MONTREAL—In the fall of 2018, a 40-page document circulated within Canada’s tech scene. Marked “confidential” and with no author identified, the report—titled simply “Element AI company analysis”—claimed to delve into the innards of a company that had taken Montreal’s tech community by force.
Only two years old at the time, Element AI had muscled into Montreal, dazzled politicians and garnered millions of investment dollars from the likes of BDC Capital, Intel Capital and Real Ventures. So perhaps that anonymous report—which excoriated the company—was born of fear of the new behemoth on the block. Or perhaps it was sour grapes. In any case, re-reading it after Monday’s announcement that Element AI has essentially been sold for parts to California-based ServiceNow is either karmically damaging or an exercise in schadenfreude, depending on your outlook on these things.
Element AI’s sale to California-based Service Now marks the demise of a company that had muscled into Montreal, dazzled politicians and garnered millions of investment dollars from the likes of BDC Capital, Intel Capital and Real Ventures. Along the way, it made its share of enemies, and while some in Canada’s tech scene lament the company’s demise, others see it as the inevitable outcome for a company that was “long on hype and short on business.”
Element AI, the anonymous report said, “appears to be a ‘ponzi grand cru’ more than a real company”—one that went on a hiring spree, pumped itself up with a heavy dose of public relations and government lobbying, then used the resulting hype to give itself a “hyperbolic and completely unsupported” $1-billion valuation.
It decried Element AI’s “lack of public information, transparency and data,” its “technical claims that have little commercial potential,” its “highly predatory talent acquisition tactics,” the “significant conflict of interest between Element AI and Mila,” the Montreal AI think tank where Element AI co-founder Yoshua Bengio is scientific director. “Just because Element AI says something about themselves does not make it true,” it read.
In short, the report was a nasty bit of work, poison pen letter meets PowerPoint. The claims it made were anonymous and unverified, and I’m only writing about it now, in the wake of the sale, because it highlights two truths about Element AI. One, that much of Montreal’s established tech types had a visceral dislike of this glittering new interloper, and two, that many of their suspicions about Element AI’s commercial viability turned out to be rooted in fact.
The terms of Element AI’s sale to ServiceNow were not disclosed. The Globe and Mail’s sources claimed it sold for less than US$400 million, while a TechCrunch report pegged the purchase price at around US$500 million. Both prices are well below its 2019 valuation of between US$600 million and $700 million.
The company had less than US$10 million in revenue in 2018. When it closed its last funding round, in September 2019—a US$151.4-million Series B with funding from the Caisse de dépôt et placement, BDC Capital and the Government of Quebec, among many others—the company and its backers said the money was intended “to transform Element AI into a company with a commercial focus” and “accelerate the deployment and commercialization of solutions that meet customer needs.” However, its “go-to-market strategy,” launched as COVID-19 was shutting the world down, felt like rearranging the deck chairs in the shadow of an iceberg.
“The company wasn’t going anywhere; it was in serious difficulty,” a source from one of Element AI’s investors told me, on the condition they not be named so as to speak freely. “The choice was to give Element AI a bigger platform, which ServiceNow can provide, and keep the company in Montreal. Or you let it wither on the vine.”
By all accounts, its investors won’t lose their shirts. “I think this is a good outcome for the company and the Caisse de dépôt,” one told The Logic regarding the sale.
If there was a bright spot within Element AI—a reason for its still-formidable price tag—it was its research and IP output. Hype aside, Bengio wanted the company to be a wellspring of tech innovation that would buck the cliché by remaining stubbornly within Canada’s borders. The company’s raft of scientists has been prolific, with some 19 Canadian patent filings since the beginning of 2019 alone and hundreds of Google Scholar citations in its four years of existence.
“I bet we were batting above average even if you compare us to publicly funded academic labs,” a person from Element’s research side told me, requesting anonymity because they weren’t authorized to speak publicly about the company. “There was a lot of bitching about Element within some circles in Quebec. And honestly, some of it was warranted. But I believe that if we’d been in the Valley, we would have seen more enthusiastic support for what we were achieving.”
Those IP filings will now belong to a California company.
“This is a cheap acquisition for ServiceNow, and now it will create value for a foreign company in a highly strategic field,” Coveo CEO Louis Têtu told me. “Can anyone explain to me how this is good for the Quebec economy?”
ServiceNow issued its first volley of pink slips within hours of announcing the acquisition—with particularly deep cuts in Element’s consulting and government relations departments, according to a shareholder with knowledge of the affair. This only adds to the sting, particularly since the company has seen a 31 per cent decrease in its staffing over the last two years, according to LinkedIn data.
Nevertheless, Element will keep its name “for the near term” and will retain “most” of Element AI’s technical talent, according to a ServiceNow spokesperson. Gagné is joining the company, while Bengio will transition to serve as a technical advisor for ServiceNow after the transaction closes. Neither men were made available for comment.
Much like Kitchener-Waterloo-based smart-glasses maker North, another IP-heavy outfit acquired by Alphabet earlier this year after its own failure in the marketplace, Element’s sale heralds the demise of a buzzy Canadian startup that failed to live up to its own lofty goals. And yet the idea of Element remained contagious even as the fig leaf was slipping away. In the fall of 2019, about a year after the poison pen report had made the rounds, Element raised US$151.4 million from big-name investors in that Series B. In 2018, Justin Trudeau suggested that Element and other like-minded tech businesses would help transform Canada from a hewer of wood to a builder of knowledge.
Old habits die hard, it seems; as the Financial Post pointed out Monday after news of the sale broke, the federal government was primed to hand over $20 million, “a conditionally repayable contribution,” to Element over five years, a mere five months before ServiceNow showed up, chequebook in hand.
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“They were long on hype and short on business, and I think Element is a cautionary tale for governments falling prey to hype,” said Jim Balsillie, former Research In Motion (now BlackBerry) co-CEO and chair of the Council of Canadian Innovators.
Balsillie isn’t wrong. And while he’s among the first to put his name to it, he isn’t the first to say it.