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A hallway and conference room at the company offices of Element AI in Montreal on Dec. 19, 2018.Dario Ayala

Element AI Inc., the Montreal startup that raised more than US$250-million in hopes of building a Canadian artificial intelligence giant, is being sold for an undisclosed sum to Silicon Valley software company ServiceNow Inc.

The deal, announced Monday, marks the end of a tumultuous ride for four-year-old Element AI, which was championed at home, funded by global investors and once had 500 employees.

Sources briefed on the deal said Element AI sold for less than US$400-million, well below its valuation when it last raised money in 2019, but added none of its investors would lose money. The Globe and Mail is not disclosing the sources’ identity as they are not authorized to discuss the deal.

The Quebec government, which committed US$25-million as part of last year’s US$151.4-million venture financing backed by the Caisse de dépôt et placement du Québec and McKinsey & Co., “will get out at the price we invested,” Quebec Economy and Innovation Minister Pierre Fitzgibbon said in an interview. The return “is basically a wash.”

While investors are being made whole, Element AI employees aren’t so lucky: An undisclosed number received termination notices within hours of the deal’s announcement. An internal communiqué obtained by The Globe stated “there were no roles for the vast majority” of workers in corporate functions already filled by ServiceNow. Element AI also told employees their stock options are “void and cancelled ... with no value in lieu provided” in the deal.

Marc LeCuyer, ServiceNow’s general manager for Canada, declined to confirm how many Element AI employees were let go but said they would “have direct access to a ServiceNow recruiter” to help them apply for jobs internally and to outplacement services.

It’s a disappointing outcome for a company that burst onto the Canadian tech scene like few others, promising to deliver AI-powered operational improvements to a range of industries and anchor a thriving domestic AI sector. Element AI became the self-appointed representative of Canada’s AI sector, lobbying politicians and officials, securing $5-million in federal aid and landing photo ops with Prime Minister Justin Trudeau.

It invested heavily in hype and marketing – Element AI had its own brand guru, rare for an early-stage company – and earned glowing media coverage. A Fortune headline asked, Can This Startup Break Big Tech’s Hold on AI? Fast Company named chief executive Jean-François Gagné one of the world’s most creative people in business.

Element AI’s ace was Yoshua Bengio, the University of Montreal professor known as a godfather of “deep learning,” the foundational science behind today’s AI revolution. He co-founded the startup in 2016 with Mr. Gagné, Mr. Gagné's wife, Anne Martel, the chief administrative officer, financier Jean-Sébastien Cournoyer and two local technologists.

Dr. Bengio, alarmed by U.S. companies snapping up top Canadian AI experts, hoped Element AI would grow to rival the world’s tech giants. “The dream was, ‘The next Google is going to be Canadian,’ " he told The Globe in 2019.

His affiliation gave Element AI instant cachet as investor interest in AI companies and Canada’s rich vein of AI talent peaked. Nine months after its founding, Element AI raised US$102-million in venture capital, an unheard of amount for a new Canadian company, from backers including Microsoft Corp., Intel Corp., Nvidia Corp., Tencent Holdings Ltd., Fidelity Investments, a Singaporean sovereign wealth fund and venture capital firms including Mr. Cournoyer’s Real Ventures.

Element AI went on a hiring spree to establish what the founders called “supercredibility,” recruiting top AI talent in Canada and abroad. It opened global offices, including a British operation that did pro bono work to deliver “AI for good.”

But the swift hiring and attention-seeking were at odds with its success in actually building a software business. Element AI took two years to focus on product development after initially pursuing consulting gigs. It came into 2019 with an bold plan to bring several AI-based products to market, including a cybersecurity offering for financial institutions and a program to help port operators predict wait times for truck drivers.

But Element AI struggled to advance proofs-of-concept work to marketable products. Several client partnerships faltered. Mr. Gagné blamed a corporate market that he said was not ready to support AI product providers. The company cut its ranks to 300 employees to shave costs. “The market is still relatively immature. ... That certainly impacted our ability to really drive the growth that we wanted to deliver,” Mr. Gagné said in an interview Sunday.

Like other AI companies that have sold, Element AI is being acquired for its brains and intellectual property – including 84 patent filings and one patent – not its business. “We’re buying talent and capabilities,” ServiceNow’s Mr. LeCuyer said in an interview. (Mr. Gagné is staying on while Dr. Bengio will become a ServiceNow adviser.)

Mr. LeCuyer said when ServiceNow buys a company, “we typically … take it off the market and then rebuild the capabilities” into its flagship Now software platform, used by corporate customers to digitize workflows.

“What is really unfortunate about this situation is [ServiceNow] is really clear they are really targeting the patents and the talent, which is what, as a Quebec company, we should be really interested in keeping,” said Dominique Anglade, Leader of the opposition Liberal Party in Quebec and a former provincial economy minister.

“This is a strategic sector for us, with patents, with talent, and we should be doing everything we can to think about how we’re going to protect our IP [intellectual property] in the future.”

“It’s late in the game for this particular situation,” she added, “but I think it opens up a question about what we want to do with IP in general,” given some of the work that went into the IP was publicly funded. “This is a typical example where at the end of the day we lose. ... because we can’t leverage what we’ve created.”

Element AI will become a ServiceNow development centre similar to operations in the U.S. and India as its new owner looks to enhance Now’s AI capabilities. The parties portrayed that as a positive outcome: ServiceNow will retain Element’s technical employees in what it called its “AI Innovation hub in Canada.” Mr. Gagné called it “an incredible opportunity” for employees to work on a product that “impacts millions of users.”

Mr. Fitzgibbon called the sale “good news” for Montreal’s AI sector. “It’s not the original outcome that was contemplated. ... Element AI was meant to be a package of different applications on the shelf. The model didn’t work, but [ServiceNow will] keep the employees, keep the focus … on the hub.”

With a report from Nicolas Van Praet in Montreal

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