FFCON21 Breaking Barriers May 11-13, 2021

Debating Element AI’s legacy

Montreal in Tech | Joseph Czikk  | Apr 2, 2021

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Sam Presti made a risky bet in the summer of 2018. The general manager of the NBA’s Oklahoma City Thunder traded for star player Paul George.

There was just one problem.

George had one year left on his contract before he was free to sign with whomever he wanted, and he made it clear he wanted to return home to Los Angeles to play for the Lakers. Presti made a bet on an asset that would probably skip town in a year’s time. In doing so, he risked his job in Oklahoma City, a small market team that doesn’t often lure high-end free agent players.

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“Scared money don’t make none,” Presti famously remarked at the press conference, referencing a lyric from Midnight, by A Tribe Called Quest.

Presti’s big bet paid off. George liked it so much in the midwest that he spurned the Lakers and signed on for another year with the Thunder, shocking many.

Montreal’s next tech unicorn?

Like Presti’s gamble, risk-taking is sometimes necessary in life. And for so long it felt like Canadian tech markets like Montreal couldn’t stacked up to Silicon Valley and New York because of a lack of risk.

We’ve heard the same refrain over and over again: Canadian markets lack the big bet behaviour to compete with our American neighbours.

But in the October of 2016, the beginnings of what would become one of Montreal’s biggest bets to date began to take shape. A new incubation-style “AI startup factory” launched in an attempt to retain the city’s AI talent and provide a spark for young companies.

The company was named Element AI.

Four years later as we examine the wreckage, the question remains that has polarized Montreal’s tech community. Was Element AI positive or negative for Montreal’s tech sector?

Hype and fanfare

Element AI burst onto the Canadian tech scene four years ago amid hype and fanfare, promising to deliver AI-powered operational improvements to a range of industries and anchor a thriving domestic AI sector, wrote the Globe and Mail at the time.

“The company became the self-appointed representative of Canada’s AI sector, lobbying politicians and officials and landing numerous photo ops with them, including Prime Minister Justin Trudeau.”

But the mega-funded Montreal-based AI research company sold to the Silicon Valley cloud computing giant ServiceNow just before Christmas, 2020. The bargain-bin price tag was US $230 million, and adjustments and expenses could bring the final price down to US$195 million. This was far below Element AI’s reported value at between $750 million and $880 million when it last raised money ($200 million at the time) in September 2019.

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Debate abounded following the sale. How could investors pump so much public and private money into Element AI only to see this ending? How could it get to a point where actual earnings dramatically trailed overhead?

I spoke to several Montreal-based AI startup founders about this story. Some see it as a disappointing tale of a community desperately trying to build its own flagship version of tech success.

They’re frustrated that smaller AI startups in Montreal were ignored by local public and private capital firms. They say investors were too enamoured with Element AI, leaving little capital or facetime for smaller companies desperately competing for a slice of funding.

Others say the city is better off after the tale of Element AI, and that investors are now being chastised for taking the swing-for-the-fences gamble that many had long pushed for.

Dr. Jason Behrmann questions why the “grow fast at all costs using VC funds” model remains the most popular

“When you take $200, $300 million and you put it into one business, the reality is that there are probably 50 smaller AI shops that didn’t get $3, $4, $5 million in seed funding,” said Bouchard.

“I haven’t seen anyone from the government explaining how they’ll reuse that money and we haven’t seen any VCs do any sort of a mea culpa. These guys are just not talking about the deal,” said the source. “I think we’re long overdue for an answer.”

“Element AI tried to raise significant money and do it the Silicon Valley way, which happens 10 times a month in the Bay area. We tried it here and it didn’t work out. But we need to take risks, right?” said Maclean.

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