Currently the world's most valuable privately held AI Company by far is open AI The previously nonprofit Enterprise Behind Chat GPT The now for-profit company is reportedly in talks to raise money from Venture capitalists at an eyering valuation of $80 billion before open AI stole the Limelight The world's most valuable private artificial intelligence unicorn was a Chinese company called Sense Time. In 2018. it raised a funding round, valuing it at over $4.5 billion. It attracted Blue Chip investors including SoftBank Qualcomm and Alibaba.

Since Time creates computer vision technology, this is artificial intelligence which can look at an image or video and identify objects or people. Computer Vision has a wide range of use cases, most notably of which are verifying people's identities and conducting Mass surveillance with public security cameras. There is a huge growth opportunity, especially in China where the government has been ramping up surveillance to detect common criminals, terrorists, and allegedly also political dissidents. In late 2021, the US Treasury Department put s time on an investment Blacklist due to alleged involvement in human rights violations against a Muslim minority in the shin Jang region of China.

This means that Us companies and individuals are not allowed to do business with or invest in Sense Time. However, with the vast majority of its Revenue coming from the domestic Chinese market investors largely Shrugged off the US Blacklist In December of 2021, they conducted their IPO on the Hong Kong Stock Exchange raising the equivalent of $770 million Us at a valuation of 17 billion. On the first day of trading, the share price surged 23% bringing the valuation in excess of $20 billion. However, since the IPO the company's stock has performed disastrously, losing almost 80% of its value.

There are a few reasons for this: Firstly, while S. Time's Revenue was growing very quickly at the time of its IPO, its Revenue has started to decline inine over the past 2 years. Secondly, the short selling firm Grizzly research recently published a report accusing the company of artificially inflating its revenues. If this is true, the business may be collapsing even faster than its financial statements show.

And finally, this: December Since time share price fell by 20% in one day after the unexpected and untimely demise of its founder Tong Xiao who was only 55 years old In this video, we'll take a deep dive into the rise and fall of Sense Time. The world's most controversial AI company sste was founded in 2014 by Tong Shiau Tong was a professor at the Chinese University of Hong Kong and was considered to be a leader in the academic field of computer vision. They started off doing image recognition specifically of people's faces. s time can look at a photo of someone's face and analyze the various facial features.

This data is stored in a database. In the future, if S Time sees another picture of the same person, they can positively identify them. This type of facial recognition has applications insecurity, For example, various Banks and payment companies in China use Sense Times technology to verify the identities of their customers and prevent fraud. As their technology improved, Sense Time expanded from images to videos.

This is much more technologically difficult and computationally intensive, but it is also much more useful. The business really started to take off around 2017 when they started selling their services to Municipal Police departments around China. Since time can analyze security camera videos in real time to identify wanted fugitives, the Market opportunity is massive. It is estimated that there are over 700 million security cameras in operation across China including both the public and private sectors.

This is more than any other country by far. However, the vast majority of these cameras are dumb. Police have to review dozens of hours of footage after the fact to investigate a specific crime. This is a tedious and inefficient process.

With Sense 's Technology a lot of this can be automated. There are two key factors in developing an effective facial recognition software. The first is having technological expertise in computing power. many companies around the world have this.

The second factor is access to large amounts of data to train the artificial intelligence models. You need access to pictures of hundreds of thousands if not millions of people. The more data you feed into the model, the more it will learn and the more accurate it will become. Because of China's large population and the early adoption by Chinese Police departments s time was able to access tens of millions of hours of security camera footage to help train its models.

This gives them a massive data advantage over competing AI companies in the West which have a much greater difficulty in obtaining training data. Because of this, it is Wily believe that Chinese companies like Sense Time are world leaders in facial recognition. Around 2018, hype around Sense Time surged. The 4-year-old company's private Market valuation reached $4.5 billion, making it the most valuable AI startup in the world at the time.

They raised hundreds of millions of dollars from well-respected investors including the American Chipmaker, Qualcomm and the Japanese Tech conglomerate SoftBank just to name a few. Given the rapid development of the Chinese surveillance market and S times technological leadership, it's not hard to see why investors were bullish. The first major controversy around since time arose in 2019 when the New York Times published an article called one month, 500,000 face scans how China is using AI to profile a minority. According to their investigation, the Chinese government has been using Sense 's Technology to profile the Muslim minority in the region of Shinjang.

