SenseTime's Market Leadership and Opportunities in Multiple Industries
Investors are handing billions of dollars to SenseTime, a startup with less than 5-year of operating history. Valuation has sent skyrocketed, leading to both positive perceptions and questions on the feasibility of its business model.
With less than 5-year of operating history, SenseTime has raised more than 10 times financing from the well-known investors around the world, Tiger Global, Silver Lake, Fidelity, SoftBank, Qualcomm, Alibaba, Temasek Holdings - you name it. The valuation has sent skyrocketed after rounds of fundraising, leading to both positive perceptions from outsiders and questions on the feasibility of SenseTime’s business model: the team made up with scientists and professors is keen on publishing academic paper and participating in global AI competitions, but weak on monetization, and the “AI for everything” strategy seems impractical to execute at this stage.
Comparatively, other three Computer Vision startups in China, Megvii (used to be Face++), CloudWalk, and Yitu Technology remain much more “low-profile” in public, though they have also drawn millions of funding from investors. For example, Megvii (used to be Face++), another Alibaba-backed startup and the biggest competitor of SenseTime, has completed its D series founding last year, but did not make the announcement until May 2019. The company was intentionally “cooling the market” and it kept emphasizing that a funding announcement from an AI company was not the same as the major technological breakthrough it has made. An AI business, just like companies in other sectors, should have its own business cycles.
Moreover, the rest of the three startups are shifting their attention to merely a few industries and are firm believers that startups worth less than USD 10 billion should focus on specific verticals instead of doing everything. In addition to using facial recognition technology in national security and consumer-oriented mobile apps, Megvii mainly focuses on logistics, Yitu is specialized in healthcare and CloudWalk chose the financial sector. Different from its peers, SenseTime has been exploring over 10 verticals and is “impatiently” looking for opportunities to apply AI to more industries, including self-driving, surgery and diagnostics, augmented reality, chip technology, AI education, etc. During the 2019 Artificial Intelligence Summit on May 15th, SenseTime released 11 products across five industry verticals, the largest number of new products announced since the company was established.
How SenseTime turned to the most expensive AI startup
Despite the mixed comments from different groups, we believe SenseTime’s rapid journey to becoming the world’s highest-valued AI startup is driven by below factors,
1) The “best-in-kind” team - The company has grown to 3,000 employees now, doubling the number from a year ago. The team consists of PhD and college professors from MIT, Chinese University of Hong Kong, Tsinghua University, and Peking University as well as tech experts from Microsoft, Google, Lenovo, and Baidu. Everyone in the core development team has over 20 years of research experience. According to the founder, “There are less than 200 people with PhD on deep learning technology in China and SenseTime owns 120 of them. If SenseTime cannot offer the technology, the rest of the players have even smaller chance to do so.”
2) Greater government support - SenseTime has become the fifth National Open Innovation Platform for Next Generation Artificial Intelligence, after Alibaba, Baidu, Tencent, and IFLYTEK. The China government is said to support Baidu on developing automatic driving, Alibaba Cloud on developing the city brain, Tencent on developing healthcare medical images, IFLYTEK on developing Natural Language Processing (NLP), and finally SenseTime on developing Computer Vision technology. While the other four companies are tech giants with stable revenue streams, SenseTime is a rare startup made to the list. We expect the policy to give SenseTime greater access to subsidies and bigger likelihoods on winning over government contracts and on hiring AI talents than its competitors.
3) The “AI for everything” plan supported by financial muscle - Relative to its peers, SenseTime has the largest funding to deploy significant resources and to support its aggressive expansion plan. In their vision, given the competitiveness level in Chinese markets, if they do not make initiatives now, the market will be quickly taken over by emerging players in the next few years. Even if SenseTime might not have a substantial impact on certain areas, the company intends to build the industry connections and brand awareness. When technology and solutions become more mature, client companies are more likely to choose SenseTime over other vendors who are less exposed before.
