BDC participated in the firm’s June 2017 Series A round. Element also secured $5 million in a federal loan in December 2018. 

If this US$100 million in additional funding led by Caisse were to close, Element still hopes to raise more, said a source close to the current negotiations, but who is not authorized to speak publicly.

Kevin Clark, senior public relations manager for Element, did not directly answer any questions, including whether other executives will leave alongside Gagné, or why Element is in negotiations at the same valuation it was over two years ago. 

“It is no secret that Element AI is working on a financing round, however we have nothing to announce at this time and we will not comment on rumors or hearsay,” said Clark.  

Element has been trying to raise a significantly larger sum since at least July 2018, when BNN Bloomberg reported the firm was looking to raise as much as $250 million at a valuation of about $1 billion. On August 19, The Globe and Mail reported the company was looking to hit a valuation of up to US$625 million with a raise of about US$200 million. 

According to another source familiar with the negotiations, the company was in talks with Tencent about securing funding, but Canada’s fractured relationship with Beijing hampered that investment. Talks with SoftBank’s Vision Fund also broke down on geopolitical grounds, according to the source. Saudi Arabia’s sovereign wealth fund is a large investor in SoftBank’s fund. Tencent and SoftBank did not reply to requests for comment. 

Gagné studied robotic and industrial automation at Cégep, then bypassed university to found and sell two AI companies. He worked briefly as an entrepreneur in residence at Real Ventures, one of Canada’s largest VCs, before co-founding Element in July 2016. Gagné scaled the firm rapidly, taking it to over 500 employees and quickly emerging as a key player in shaping national AI policy. In October 2018, The Logic reported Element lobbied the federal government more than every other artificial intelligence company in Canada combined. 

However, not all is well behind the scenes. in July, The Globe reported that as of June 2018, the company had generated $4.7 million in revenue, mainly from consulting projects, and had to delay the launch of two major products.

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The firm’s workforce has declined by seven per cent since March, according to LinkedIn data. Senior leaders tasked with getting products to market have also left the firm. Chief product officer Linda Bernadi departed in 2018. Anuj Batra, Element’s global head of retail, left in February. Marten den Haring, a senior vice-president at Element responsible for converting research into products, took a job at a different firm in May.  

Amid this, Gagné has earned plaudits for his leadership style. In June 2018, he was designated one of Canada’s Top 40 Under 40. In May, Fast Company named him one of the 100 most creative people in business. 

Some investors, however, see Gagné as less of an asset for the firm. Caisse has been pushing for Gagné to leave, according to multiple sources. The pension giant’s CEO, Michael Sabia, is personally involved in the deal, according to one source. 

“It’s not our practice to comment on rumours or speculation. But you should know that when we invest in businesses, we invest in a constructive way to build and grow companies,” said Maxime Chagnon, senior director of media relations at Caisse. Sabia did not reply to a request for comment. 

In August, The Globe reported that Caisse wasn’t sure it was going to invest in Element AI, though Quebec Innovation Minister Pierre Fitzgibbon said the province’s largest pension fund would put in US$75 million, alongside US$25 million from the provincial government. The minister also said Caisse would receive a board seat.  

Asked if the province still plans to invest, Mathieu St-Amand, a spokesperson for Fitzgibbon, said, “An announcement will be made soon.” He declined to answer other questions, including whether the province wants Gagné to leave. 

Caisse’s interest in Element comes as the pension fund is overhauling its tech investing. In August, The Logic reported that Caisse is planning a new portfolio of up to $2 billion focused on “disruptive technologies,” and is building out a new strategy for how it invests in innovative companies across its more than $326.7-billion portfolio. 

McKinsey—which a source said will make a strategic investment of US$15 million in the round—is particularly interested in accessing Element’s AI researchers, according to multiple sources. Element has been poaching talent from other AI firms, and maintains a large staff working on basic research intended to have an academic impact. It’s expected that McKinsey will partner Element with QuantumBlack—a firm it acquired in 2015 that combines data analysis with consulting work—according to multiple sources. For Element, the deal would come with access to McKinsey’s extensive global clientele. 

McKinsey did not reply to multiple requests for comment. 

BDC—whose president and CEO, Michael Denham, spent 14 years at McKinsey from 1987 to 2001—is expected to invest at least US$10 million in the round. The federal development bank declined to comment for this story.

Element AI has also played a key role in shaping global AI policy. The firm played a significant role in the release of the Toronto Declaration in May 2018, which set international standards for ethical AI use and has has been endorsed by groups such as Human Rights Watch and Amnesty International. Gagné is also one of the 52 individuals appointed to the European Commission’s High-Level Expert Group on Artificial Intelligence, which advises on continent-wide rules for AI deployment. 

The deal is “with the lawyers now,” according to a source, and is expected to close within weeks. Yoshua Bengio, a co-founder and a world-leading AI researcher whose reputation helped the company attract early investors and top talent, is expected to remain with the firm.