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Hong Kong’s Political Unrest Isn’t Stopping A.I. Startup Megvii From Making Its Public Debut: Term Sheet

What’s going on in Hong Kong right now? Well, a lot, including that Megvii Technology, a China-based artificial intelligence startup, is filing for an initial public offering on the Hong Kong Stock Exchange. 

The A.I. unicorn is expected to raise at least $500 million and possibly as much as $1 billion in its IPO. Its public debut announcement comes at a complicated time in Hong Kong, which is enduring its twelfth consecutive weeks of anti-government protests.

Last week, Chinese tech behemoth Alibaba said it would postpone its up to $15 billion listing in Hong Kong amid growing political unrest. Megvii's decision to list is one indication that Hong Kong remains an attractive destination in spite of the current market downturn and increasingly spooked investors in several sectors.

Megvii was most recently valued at approximately $4 billion after its last funding round in May, when it raised $750 million in funds. Ant Financial owns around 15% of Megvii through a subsidiary, Alibaba owns another 14%, and the three co-founders of Megvii own a combined 16.8%. 

This is one IPO to watch because if listed, Megvii would become the first Chinese AI stock trading on the Hong Kong stock exchange. Known largely for developing Face++, a facial recognition software, Megvii is the world's largest provider of third-party authentication software.

But it hasn’t been a smooth ride for the company. In May, Human Rights Watch published a report linking the company to a mass surveillance system the Chinese police used to monitor citizens in the western region of Xinjiang. The allegation turned out to be false, and HRW issued a correction, but according to Megvii's prospectus, it caused "significant damages to our reputation which are difficult to completely mitigate." 

And there are more risk factors to consider in this upcoming IPO. Fortune reports:

Apart from the risk associated with Hong Kong's unrest and resultant economic slump, Megvii is contending with political factors like the U.S.–China trade war, in which U.S. tariffs and blacklisting have already hurt Chinese tech companies.

Megvii was not one of the Chinese tech companies blacklisted by the U.S., but rumors circulated earlier this year, fueled by the HRW report, that the U.S. might ban it. Such controversy would likely make it difficult for Megvii, a homegrown Chinese company, to go public on a U.S.-based stock exchange.

Wary of that reputation, Megvii is setting up an A.I.-ethics committee and whistle-blowing procedures for employees, and customers must pledge in their contracts that they will not use Megvii technology for "any illegal or inappropriate purposes, including infringement of human rights."

Read more here.

…MEANWHILE: U.S. companies continue to pour money into China despite the worsening trade war between Beijing and Washington. They invested $6.8 billion into China in the first half of the year, up 1.5% from the average during the same period over the past two years, according to the Rhodium Group. 

Most of that total went into greenfield projects, such as electric vehicle maker Tesla’s factory in Shanghai, which will be the first wholly foreign-owned auto plant in China. Other large deals included US fund Bain Capital’s $570 million investment in data centre provider Beijing Qinhuai. Read more.

SLACK UPDATE: It’s been two months since workplace messaging platform Slack went public via a direct listing, an unconventional method of going public without issuing new shares or working with an underwriter.

My colleague Michal Lev-Ram has an interesting piece on the company in the months following its public debut. Despite its successful direct listing, she writes, Slack now faces even higher expectations of growth and the same powerful nemesis: Microsoft.

From her story:

If becoming the one-stop shop for corporate software sounds a lot like Microsoft’s pitch, it is and it isn’t. Ironically, for Slack to succeed, at least in the eyes of Wall Street, it will need to become an enterprise giant much like its rival. But Butterfield is convinced he can continue to push the company into adulthood without forgetting its roots—the simplicity that helped Slack catch on in the first place.

Read in full here.

VENTURE DEALS

CRED, an India-based members-only app that rewards the user with exclusive rewards for paying credit card bills, raised $120 million in Series B funding. Investors include Sequoia Capital, Ribbit Capital, DST Global’s Gemini Investments, Tiger Global, Hillhouse Capital, General Catalyst, Greenoaks Capital and Dragoneer. Read more.

Axonius, an Israel-based management company, raised $20 million in Series B funding. OpenView led the round, and was joined by investors including Bessemer Venture Partners, YL Ventures, Vertex, WTI, and Emerge.

Stylitics, an AI-powered visual merchandising and outfit recommendation platform, raised $15 million in Series B funding. PeakSpan Capital led the round, and was joined by investors including Trestle LP. 