4) Being a frontrunner on revenue and profitability - though the specific revenue or net income figures are not disclosed, our industry researchers confirmed that in 2017, SenseTime made revenues of around CNY 700 million and turned profitable, similar to Megvii. In 2018, sales reached CNY 7 billion, well exceeding all competitors. Most of the revenue has come from the government clients, where SenseTime could leverage its strong connections.
Among all sectors that SenseTime is currently exploring, we highlight education, Smart City, and entertainment, which we think SenseTime has competitive advantages in.
Governments are chasing AI education solutions
Recently, SenseTime has introduced its internally designed AI textbooks, “Fundamentals of Artificial Intelligence”, to around 40 high schools in Beijing, Shanghai, Shenzhen, and Shanxi. To spark students’ interests, its platform “SenseStudy” offers AI and programming courses with over 200 hours. Students can experience and grasp the ideas of facial recognition, gesture recognition, augmented reality and many other trending technologies.
Behind the scene, it is the domestic and regional governments who are spending millions of dollars on SenseTime’s education solutions. Why does the government introduce AI to K12 education? While US has been promoting STEM education (Science, Technology, Engineering and Math) for decades, China is in short of engineers, physicians and data scientists. The edge in scientific and technological innovation has only become more important amid the current escalation of US-China trade war.
We believe with SenseTime’s strategic partnership with China Education Association, it is relatively easy for the business to secure additional orders and supply more schools with AI textbooks, training, and equipment in laboratories. In this sector, the monetization is clear and will likely be sustainable in the long run.
Smart City is a big pie with low threats from new entrants
Visual surveillance systems from train stations to airports are upgraded to be more technologically advanced. Besides national security, the scope of Smart City is even broader, including vehicle license plate recognition, traffic data identification, crowd flow analysis and so on. Cities and provinces are delegating the Smart City projects to different vendors, who win contracts based on bidding.
While 2017/2018 was the time for AI vendors to bid on contracts, companies which have secured contracts are in the process of fulfilling services now. Since national security, which takes a big portion in Smart City projects, involves considerable sensitive information, governments are unlikely to delegate such projects to a provider without a trusting relationship. Therefore, in a market worth around USD 80 billion with double-digit growth rates, there are limited opportunities for new entrants.
SenseTime has developed particularly strong relationships with both national and overseas governments, demonstrated by 1) it won contracts with over 100 cities, nearly one-third of all cities in China, and has equipped over 100,000 smart cameras. 2) it has built research centers globally and has made strategic cooperation with Southeast Asian countries, selling Smart City solutions to Thailand, Malaysia, Cambodia and India. It owns a heavier business model compared to its peers, who are mostly doing business development remotely or have not expanded internationally at all.
AR brings higher user engagement to the entertainment sector
SenseTime helps mobile game apps, social video apps, and other user-generated (UGC) video platforms bring an innovative human-computer interaction via augmented reality (AR) technology. For example, Tencent's first AR mobile game which was launched last month, "catching the demon”, adopted a cutting-edge blend of computer vision, depth detection, and real-time object recognition, provided by SenseTime. On the back of declining user engagement and rising user churn rates, mobile app providers are looking for various tactics to increase app’s “stickiness”. If an app provider starts to use AR technology to attract users, its competitors are likely to make the same move or they will drive their users to other platforms and lose market shares.
Under this business model, downside risks are easily identified. Trying to cover many sectors is likely to distract SenseTime from developing industry expertise, the real moat, and may lead to the outcome that it only plays a minor role in certain industries, such as automatic driving, which requires years of development.
In addition to the government clients, SenseTime claims to team up with over 700 corporations in China and overseas, such as Qualcomm, Nvidia, Huawei, Xiaomi, and JD.com. However, the value that SenseTime provides to its enterprise clients may not directly reflect on their financials. For example, Meitu, a leading photo-editing app which heavily uses SenseTime’s facial recognition technology to let its users beautify their photos, was not able to prevent its shares from plummeting despite using AI and even blockchain technologies. It is challenging for SenseTime to drive profitability by serving only one or two industry leaders who have deeper pockets.