Shin Jang is a region in western China home to a large Muslim minority. Shin Jang is also home to a number of separatist groups which have at times conducted violent terrorist attacks both within Shen Jang and other parts of China. The Chinese authorities have responded by cracking down hard, arresting hundreds of thousands of suspected terrorists and separatists. Many foreign groups have accused China of violating human rights by arresting people in Shin Jang without due process.

The Chinese government vigorously denies this, but what's undeniable is that they have invested billions of dollars to set up a high-tech surveillance system. with police checkpoints and security cameras almost everywhere. This is a perfect place to deploy AI Technologies to sift through billions of hours of surveillance footage to track millions of people according to Sense Time. Subsequent Financial filings its business activities in Shin Jang are minuscule.

They claimed that sales to customers in Shin Jang represented at most 6% of their total revenue in any given year, and in the first half of 2021, they generated zero Revenue in the region. With that being said, it may be possible that they sold their software to Chinese government entities located outside of Shin Jang that were ultimately tasked with analyzing surveillance footage from Shin Jang. It's difficult to know. In 2019, the Trump Administration put S Time on the Department of Commerce's entities list, which prevents Us companies from doing business with Sense Time unless they receive a waiver.

The most impactful implication is S's ability to purchase Us design semiconductors, such as Nvidia Gpus, which they use to train their AI models. Importantly, the restrictions only targeted one of S subsidiaries, Beijing S, which is alleged to be involved in surveillance in Shing Jang. Other parts of its business were not incumbered. once one of S Time's other subsidiaries purchases US Design chips.

The Commerce Department realistically has no way of knowing what they are used for, so their inclusion into the Commerce Department's entities list in 2019 had limited, if any impact. In 2021, the restrictions against S. Time significantly tightened when the US Treasury Department added the company to its investment. Blacklist This prevents any Us business or citizen from doing any business with or investing in Sense Time.

and unlike the previous restrictions, the investment Blacklist applies to all the company subsidiaries. This makes it impossible for Sim to directly buy Nvidia Gpus or other Us Design chips since Time has already stockpiled a large number of Gpus prior to the implementation of these restrictions. Furthermore, they are reportedly still able to rent capacity on Nvidia Gpus from cloud computing companies, although it's unclear how sustainable this is, as these cloud computing companies may also become subject to trade restrictions. In the meantime, Chinese companies are rapidly developing their own Gpus and other semiconductor products which are now unavailable due to Us export restrictions.

According to most industry analysts, these Chinese ships are still years behind the most Cutting Edge chips designed in the US With that being said, the inability to Source top-notch Nvidia Gpus may not be as disastrous as at first sounds. Under the most recent trade restrictions, no Chinese companies are allowed to buy topend Us chips. The vast majority of Sense Time's Revenue still comes from within China to the extent that Sense Time's technological development is curtailed by Us technology controls, so too will all their competitors, so it shouldn't have any impact on their competitive position in December of 2021, Shortly after they were added to the US investment, Blacklist Sste conducted an IPO on the Hong Kong Stock Exchange. Despite Us investors not being able to participate, the listing was a success.

They raised $770 million Us at a 17 billion valuation. Technically, the money Rais was in Hong Kong dollars, but for Simplicity I've converted everything to US dollars. So for the rest of this video, every time we say dollars we're referring to US Dollars The IPO was heavily supported by the Chinese government. An investment fund owned by the Central government bought $200 million worth of the shares.

Funds owned by the Shanghai city government also invested about $220 million. Thus, more than half of the money since time Rais in the IPO came from Chinese government entities. When S Time ipoed, it had a premium valuation of well over 20 times its trailing. Revenue Since then, the share price has lost roughly 80% of its value.

This is largely due to the company's disastrous financial performance. In 2021, their revenue grew 36% Investors presumably expected growth to continue at that pace or even accelerate, but Revenue declined 19% in 2022 and another 25% in the first half of 2023. This is despite the company spending massively on research and development, which has caused them to post massive operating losses. To dig deeper, we can look at their revenue by segment.

They have four segments: Smart Business, Smart City Smart Life, and Smart Auto. Historically, their largest segment has been Smart City. This includes the police surveillance video business that they are most well known for. Smart Business includes things like facial recognition for employees to access restricted areas at their workplace.

They also sell similar products to apartment complexes to allow residents to unlock their doors by scanning their faces. The Smart Life segment contains a hodge podge of consumer offerings. For example, they created a software that can analyze the photos that people take with their smartphones and automatically sort them into albums. They licensed this software to a Chinese phone manufacturer called Vivo.

