DeepSeek AI cranks open the spigots on Chinese venture capital

BEIJING — DeepSeek's artificial intelligence breakthrough is stirring up China's venture capital world after three straight years of decline.

As DeepSeek released its OpenAI rival in late January, AI drug discovery company Insilico Medicine was finalizing a $110 million series E financing round led by Hong Kong-based Value Partners, the startup's CEO and founder Alex Zhavoronkov told CNBC in an exclusive interview. The deal closed last month.

But so many Chinese funds wanted to participate at the last minute — "like an avalanche" — that Insilico is planning a series "E2" raise, Zhavoronkov said. "We have never seen this level of interest before."

Qiming Ventures-backed Insilico uses AI from DeepSeek and other companies to create models for developing drugs. Ten of the startup's drugs have already received approval for clinical tests, according to Insilico, which lists research labs in China, the U.S. and the Middle East.

Zhavoronkov added that during his U.S. travels in the last few weeks, many U.S. and other global investors have asked him about ways to invest in Chinese AI companies.

"It looks like the DeepSeek moment, it created a lot of interest from global investors to invest in China," he said Monday. "I think the funding is going to come back."

Regulatory uncertainty in both China and the U.S., especially around IPOs, and slow economic growth have contributed to a sharp drop in Chinese venture capital activity in recent years. VC investment into China-based companies has fallen for the last three years, reaching just $48.86 billion in 2024, the lowest on record going back to at least 2016, according to Pitchbook data.

Now, as regulatory clarity emerges, sentiment is changing — and encouraging investors to take a different approach to the past, when internet-based startups such as Alibaba emerged.

"People are rushing just to find the next DeepSeek," said Annabelle Yu Long, founding and managing partner of BAI Capital in Beijing. She also sits on the board of Coach parent Tapestry.

"Everybody is making investments, but I am asking my team to hold on new deals, because we see our core portfolio [of around 6 companies] are gaining very, very meaningful AI traction," she said, noting that her firm is opting to increase its investments in existing holdings in coming months.

Part of her call stems from her view that Chinese funds have far less capital than U.S. ones to invest in AI, requiring a targeted approach. Instead of looking at new startups, Long said she expects entrepreneurs who are already using AI well to succeed in the near future.

For example, BAI Capital-backed Black Lake, which sells manufacturing management systems, has become profitable this quarter because AI has lowered service costs, Long said. Another of her investments, a healthcare company called Lejian, has become more profitable with the help of AI, and Goldman Sachs is preparing its IPO, she added.

Long said she plans to list nine portfolio companies this year, mostly in Hong Kong, and has received many calls from international investors about China's economy and Chinese entrepreneurship beyond AI. "I definitely see a return of confidence."

Other recent investment rounds also reflect how capital is piling into existing players. Insilico's Zhavoronkov said some Chinese investors had previously lost nearly all their money on AI drug startups, and now recognize that only a few, likely more established, players will make it.

This month, AI model company Zhipu AI raised the equivalent of around $137.68 million from Alibaba Cloud and a Hangzhou city-backed fund, according to PitchBook's records of 12 AI deals for the first 10 days of March. The data also showed robotics company LimX Dynamics raised an undisclosed amount from Alibaba Group and other investors.

China's Lunar New Year in late January marked a turning point for AI investment. DeepSeek's R1 model came out just before the holiday, while state media's widely broadcast Spring Festival gala showcased dancing robots from Unitree.

"I think Unitree and DeepSeek encourage a lot of foreign investors to try to seek opportunities here," said Hongye Wang, executive director at Shenzhen-based Forebright Capital, which has funds denominated in the U.S. dollar and Chinese yuan. He noted that some Middle East funds have recently been looking for opportunities in Chinese AI companies.

"I believe confidence [is] coming back," he said of domestic VCs, noting many were traveling again for meetings.

Wang said his firm has invested in a company that makes cellphone chargers and AI glasses, and is looking for opportunities in humanoid robots, along with companies that provide solutions for computing reasoning. Forebright, which Wang says has several billion U.S. dollars in assets under management, plans to make at least five to six investments this year, he said.

Importantly for a market that's been hit by regulatory crackdowns, Beijing is signaling clear support.

"The fact that President Xi [Jinping in February] shook the hand of DeepSeek's founder and pretty much gave the green light for generative AI to be used at scale, now you should expect a massive number of DeepSeek-like clones ... that will be popping out and just disclosing what they have been doing over the past three years," Zhavoronkov said.

Xi held a closed-door symposium last month with some of the country's most prominent business leaders, including Alibaba founder Jack Ma.

"People underestimate the importance of that meeting," Alibaba Group Chairman Joe Tsai said at CNBC's CONVERGE LIVE in Singapore on Wednesday.

"What that meeting did to the entire entrepreneur sector, or ... the private business sector, is it gave private business people confidence to make investments in their business," he said.

Premier Li Qiang's work report last week said China would work to "accelerate the development of venture capital investment and the growth of patient capital," referring to long-term investment.

A day after Li presented that plan, Zheng Shanjie, head of the National Development and Reform Commission, told reporters the central government is planning a fund that's expected to mobilize 1 trillion yuan ($137.7 billion) for tech investment. Central bank governor Pan Gongsheng announced at the same press conference that a loan program for tech innovation would nearly double to as much as 1 trillion yuan.

"From early stage investment to exit, policy is more complete and clearer," Liu Rui, vice president of China Renaissance, said in Mandarin, translated by CNBC.

He expects more resources to go toward AI applications this year, given the faster-than-expected decline in model operating costs and China's large consumer base.

Tensions with the U.S. — ranging from tariffs to tech restrictions — remain a hurdle for international investors contemplating China AI opportunities, however.

Unlike U.S.-based companies that can access the global market, China-based ones will also likely find it harder to expand abroad given the sensitivities around AI and data, said Xuhui Shao, Palo Alto-based managing partner at Foothill Ventures. His firm focuses on the U.S. and doesn't invest in China.

Even with the potential of China's large market, foreign investors need to understand the risks of investing in China, such as restrictions on capital flow, Shao said. But he pointed out that "innovative breakthroughs" such as DeepSeek shouldn't be a surprise given that China has many college-educated engineers and data scientists, who can represent half of the AI researchers at an industry conference.

"I think," he said, "competition always pushes the whole sector [to move] forward and technology would not be contained by borders."

Clarification: This story has been updated to accurately reflect the English-language name of China Renaissance.