After three years of decline, DeepSeek‘s breakthrough in artificial intelligence is causing a stir in China’s venture capital scene.
In an exclusive interview with CNBC, Alex Zhavoronkov, the CEO and creator of AI drug discovery business Insilico Medicine, said that the startup was completing a $110 million series E fundraising round sponsored by Hong Kong-based Value Partners, just as DeepSeek debuted its OpenAI rival in late January. Last month, the deal was finalized.
However, Zhavoronkov stated that Insilico is organizing a series of “E2” raises because so many Chinese funds wanted to participate at the last minute, “like an avalanche.” “This level of interest has never been seen before.”
Supported by Qiming Ventures Insilico builds models for drug development using AI from DeepSeek and other businesses. According to Insilico, which includes research facilities in China, the United States, and the Middle East, ten of the startup’s medications have already been approved for clinical testing.
Several American and international investors have questioned Zhavoronkov about methods to invest in Chinese AI businesses during his recent trips to the United States, he added.
On Monday, he stated, “It appears to be the DeepSeek moment, which generated a lot of interest from international investors to invest in China.” “I believe the funding will return.”
Chinese venture capital activity has drastically decreased in recent years due to poor economic growth and regulatory uncertainties in both China and the U.S., particularly with regard to initial public offerings (IPOs). According to Pitchbook data, venture capital investment in Chinese startups has decreased over the past three years, hitting a record low of $48.86 billion in 2024—the lowest since at least 2016.
As regulations become more clear, investors are being encouraged to adopt a different strategy than they did in the past, when internet-based firms like Alibaba first appeared.
The founding and managing partner of BAI Capital in Beijing, Annabelle Yu Long, stated, “People are hurrying just to find the next DeepSeek.” She is also a member of the Coach parent Tapestry board.
In the upcoming months, her firm plans to raise its investments in its current holdings. “Everyone 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.
Her argument that a focused approach is necessary since Chinese funds have far less cash than American ones to invest in AI is part of her proposal. Long stated that she anticipates success in the near future for entrepreneurs that are already effectively utilizing AI, rather than focusing on new firms.
For instance, Black Lake, a production management systems company sponsored by BAI Capital, turned a profit this quarter as a result of AI reducing service costs, according to Long. AI has helped another investment of hers, Lejian, a healthcare startup, become more lucrative, and Goldman Sachs is getting ready for its initial public offering (IPO), she said.
Long stated that she has received numerous inquiries from foreign investors regarding China’s economy and Chinese entrepreneurship beyond artificial intelligence, and she intends to list nine portfolio firms this year, primarily in Hong Kong. “I can definitely see confidence returning.”
The way that money is pouring into established players is also evident in other recent investment rounds. According to Zhavoronkov of Insilico, several Chinese investors have realized that only a select few, probably more established, players will succeed after losing almost all of their money on AI medicine startups in the past.
Based on 12 AI deals for the first 10 days of March, PitchBook shows that Zhipu AI, an AI model firm, raised approximately $137.68 million this month from Alibaba Cloud and a Hangzhou city-backed fund. The data also revealed that Alibaba Group and other investors contributed an undisclosed sum to the robotics business LimX Dynamics.
A pivotal moment during the holidays
An important tipping point for AI investment was China’s Lunar New Year in late January. Just before the holiday, DeepSeek released its R1 model, while Unitree’s dancing robots were featured in the extensively televised Spring Festival extravaganza on state media.
Hongye Wang, executive director of Forebright Capital, a Shenzhen-based company with funds denominated in both Chinese yuan and the U.S. dollar, stated, “I believe that Unitree and DeepSeek encourage a lot of foreign investors to try to seek opportunities here.” He mentioned that several Middle Eastern financiers have been searching for Chinese AI company chances lately.
Regarding domestic VCs, he stated, “I think confidence [is] coming back,” pointing out that many were once again traveling for meetings.
Wang stated that his organization is searching for chances in humanoid robots, as well as businesses that offer computing reasoning solutions, and has invested in a startup that produces AI glasses and cellphone chargers. According to Wang, Forebright, which manages funds worth many billions of dollars, intends to make at least five or six investments this year.
Support for policies
Crucially, Beijing is expressing unambiguous support for a market that has been negatively impacted by regulatory crackdowns.
“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, referring to President Xi Jinping’s February handshake with DeepSeek’s founder, which essentially gave the go-ahead for generative AI to be used at scale.
In reference to long-term investment, Premier Li Qiang stated in his work report last week that China
would endeavor to “accelerate the development of venture capital investment and the growth of patient capital.”
Zheng Shanjie, the head of the National Development and Reform Commission, said reporters that the central government is preparing a fund that is anticipated to raise 1 trillion yuan ($137.7 billion) for tech investment the day after Li unveiled that plan. At the same news conference, Pan Gongsheng, the governor of the central bank, declared that a tech innovation loan program will almost treble to a total of 1 trillion yuan.
Liu Rui, vice president of China Renaissance Capital, stated in Mandarin, as reported by CNBC, that “from early stage investment to exit, policy is more complete and clearer.”
Given China’s sizable user base and the model operational expenses’ quicker-than-expected drop, he anticipates more funding will be allocated to AI applications this year.
However, tensions with the United States, which range from tariffs to tech regulations, continue to be a barrier for foreign investors considering China’s AI potential.
According to Xuhui Shao, managing partner at Foothill Ventures in Palo Alto, China-based businesses would probably have a harder time growing overseas due to the sensitivity around AI and data, in contrast to U.S.-based businesses that have access to the global market. His company doesn’t invest in China and instead concentrates on the United States.
Foreign investors must be aware of the risks associated with investing in China, including capital flow limitations, despite the country’s sizable market, according to Shao. But he said that since China has a large number of college-educated engineers and data scientists who can represent half of the AI researchers at an industry conference, “innovative breakthroughs” like DeepSeek shouldn’t come as a surprise.
“I believe that competition propels the entire industry [to advance], and technology would not be limited by national boundaries,” he stated.