The Smart Life segment also includes consumer robots which can play board games like Chinese chess and go. The purpose of these robots is to teach kids how to play the game. This product was mostly viewed as an overpriced gimmick and flopped massively. Most parents would rather just teach their kids to play these games themselves.

The final and smallest segment is Smart Auto. This includes facial recognition software which can verify the identity of the car's driver as well as an Alexa likee. AI Voice Assistant. Some automakers have licensed this technology.

They're also working on using their existing computer vision technology to make a self-driving car, but they are still many years away from Full self-driving As we look at the revenue by segment, the most surprising thing is a collapse in Smart City Revenue this is supposed to be S Times Bread and Butter in 2021 made 2.1 billion Chinese R&B from this segment which is equivalent to about $300 million based on the current year run rate. This is on track to decline by a shocking 70% to roughly $90 million in 2023. So what happened? The main customers forens time Smart City segment are municipal governments. Historically Chinese City governments have raised a significant portion of their revenue from the sale of land to real estate developers.

Following the real estate crisis of 2021 and 2022, few developers still have the cash to buy new land. This has led to a severe decrease in Revenue forcing municipalities to cut costs. One of the ways they have done this is decreasing their orders to companies like Sste. It is true that Sste provides a valuable service to City police departments, but in many cases, cutting off Sens time will only have a limited impact on Public Safety State-run news channels in China frequently boast about the effectiveness of police surveillance.

The perception of a high-tech surveillance system can often deter wouldbe criminals in and of itself. If you see security cam everywhere and believe they're connected to a high-tech AI system, you'll think twice about committing any crimes. In reality, the cameras may or may not even be working. Thus, cutting back on their sense time bills is an easy way for municipalities to save costs, at least in the short term.

Sense Time itself has tacitly admitted as much. In their 2023 interim report, they disclosed that some of their Smart City customers are facing temporary budget constraints due to the uncertain macroeconomic environment. The second problem is competition. Substantially all all of China's Tech Giants including Alibaba tensent and Buu are investing massively in AI including computer vision technology.

While they haven't been doing this as long as Sense Time, they have profitable core businesses which allow them to invest in AI indefinitely without the need to raise capital. And while the numbers look bad on their face, S. Time's real financial situation may be even worse than his financial statements lead us to believe. in.

November Of 2023, the short selling firm Grizzly research published a short report accusing Sense Time of using elaborate round tripping transactions to artificially inflate its reported Revenue. According to the report, in 2020, since Time sued a company called Jingy Do Jin Do is a distributor for Sense Time software, Sense Time paid J Do 10 million R&B In return J Da signed an agreement to purchase 10 million R&B worth of facial recognition products from Sense Time, but instead of purchasing the products directly J DA paid another company called Emo. In exchange, Emo would assume the liability to purchase 10 million R&B be worth of Sense Times products. but before Emo could fulfill the agreement, its founder was arrested for an unrelated crime.

Thus, Emo was not able to fulfill the purchase agreement sste proceeded to sue Jing Do for failing to fulfill its obligations under the purchase agreement. All this information came to light in public court filings. Jing Da argued that they were no longer liable as they had already passed on the purchase obligation to Emo. To the extent that Sense Time cannot enforce the agreement with the Emo, it's not Jing y DA's fault.

The court ultimately ruled in favor of J Da. The important part of the story is not the fact that Imemo defaulted. this is just the reason it ended up in court. The real heads scratcher is why would Sense Time engage in such a weird arrangement in the first place, paying a company to pay another company to buy its product.

According to Grizzly research, this was a round tripping transaction meant to inflate the company's reported revenues. Not enough. Real customers were interested in buying Sense Times products, so they sneakily paid people to become customers. The reason they added Emo is was a middleman was presumably to make the paper trail more convoluted and pull the wool over the eyes of their auditor.

Round tripping could explain why they've been losing so much money. If you have to pay your customers, it's very difficult to make a profit. It could also explain why Revenue growth collapsed following its IPO with the increased scrutiny of being a public company since time may have decided that continued round tripping transactions are too risky. On December 18th s time share price plunged to an all-time low following the announcement of the untimely eyes of one of its co-founders Tong Xia O.

According to the company, he succumbed to an illness. although we don't know what the illness was. while Tong still owned roughly 20% of the company's stock, he no longer held a management position. Thus, his passing is unlikely to have a significant impact on the company's ongoing operations, But given the disastrous financial performance short report and US export controls, investor sentiment was already extremely low.

Kong's death was likely a convenient excuse for many back holders to finally cut their losses. All right guys, that wraps it up for this video. What do you think about Sense time? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.