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The Impending Artificial Intelligence Shakeout

AI

Recently, the public got a rare peek into the other side of the stoic and inscrutable Elon Musk, the South African-born billionaire behind Tesla and SpaceX. In a strangely maudlin revelation, Musk admitted that long work hours and work-related stress were taking a heavy toll on him,

"This past year has been the most difficult and painful year of my career," he said. "It was excruciating."

Well, he’s in good company. Musk’s comments must have struck a chord with numerous founders of AI startups in China, whose fledgling businesses now face a very uncertain future.

One such person is Zhao Xiuwen, CEO of ZingFront, an AI-driven short video production startup. In an interview with the South China Morning Post, Zhao said: “It has become harder and harder to raise money recently. I’m under a lot of pressure. Sometimes I’m awake from around 2am to dawn and can’t stop thinking about my company’s future.”

Bursting the Bubble

Zhao’s woes succinctly sum up the plight of many AI founders in the country. In recent years, the industry has been awash with cash as anything remotely linked to artificial intelligence received the financial backing of starry-eyed VCs and angel investors.

Over the past five years, 60 percent of all funds raised globally that targeted AI projects found their way into China. In 2017, Chinese companies gobbled up 70 percent of the nearly $40 billion raised worldwide for AI investments. Related: What Happens If A Bitcoin ETF Is Approved?

The financing activities for AI in China greatly surpassed that of the United States, with many early start-stage startups with no established operations able to raise funds at valuations of as high as 100 million yuan (~$15 million). Never mind the fact that many were built on quicksand with no clear plans for commercialization. Indeed, all that many had to show were fancy algorithms or engineering tricks and few have managed to cross the $100 million in revenue milestone.

And now one money manager says the time of reckoning has come, with only a select few slated to survive the impending shakeout.

Ai Yu, head of investment at China’s new-economy fund Everbright, told SCMP that as many as 90 percent of China’s AI startups will encounter “great difficulty” over the next couple of years due to a severe funding strain caused by the country’s ongoing deleveraging drive, an economy that’s beginning to lose steam and mounting pressure to commercialize their technologies.

The worst hit will be startups in highly competitive fields such as natural language processing and facial recognition since the early leaders have already emerged.

China the Tech Leader

Mr. Ai certainly should be in the know. After all, he manages about 30 billion yuan (US$4.4 billion) in investments including well-known names such as iQiyi, Meituan-Dianping, NIO and Xpeng.

Yang Fan, co-founder and VC of the world’s largest AI start-up SenseTime, told SCMP something similar. But he also noted the frivolity of some of the products. For instance, installing facial recognition in public restrooms to cut down on toilet paper wastage is not only absurd but preposterous from a financial standpoint. After all, how many tons of toilet paper would you need to save to recoup your investment?

Nevertheless, despite all the pain and steep learning curve that the industry will have to endure, Pricewaterhouse Coopers has estimated that AI deployment will add $15.7 trillion to global GDP by 2030, with China taking home nearly half and almost double North America’s $3.7 trillion in gains.

China President Xi’s goal to take on the U.S. in tech might have been overly ambitious and has even been blamed for causing the ongoing trade wars. But in the end, it might just leave China richer, and the world a better place.

By Alex Kimani for Safehaven.com

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