(Note: Last Updated January 15, 2021 to reflect the announced purchase price.)
On November 30, 2020, ServiceNow announced an agreement to purchase Element AI, which was one of the top-funded and fastest-growing companies in the AI space.
Element AI was founded in 2016 by a supergroup of AI and technology executives with prior exits including Jean-Francois Gagne, Anne Martel, Nicolas Chapados, Philippe Beaudoin, and Turing Award winner Yoshua Bengio. This team was focused on helping non-technical companies to develop AI software solutions and expectations were only raised after a $102 million Series A round in 2017 followed by a $151 million funding round in 2019.
Element AI’s business model was similar to the likes of Pivotal Labs from a software development perspective or Slalom from an analytics perspective in that Element AI sought to provide the talent, skills, resources, and development plans to help companies adopt AI. The firm was often brought in to support AI projects that were beyond the scope of larger, more traditional consultancies such as Accenture and McKinsey.
However, Element AI faced a crossroads in 2020 in between several key market trends. First, the barrier to entry for AI has reduced considerably due to the development of AutoML solutions combined with the increased adoption of Python and R. Second, management consulting revenue growth slowed down in 2020, which reduced the velocity of pipeline to Element AI and made it harder to project the “hockey stick” exponential growth expected by highly funded companies, especially in light of COVID-related contract delays. And third, the ROI associated with AI projects is now better understood to largely come from the automation and optimization of processes associated with already-existing digital transformation projects that make separate AI efforts to be duplicative in nature, as Amalgam Insights has documented in our Business Value Analysis reports over time.
In the face of these trends, the acquisition of Element AI by ServiceNow is a very logical exit. This acquisition allows investors to get their money back relatively quickly.
(Update: on January 14, 2021, ServiceNow filed that the purchase price was approximately US $230 million or CDN $295 million. This was a massive discount on the estimated $600 million+ valuation from the previous September 2019 funding announcement )
Not every bet on building a multi-billion dollar company works out as planned, but this exercise was successful in creating a team of AI professionals with experience in building enterprise solutions. Amalgam Insights expects that over 200 Element AI employees will end up moving over to ServiceNow to build AI-driven pipelines and solutions under ServiceNow’s chief AI officer Vijay Narayanan. This team was ultimately the key reason for ServiceNow to make the acquisition, as Element AI’s commercial work is expected to be shut down after the close of this acquisition so that Element AI can focus on the ServiceNow platform and the enterprise transformation efforts associated with the million-dollar contracts that ServiceNow creates.
With this acquisition, ServiceNow has also stated that it intends to maintain the Element AI Montreal office as an “AI innovation hub,” which Amalgam Insights highly approves of. Montreal has long been a hub of analytics, data science, and artificial intelligence efforts and it would both help ServiceNow from a technical perspective to maintain a hub here and could help assuage some wounds that the Canadian government may have from losing a top AI company with government funding to a foreign company. Given ServiceNow’s international approach to business and Canada’s continued importance to the data, analytics, and AI spaces, this acquisition could be an unexpected win-win relationship between ServiceNow and Canada.
What To Expect Going Forward
With this acquisition, ServiceNow has quickly gained access to a large team of highly skilled AI professionals at a time when its revenues are growing 30% year over year. At this point, ServiceNow must scale quickly simply to keep up with its customers and this acquisition ended up being a necessary step to do so. This acquisition is the fourth AI-related acquisition made by ServiceNow after purchases of Loom Systems for log analytics, Passage AI to support conversational and natural language understanding, and Sweagle to support configuration management (CMDB) for IT management.
At the same time, Amalgam Insights believes this acquisition will provide focus to the Element AI team, which was dealing with the challenge of growing rapidly, while trying to solve the world’s AI problems ranging from AI for Good to defining ethical AI to building AI tools to discovering product-revenue alignment. The demands of trying to solve multiple problems as a startup, even an ambitious and well-funded startup, can be problematic. This acquisition allows Element AI to be a professional services arm and a development resource for ServiceNow’s ever-evolving platform roadmap as ServiceNow continues to expand from its IT roots to take on service, HR, finance, and other business challenges as a business-wide transformational platform.