The DeepSeek-fueled surge in Chinese AI investment: Massive funding, policy support, and global attention

The DeepSeek-fueled surge in Chinese AI investment: Massive funding, policy support, and global attentionDeepSeek's breakthrough in artificial intelligence is reshaping China's venture capital landscape, ending a three-year slump. This breakthrough has not only attracted massive funding but also ignited global investor interest in China's AI sector, marking a new phase of development for the industry

The DeepSeek-fueled surge in Chinese AI investment: Massive funding, policy support, and global attention

DeepSeek's breakthrough in artificial intelligence is reshaping China's venture capital landscape, ending a three-year slump. This breakthrough has not only attracted massive funding but also ignited global investor interest in China's AI sector, marking a new phase of development for the industry.

Alex Zhavoronkov, founder and CEO of Insilico Medicine, reveals that since DeepSeek released its OpenAI-competitive product at the end of January, the company is experiencing an unprecedented investment boom. Insilico Medicine, focusing on AI-driven drug discovery, completed a $110 million Series E funding round led by Hong Kong-based Value Partners, closing last month. However, due to an influx of Chinese funds, Insilico is planning a Series E2 round to meet the surging demand. "We've never seen such high investment interest," Zhavoronkov stated.

Insilico Medicine leverages AI technologies from companies like DeepSeek to build drug discovery models and has secured clinical trial approvals for ten drugs, with research labs in China, the US, and the Middle East. During a recent US trip, Zhavoronkov fielded numerous inquiries from American and other global investors about investing in Chinese AI companies. "It seems to be DeepSeek's moment," Zhavoronkov said. "It's triggered a lot of global interest in China, and I think the money will flow back."

In recent years, regulatory uncertainties in both the US and China, particularly surrounding IPOs, coupled with slowing economic growth, caused a sharp decline in Chinese venture capital activity. According to PitchBook, venture capital investment in Chinese companies dropped to $48.86 billion in 2024, the lowest since 2016. However, with regulatory clarity emerging, market sentiment is shifting. Investors are adjusting strategies employed during the surge of internet companies like Alibaba.

"People are scrambling to find the next DeepSeek," says Annabelle Yu Long, founder and managing partner of Bertelsmann Asia Investments (BAI Capital) and a director at Tapestry, Coach's parent company. She notes that approximately six companies in BAI Capital's core portfolio have made significant strides in AI, leading BAI Capital to plan increased investments in existing holdings in the coming months rather than focusing on new startups. "Everyone is investing, but I'm asking my team to be prudent on new deals," Long adds, "because we see our core portfolio making really meaningful progress in the AI space."

Long's strategy is based on her observation of relatively under-investment in AI by Chinese funds. She believes entrepreneurs who have effectively leveraged AI will succeed in the near future. For example, BAI Capital's investment in Black Lake Technology, a smart manufacturing management system company, achieved profitability this quarter due to AI-driven cost reductions. Another BAI Capital-backed healthcare company, Lejian Technology, also boasts higher profitability thanks to AI and is poised for an IPO led by Goldman Sachs. Long also plans to list nine portfolio companies in Hong Kong and other locations this year, noting she's received many inquiries from international investors about China's economy and startups beyond AI. "I do see a return of confidence," she says.

Other recent investments reflect capital flowing towards existing companies. Insilico's Zhavoronkov notes that some Chinese investors previously lost almost all their money on AI-drug startups, realizing now that only a few, and likely more mature, companies will succeed. This month, PitchBook reported that in the first ten days of March, AI model company Zhipu AI raised approximately 1 billion yuan from Alibaba Cloud and a Hangzhou government-backed fund; robotics company Zhuji Dynamics also secured undisclosed funding from Alibaba Group and other investors.

The Lunar New Year at the end of January marked a turning point for AI investment. The release of DeepSeek's R1 model before the holiday and the CCTV Spring Festival Gala showcasing Unitree Robotics' dancing robots contributed to the investment surge. "I think Unitree Robotics and DeepSeek attracted many foreign investors to explore opportunities in China," says Wang Hongye, managing director of Forebright Capital in Shenzhen. He also notes that some Middle Eastern funds have recently been seeking opportunities to invest in Chinese AI companies. "I believe the confidence of domestic venture capital firms is returning," he says. "Many VCs are back on the road, attending conferences." Wang states that Forebright Capital, which manages billions of dollars in assets, has invested in a company producing phone chargers and AI glasses and is looking at humanoid robots and companies offering inference computing solutions. He plans at least five to six investments this year.

Supportive signals from the Chinese government are also crucial. Zhavoronkov notes that the private enterprise roundtable last month, which DeepSeek's founder attended, "essentially greenlit the large-scale application of generative AI." Alibaba Group Chairman Joseph Tsai also stated: "People underestimated the importance of that meeting. The impact of that meeting on the whole entrepreneurial sector or private sector is that it gives the private sector confidence to invest in their own businesses." The government work report released last week mentioned China's aim to "accelerate the development of venture capital and expand patient capital," referring to long-term capital. National Development and Reform Commission (NDRC) Director Zheng Shanjie revealed that the central government is planning a fund aiming to raise 1 trillion yuan for technology investment. Meanwhile, central bank governor Pan Gongsheng announced that the scale of technology innovation loan programs will nearly double to 1 trillion yuan. Liu Rui, vice president of China Renaissance Capital, says, "From early-stage investment to exit, the policies are more comprehensive and clearer." Given the faster-than-expected decline in model operating costs and China's massive consumer base, he anticipates more resources will flow into AI applications this year.

However, US-China tensions remain a significant hurdle for international investors considering AI opportunities in China. Shao Xuhui, managing partner at Foothill Ventures in Palo Alto, points out that unlike US companies that can access global markets, Chinese companies may find it difficult to expand overseas given the sensitivities around AI and data. He also emphasizes that while the Chinese market has immense potential, foreign investors need to understand the risks of investing in China, such as capital flow restrictions. But he also notes that given China's large pool of highly educated engineers and data scientistswho can make up half the AI researchers at industry conferencesbreakthroughs like DeepSeek aren't surprising. "I think competition always pushes the whole industry forward, and technology doesn't respect borders," Shao adds.