Will DeepSeek Burst VC’s AI Bubble?

For many investors in artificial intelligence, the week started with a jolt as a Chinese AI app sent tech stocks plummeting and likely left many privately held startups shaking.

DeepSeek, birthed by a China-based hedge fund, claims to have created AI models that rival even those of OpenAI — but at much lower cost and using less energy.

The news that the U.S. may be falling behind in the AI arms race sent shares of many publicly traded tech companies nosediving on Monday. AI giant Nvidia’s shares dropped more than 15% at certain points of trading, falling back to a price point it has not seen since last fall. The tech- heavy Nasdaq Composite also plunged about 3% in early afternoon trading as investors started to sell off tech stocks on concerns China has usurped the AI crown from the U.S.

Venture dollars

Public-market investors surely are not the only ones watching the ramifications of the DeepSeek news closely.

Nearly a third of all global venture funding last year went to companies in AI-related fields as funding to those startups reached over $100 billion, per Crunchbase data. The fourth quarter alone saw more than $42 billion invested into AI-related startups, per Crunchbase.

That was nearly twice as much money as was invested in Q3 2024 — which was a record at the time. It also was about 3.5x the amount invested in Q4 2023.

That means there likely were many VC firms watching the DeepSeek news blitz this weekend very closely, wondering just what effect the Chinese upstart will have on their portfolios.

Just last week we examined several firms with the most AI-related investments last year. Names including Andreessen Horowitz, Lightspeed Venture Partners and Thrive Capital dominated the list. Those firms — the ones with the most money on the biggest bets — are likely more curious than ever if the U.S. is indeed king of AI.

“This is a game changer,” Umesh Padval, a venture partner at Thomvest Ventures, said in an interview. Padval has invested in AI startups such as large language model builder Cohere.

Padval said he sees DeepSeek as mainly a net positive for the AI industry, as it should only increase AI adoption and quicken the development cycle pace. However, it could be bad news for some of the foundational model startups that have raised billions of dollars at sky-high valuations — especially considering DeepSeek claims to have developed its model for about $6 million.

The biggest of the big

The foundational model startups that have raised billions of dollars at sky-high valuations are also likely watching the DeepSeek news closely and wondering what the mania around the China-based startup will mean for their next fundraise or secondary offering.

Just last October, OpenAI locked up a $6.6 billion raise at a post-money valuation of $157 billion led by Thrive Capital. The round made the ChatGPT creator one of the most valuable private companies in the world.

In November, xAI raised $6 billion in a funding round valuing it at $50 billion, The Wall Street Journal reported. The new round includes investment from the Qatar Investment Authority, Valor Equity Partners, Andreessen Horowitz and Sequoia Capital.

Those startups, along with others such as Mistral AI and Anthropic — which is reportedly taking in a fresh $1 billion investment from previous investor Google — likely will watch closely through the next several days to see DeepSeek’s next steps.

“I think the DeepSeek news is a real wake-up call for some startups who have raised like crazy,” said Padval, adding a few startups likely will have to look at their fundraising habits. This likely will become a tug-of-war in the AI race between China and the U.S., he said, but now costs and profitability will become bigger issues for some startups to grapple with.

The future of AI

The DeepSeek news also comes just days after the White House announced its new AI Stargate Project centered on the three Big Tech names: OpenAI, SoftBank and Oracle.

The project is anticipated to help build out $100 billion to $500 billion in AI datacenters and infrastructure, and is a key piece of the new administration’s plan to fuel the U.S. economy’s growth through the booming AI industry.

DeepSeek’s emergence could scuttle some of those plans and expectations.

However, it is much too early to know anything for sure, including whether the Chinese company did indeed build cheaper and better AI models.

There also assuredly will be concerns about personal data with DeepSeek being a China-based firm. Such concerns are already at the core of the U.S.’ current issues with TikTok, the video sharing platform that has turned into a political hot potato due to its ties to China.

Much still has to be learned and sorted out, but it does seem possible we are heading into a much different AI world than many investors envisioned.

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Illustration: Dom Guzman