Luma Health, a San Francisco-based patient engagement platform, raised $16 million in Series B funding. PeakSpan Capital led the round, and was joined by investors including Cisco Investments, the Texas Medical Center, and U.S. Venture Partners. 

PeerWell, a San Francisco-based company that helps patients prepare physically and mentally for orthopedic surgery and recover faster, raised $6.5 million in Series A funding. OMERS Ventures  led the round, and was joined by investors including XSeed Capital.

CardX, a Chicago-based payment technology company, raised $2 million in funding, from Pace Financial Group.

Ario Technologies, a Norfolk, Va.-based provider of an augmented reality software-as-a-service platform, raised $2 million in funding. NRV led the round.

Inzpire.me, a Norway-based today platform for influencers and brands, raised €1.2 million ($1.3 million) in funding. Schibsted Media Group led the round, and was joined by investors including SNÖ Ventures, Thomas Falck, and Martin Ingemansson. 

HEALTH & LIFE SCIENCES DEALS

Atonarp, a Japan-based molecular diagnostics company, raised $33 million in Series C funding. Investors include Japan Post Investment Corporation, SBI Investment Co., Ltd, Northwestern Mutual Future Ventures, INCJ Ltd and Innovative Venture Fund Investment Limited Partnership.

Boston Microfluidics, a Boston-based developer of simple, intuitive blood collection devices, raised $17.5 million in Series A funding. Anzu Partners led the round, and was joined by investors including LabCorp Holdings.

FIGUR8, a Boston-based diagnostics platform that captures 3D skeletal movement, raised $7.5 million in seed funding. P5 Health ventures led the round, and was joined by investors including E14 Fund.

PRIVATE EQUITY DEALS

Warburg Pincus agreed to acquire WebPT, a Phoenix, Ariz.-based developer of an electronic medical record and practice management solutions for physical therapists. Financial terms weren’t disclosed. 

TA Associates will make an investment in Gong Cha Group, a China-based provider of premium quality bubble and milk tea. Financial terms weren’t disclosed. 

Ben Franklin Technology Partners invested in ERApeutics, a Lancaster, Penn.-based provider of brain health supplements. Financial terms weren’t disclosed. 

Alloy Die Casting Co, a Los Angeles-based provider of manufacturing and supply-chain solutions for highly-engineered metal components, raised funding of an undisclosed – amount, from PWP Growth Equity.

Water Street Healthcare Partners and JLL Partners acquired THREAD, a Tustin, Calif.-based provider of technology that enables virtual research approaches to modernize clinical studies and registries. Financial terms weren’t disclosed. 

Sunbelt Supply, which is backed by Clearlake Capital Group, acquired Severe Service Specialists, a provider of services and valves that are engineered to withstand severe applications. Financial terms weren’t disclosed. 

IPOs

Shanghai Henlius Biotech Inc., a Chinese biotech firm backed by the Fosun group, is weighing a Hong Kong IPO of roughly $600 million, Bloomberg reports, citing sources. Read more.

Igua Saneamento, a Brazilian sanitation company, filed for an initial public offering in the country. Read more.

EXITS

Entelo acquired ConveyIQ, a New York-based provider of candidate engagement software-as-a-service solutions. Financial terms weren’t disclosed. ConveyIQ raised approximately $19.6 million from investors including Rittenhouse Ventures, StarVest Partners, 3TS Capital Partners, SC Ventures, and Jove Equity Partners.

Playtika acquired Seriously, a Finland-based mobile entertainment startup. Financial terms weren’t disclosed. Seriously had raised approximately $28 million in funding from investors including Daher Capital, Upfront Ventures, Heartcore Capital, Korea Investment Partners, and Northzone. 

Airship will acquire Apptimize, a Menlo Park, Calif.-based developer of a mobile A/B testing platform. Financial terms weren’t disclosed. Apptimize had raised approximately $18.6 million in venture funding from investors including USVP, Costanoa Ventures, Goldcrest Investments, Glynn Capital Management, and Jonathan Abrams.

FIRMS + FUNDS

Algo Capital, a blockchain-focused venture capital firm, raised $200 million for its Algo VC Fund.

PEOPLE

Potomac Equity Partners promoted Chris Blythe to partner.

Madeline Keulen joined Victress Capital as vice president.