For stakeholders and experts, the sale of Element AI underscores critical problems in Canadian innovation

Mark Mann
December 9, 2020

Many in Canada’s innovation ecosystem were disappointed to learn last week that Element AI, the technology company once seen as a pillar of Montreal’s AI ecosystem, had been acquired by California’s ServiceNow, which offers workflow technology over the cloud.

Canadian innovation advocates found little to celebrate in the acquisition. For some, the deal echoed Google’s recent purchase of Waterloo-founded smart glasses-maker North — another vaunted Canadian startup that received large venture capital investment and quickly grew its workforce but ultimately did not meet expectations — and offered further proof that domestic tech companies are mostly unwilling or unable to scale in Canada.

The Globe and Mail has reported that Element AI sold for less than US$500 million, well below the US$600-$700 million valuation it was given when the company raised CAD$200 million last September, one of the largest funding rounds in Canadian history, which was led by Caisse de dépôt et placement du Québec (CDPQ). Louis Tetu, CEO of Quebec City-based enterprise AI provider Coveo, observed on LinkedIn that Element AI had been purchased for “peanuts relative to the value that same talent would have created in our economy if it had been properly managed."

Dan Breznitz, co-director of the Innovation Policy Lab at the University of Toronto, shared a similar sentiment in an email to Research Money. “I was a bit shocked at the price,” said Breznitz, which amounted to “more or less the value of the IP plus some handouts to the former investors and founders so they can argue it was not a fire sale.” He was hoping it would go for at least a billion dollars.

Although disappointed by the sale, Breznitz said he was “not surprised at all” by the acquisition itself. “This is yet one more indication that even the smartest and most successful Canadians do not think that Canada is a place where they can scale-up global high-tech leaders.”

A bad deal for Canadians

Breznitz emphasized the critical loss of Element AI’s intellectual property. ”The IP was mostly (or completely) funded by Canadian taxpayers who will now not only not see any economic growth out of it, but can expect it to be used to block them or extract rents,” he said. ”All this Canadian IP is now sold at a deep discount price for an American company and what does Canada get out of it and its million of dollars and years of investment? Nothing much.”

Benjamin Bergen, executive director of the Council of Canadian Innovators, underscored this point in a statement to Research Money: “The report this week that Element AI is being acquired by ServiceNow emphasizes the need for a strategy that ensures public investments benefit Canadians first and foremost. Intellectual property and data move seamlessly across borders which is why the Council of Canadian Innovators has called for an updated framework on reviewing foreign purchases of domestic technology that might be strategically important for our economy or our security.”

On the value of the deal to Canadian taxpayers who funded the deal, Marc LeCuyer, the general manager for Canada at ServiceNow, told Research Money in an email that the grants and loans Element AI received ”either funded published research or will be repaid with interest.”

Alan Bernstein, president and CEO of CIFAR, told Research Money that we need to account for more factors than IP when assessing an ecosystem: talent, critical mass, risk capital, compute and physical infrastructure, affordable housing, healthcare and schools, talent development, and supportive government policies, among others. IP alone won’t solve Canada's innovation productivity problem, he said, pointing out that ”Canada has been remarkably successful in creating a very robust AI startup ecosystem,” which we should celebrate and build upon. Even so, Bernstein acknowledged that while it’s normal for small firms to be bought out by larger firms, “we need some home grown anchor tenants within the Canadian ecosystem.”

Lots of promise, little return

Element AI had longstanding internal problems that hindered its success. Despite leaping to a peak of 500 employees within a few years of its founding in 2016, the company never demonstrated that it had a proven go-to-market strategy and was forced to restructure last year, bringing the number of employees back down to 350.

In the Series B funding announcement last year, Element AI CEO Jean-François Gagné obliquely acknowledged the difficulties they were facing bringing real products to market: "Operationalizing AI is currently the industry's toughest challenge, and few companies have been successful at taking proofs-of-concepts out of the lab, imbedding them strategically in their operations, and delivering actual business impact.”

In his blunt LinkedIn post, Louis Tetu pointed out that Element AI had neither a clear mission, identifiable products, a distinctive niche, or demonstrable successes. The massive foreign direct investment that flowed into Element AI propelled what Tetu called ”irresponsabilité fiscale stupéfiante,” in the form of an unprecedented hiring spree that harmed Quebec’s digital tech companies by increasing wage inflation and talent scarcity. He says the government rushed to help Element AI when investors were cooling off, driven by hype and excessive lobbying, despite the company’s lack of substance. According to Tetu, Canada and Quebec just exported a massive bloc of experts — whose education and salaries were partly funded by taxpayers — in a highly strategic sector, for little return. All the benefits now flow to shareholders outside the country.

Pierre Fitzgibbon, Quebec's minister of economy and innovation, acknowledged that Element AI never had a functional business model, but took consolation that the Quebec government at least broke even on its investments. BNN Bloomberg reported that Fitzgibbon was “pleased that at least ServiceNow has found value in Element AI.”

Not everyone took such a bleak outlook on the deal, however. Even though employee stock options were “void and cancelled...with no value in lieu provided,” according to an internal communique obtained by the Globe and Mail, one employee who spoke anonymously to Research Money said that laid-off workers were given generous severance packages that may have even exceeded the value of the stock options, and that some viewed the acquisition as a successful exit for the company.

Proliferating AI hubs

Following the acquisition, ServiceNow says it will create an AI Innovation Hub in Canada “to accelerate customer-focused AI innovation of its Now Platform.”

For context, the latest Pan-Canadian AI Strategy Impact Report released in September by CIFAR cites 45 new AI R&D labs established in Canada by major multinational firms and 50% growth in foreign direct investment in Canadian ICT.

Breznitz, who also serves as co-director of CIFAR’s Innovation, Equity, & the Future of Prosperity program, finds the proliferation of foreign AI hubs a “perfect reflection of reality,” that Canada has become a node in the global R&D network for multi-national corporations. “On one hand this is a great achievement and shows how good we are at R&D, on the other, it is game over for any local startups (since they cannot compete with the salaries) and since those are only R&D teams there will be VERY little spill-overs to any Canadians who are not top-notch AI R&D engineers.”

Alan Bernstein thinks the large number of foreign R&D labs in Montreal is positive, however. “They employ our graduates, probably give them their first full-time experience of working in the private sector and a launching pad if they so desire to establish their own companies.” It's the inverse reality — large companies drawing graduates out of the country — that would be negative, Bernstein says.

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