China AI Firm Megvii Decides To Move Forward With IPO In Face Of U.S. Blacklisting

Oct 16, 2019
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Megvii is China's largest AI startup and is moving forward with its Hong Kong IPO despite finding itself on a U.S. blacklist which precluded it from getting the vital hardware components it needs to feed its servers.

Megvii and the blacklist

Megvii

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Megvii is China's crown jewel when it comes to artificial intelligence companies. Its software uses highly advanced algorithms to identify people based on their faces. Critics of the company say that it has used its technology to help aid the Chinese in humans rights violations against Muslim minorities in the country's Xinjiang district. Over a million people have been reported, validated by a slew of sources, held in "re-education camps" across the country. Its perhaps the largest ongoing human rights issue in China.

The world-at-large has been vocal in opposition to this practice and the U.S. formally entered the fray just earlier this month by adding eight companies to its supply-side blacklist. What this means is that Megvii is free to sell its services to anyone, but U.S. companies may not sell it any equipment or service of any kind.

At the top of the list of crucial items would be NVIDIA's (NASDAQ:NVDA) graphics accelerators that do the heavy lifting computational processing for Megvii's algos. When it comes to machine-learning, "AI" as we know it today, graphics processors are an order of magnitude faster than even the quickest, most expensive Intel (NASDAQ:INTC) Xeon available.

IPO moving forward despite the blacklist

When it comes to the financial risk story of Megvii, a complete ban on much-needed hardware is a massive element of uncertainty that a potential backer would need to accept before investing in the unicorn.

Of course, Hong Kong itself is embroiled in one of the largest ongoing protests the world has ever seen, with human rights at the core of the dispute. The climate certainly doesn't seem favorable for Megvii, yet sources informed Bloomberg that the company was charging forward regardless.

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It might be the fact that Megvii lost half a billion dollars last year, and its current war chest is sitting at around $210 million after it burned about $90 million in the first half of the year. It has a further $440 million in short term bank deposits with maturities ranging from 3 to 12 months.

Megvii is seeking to raise over a $1 billion in fresh capital with an IPO, and that's probably why it's continuing to press on an IPO, expected early next month. It simply needs the cash.

What's not clear is the motivation behind the Trump administration's blacklisting of Megvii. Are they being used as a pawn among the greater trade war between the United States and China? If so, a trade deal could see them cleared from the blacklist and things could resume as normal at the drop of a hat. If the ban is in "good faith" so to speak, then things might drag out longer as neither the Chinese government nor Megvii itself acknowledge any involvement in the whole Xinjiang ordeal.

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