AI start-up Fourth Paradigm, formed by Huawei veterans, becomes China’s latest unicorn

Fourth Paradigm is the latest Chinese start-up to net a valuation north of US$1 billion. Founded just three years ago by Huawei Technologies veterans, the Beijing start-up is fast winning favour among state-backed banks preparing a plunge into artificial intelligence.

The start-up – known also as 4Paradigm – said in a statement it’s scored more than US$150 million of funding at a valuation of about US$1.2 billion. With that financing, its investors and paying customers now include four of China’s five largest banks: a major boost for a little-known outfit hoping to compete with the likes of Alibaba Group Holding and Ant Financial in the massive undertaking of wrenching a state-dominated US$37 trillion banking arena into the digital age.

Unlike other Chinese AI players are developing consumer apps or facial recognition, Fourth Paradigm works in a more mundane field. It essentially hands its clients a suite of software tools that let them run complex algorithms on their data without needing to employ highly trained engineers. Its main service provides tools for banks to detect fraud, identify customers and perform other analysis.

“What we are doing is to set up a platform for the data they collect, from all the different data sources, to generate their own models,” said co-founder and Chief Executive Officer Dai Wenyuan.

Dai was an architect of Baidu advertising systems before joining Huawei’s AI division, a business his co-founder Yang Qiang helped form.

Fourth Paradigm has benefited from a push to modernise China’s banking sector, as Beijing pursued a de-leveraging campaign and urged lenders to formulate ways to better assess risk. It’s also been helped by the success of Alibaba, its affiliate Ant Financial and Tencent Holdings, which are posing credible threats to established lenders through their own mobile payments and online financial services.

But winning over the banking sector, which has been slow to adopt new tech, wasn’t easy. “Chinese banks are less willing to pay for software,” said Kai-fu Lee, founder of Sinovation Ventures and an early investor alongside Sequoia. “So Fourth Paradigm had a very tough first two years getting anywhere. They basically had to prove themselves through trials.”

With its latest financing round, the start-up added the Bank of Communications as an investor. Three other state lenders – Industrial and Commercial Bank of China, Bank of China and China Construction Bank backed the company in January. Dai said Fourth Paradigm has “several hundred million yuan” in revenue and also has clients in retail, health and media, where it helps publications personalise their news apps. A company spokeswoman said it is “not yet” working with China’s national social credit scoring system.

The start-up, which has over 600 employees, is raising more money, in part, to bankroll a risky move. This year, it started making hardware – a chip customised to process its algorithms. The company will offer the component as a package with software to clients, Dai said, although he declined to say when.

It’s a trend for every company working on AI. The technology demands tremendous computing resources and chips that can handle that output. Thanks to the trade war, Chinese firms have had to pay more for these processing components, which they largely import from the US. Dai declined to say how much the chip effort costs.

“In China, the customer is willing to pay for hardware much more than software,” he said.