DeepSeek: Chinese AI Startups See Surge in Funding After Spring Festival

On Thursday, it was reported that DeepSeek’s breakthrough in the field of artificial intelligence is causing a stir in China’s venture capital community, ending a three-year downward trend.

When DeepSeek released its OpenAI-rivaling product in late January, the AI ​​drug discovery company he founded was finalizing a $110 million Series E round led by Hong Kong-based Value Partners, according to Alex Zhavoronkov, founder and CEO of Insilico Medicine, in an exclusive interview. The deal closed last month.

However, thanks to a last-minute influx of Chinese funds — “like an avalanche” — Insilico is planning an E2 round of funding. “We’ve never seen such high interest,” Zhavoronkov said.

Insilico, which is backed by Qiming Venture Partners and uses AI technology from companies such as DeepSeek to build models for drug development, says it has 10 drugs approved for clinical trials and has research labs in China, the U.S. and the Middle East.

Zavoronkov added that during his trips to the United States in recent weeks, many U.S. and other global investors have asked him how to invest in Chinese artificial intelligence companies. He said: “This seems to be DeepSeek’s moment, which has triggered strong investment interest in China from global investors, and I think the money will flow back.”

Regulatory uncertainty in both China and the U.S., especially around IPOs, and slowing economic growth have led to a sharp decline in Chinese venture capital activity in recent years. According to PitchBook data, venture capital investment in Chinese companies fell to $48.86 billion in 2024, the lowest level recorded since 2016.

Now, as regulatory policies become clearer, market sentiment is changing, prompting investors to change their investment strategies from the past when Internet startups (such as Alibaba) emerged.

“People are rushing to find the next DeepSeek,” said Annabelle Yu Long, founder and managing partner of Bertelsmann Asia Investments (BAI Capital) and a director of Coach parent Tapestry.

“Everyone is investing, but I’ve asked my team to be cautious about new deals because we’re seeing meaningful progress in AI in our core portfolio of about six companies,” Long said. She also noted that BAI Capital plans to increase investments in existing holdings in the coming months.

Long Yu’s decision was partly due to her belief that Chinese funds have invested far less in AI than American funds, so a targeted strategy is needed. She expects that entrepreneurs who have already made good use of AI will succeed in the near future, rather than betting on new startups.

For example, Black Lake Technology, an intelligent manufacturing management system company invested by BAI Capital, has achieved profitability this quarter due to the reduction of service costs by artificial intelligence. Lejian Technology, another healthcare company invested by Long Yu, has also achieved higher profits with the help of artificial intelligence, and Goldman Sachs is preparing for its IPO (initial public offering).

Long Yu also said that she plans to list nine portfolio companies in Hong Kong and other places this year, and has received inquiries from many international investors about the Chinese economy and the situation of Chinese entrepreneurship outside of artificial intelligence. “I do see a return of confidence.”

Other recent investments also reflect capital flowing into existing companies. Some Chinese investors, who lost almost all their money on AI drug startups, now realize that only a few, more likely to be established companies, will succeed, said Insilico’s Mr. Zhavoronkov.

This month, AI modelling company Zhipu AI raised about 1 billion yuan from Alibaba Cloud and a Hangzhou government-backed fund, according to PitchBook’s tally of 12 AI deals in the first 10 days of March. The data also showed that the robotics company Zhuji Power raised an undisclosed amount from Alibaba Group and other investors.

Spring Festival holiday: a key turning point for AI investment

The Chinese New Year in late January became a turning point for AI investment. DeepSeek’s R1 model was released before the holiday, while the CCTV Spring Festival Gala showcased a dancing robot from Yushu Technology.

“I think Yushu Technology and DeepSeek have attracted many foreign investors to explore opportunities in China,” said Wang Hongye, executive director of Shenzhen-based Forebright Capital, noting that some Middle Eastern funds have recently been looking to invest in Chinese artificial intelligence companies.

“I believe that confidence among domestic venture capital firms is returning,” he said, noting that many VCs are travelling again and attending conferences.

Wang said Forebright Capital has invested in a company that makes mobile phone chargers and artificial intelligence glasses and is looking for humanoid robots and companies that provide inference computing solutions. He also said Forebright Capital, which manages billions of dollars in assets, plans to make at least five to six investments this year.

Policy support

At the same time, the Chinese government has sent a clear signal of support. Zhavoronkov said that at a private enterprise symposium last month, the founder of DeepSeek attended, “basically giving the green light to the large-scale application of generative artificial intelligence. Next, you should see a large number of companies like DeepSeek emerge and they will disclose the results of the past three years.”

“People underestimate the importance of that conference,” said Alibaba Group Chairman Joe Tsai. “The impact of that conference on the startup world or the private sector in general is that it gave private companies the confidence to invest in their own businesses.”

Last week, the government work report stated that China would “accelerate the development of venture capital and strengthen patient capital,” referring to long-term capital.

Zheng Zhajie, director of the National Development and Reform Commission, revealed that the central government is planning to set up a fund that is expected to raise 1 trillion yuan for technology investment. At the same time, at a press conference, Pan Gongsheng, governor of the central bank, announced that the scale of the science and technology innovation loan program will almost double to 1 trillion yuan.

“From early-stage investment to exit, policies are more complete and clearer,” said Liu Rui, vice president of China Renaissance Capital. He expects more resources to be invested in AI applications this year, given faster-than-expected declines in model operating costs and China’s huge consumer base.

However, tensions between the U.S. and China — from tariffs to technology restrictions — remain a major obstacle for international investors considering investment opportunities in China’s artificial intelligence sector.

Unlike U.S. companies that can access global markets, Chinese companies may find it difficult to expand overseas given the sensitivities around AI and data, said Xuhui Shao, managing partner at Foothill Ventures in Palo Alto.

He also said that despite the huge potential of the Chinese market, foreign investors need to understand the risks of investing in China, such as restrictions on capital flows. But he also pointed out that considering China has a large number of highly educated engineers and data scientists (they can account for half of artificial intelligence researchers at industry conferences), “innovative breakthroughs” like DeepSeek are not surprising.

Shao Xuhui added: “I believe that competition always drives the entire industry forward, and technology is not restricted by national borders.”