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February 2025
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DeepSeek muddies the water for investors

DeepSeek
By Paul Mackintosh   
February 5, 2025

Marc Andreessen, co-founder of Andreessen Horowitz, has described Chinese artificial intelligence startup DeepSeek as AI’s “Sputnik moment”.

He may have cause for concern. According to newly released data from PitchBook, his company has to date committed US$7.1 billion to AI deals, the highest among the leading US venture capital firms. The next highest are Sequoia with $6.4 billion, Tiger Global, $1.8 billion, and Accel and Menlo Ventures with $1.4 billion each. Those deal valuations may now be as vulnerable as Nvidia’s stock price.

Back in 2023, Sequoia split off Sequoia China as HongShan amid pressure from US lawmakers to limit investing in Chinese technology. That same year, a House of Representatives select committee asked Sequoia to provide details about its and HongShan’s investments in AI and other sectors. But US limited partners, including CalPERS and University of Washington Investment Management, went ahead and invested in HongShan anyway.

US venture capital firms have naturally been quick to defend their own positions. Bloomberg quoted Kyle Harrison, general partner of Contrary Ventures, describing public markets’ response to the DeepSeek news as “completely irrational and borderline stupid”. That may be true in one respect. No one probably expected that China, increasingly fenced out of the US tech ecosystem, would fail to develop its own competing AI offerings. And, it appears, China has access to resources – and price points – that the US has failed to address.

DeepSeek reportedly cost just $6 million to develop, which raises questions about the billions that US VCs and tech firms have ploughed into AI. Its open-source AI model, DeepSeek-R1, and cheap hardware requirements also challenge the proprietary AI strategies that helped drive tech valuations and threatened to keep AI technologies exclusive to the rich world.

US tech firms and tech funds will probably double down on homegrown AI. But there’s no guarantee that institutional investors will follow suit. There’s every chance that limited partners and even public market investors may start to spread out their bets more now that non-US AI has demonstrated its value and differentiating advantages – and US markets have demonstrated their capacity to haemorrhage value on tech bets.

According to Alex Stauffacher, equity analyst at Vontobel, the whole debacle may “mark a significant shift in investor sentiment, with emerging markets again becoming increasingly competitive and attractive for investment”.

In the meantime, the increasingly isolationist and insular stance of the US may cost it global leadership in AI. That’s something for VCs and their investors in the US and beyond to ponder.