PALO ALTO, California -- DeepSeek may have jolted Wall Street and Silicon Valley into reconsidering their AI investment strategies, but the startup's sudden rise has yet to spur venture capital activity in China, where government funds have emerged as the primary backers of the technology.
Despite an overall decline in the VC market since 2021, China venture investors led bets in the artificial intelligence and machine learning sector in Asia last year, according to data from PitchBook. China recorded 715 deals in the sector in 2024, totaling $7.3 billion, far surpassing any other country in the region. South Korea followed with 308 deals totaling $1.8 billion and India came third, with 306 deals worth $1.7 billion.
Since the release of the DeepSeek R1 model, which promised performance on par with that of OpenAI's o1 reasoning model at a fraction of the cost, Chinese AI has grabbed headlines and has been the talk of tech bosses around the globe.
Venture investors in China, however, seem to be in no hurry to ink deals.
As of March 11, China had logged 100 deals in the AI and machine learning space, with a total value of $917.8 million. Although the quarter is not yet over, the pace of investment this year is well behind the $2.6 billion from 196 deals seen in the first three months of 2024.
"It's probably too soon to say that investment trends have shifted due to DeepSeek's emergence. China's VC market is still in decline, and AI investment in the country is less than half the amount from the high in 2021," said Kyle Stanford, director of venture capital research at PitchBook.
"I don't doubt that we will see an increase in AI investment in the next couple quarters and years, it's just a bit too early to say that DeepSeek has changed investment activity on its own," he added.
One reason for the muted response from venture investors might be China's unique AI investment ecosystem.
Last year, the Biden administration finalized an investment ban on China that prevents U.S. companies and individuals from investing in Chinese businesses related to AI semiconductors and quantum technologies.
With American money essentially shut out from AI investment in China, the sources of capital for funding high-cost AI companies have become "quite limited," said a Beijing-based venture investor who has invested in China tech for over two decades.
In early March, Zheng Shanjie, head of China's National Development and Reform Commission, told reporters that China will set up a national venture investment fund in the near future that will mobilize 1 trillion yuan ($138 billion) to invest in high-tech sectors such as AI.
Media outlet The Information reported that the Chinese government has become more involved in DeepSeek's business since its breakout in January, with local Zhejiang government officials playing a role in screening potential investors.
"AI has increasingly become a play for government funds in China. Private investors are subject to a lot of scrutiny and limitations, even for domestic [yuan] funds," said the Beijing-based VC. "More importantly, DeepSeek has not changed our fundamental investment thesis on AI. There are still questions on how and when AI can be commercialized at scale, and where is the road to profitability."
Meanwhile, India has emerged as the second-largest market in Asia for AI deals, beating out South Korea and Japan.
As of March 10, India recorded 53 AI and machine learning deals, totaling $222.8 million. South Korea logged $95.1 million from 51 deals in the sector, while Japan had 39 deals for a total of $27.5 million.
"India has the potential to become a major VC market that could eventually rival China, so seeing a separation between India and Japan isn't surprising," PitchBook's Stanford said.
"India is the second-largest venture market in Asia, with a growing and increasingly connected population. Those factors drive investment into rapidly expanding sectors with talent to match. India has the second-highest number of graduates from STEM programs in the world," he said.
"On the other hand, Japan has a declining, aging population, and is traditionally seen as a slower-moving venture market. That being said, the data shows that Japan isn't necessarily too far behind India regarding deal count into AI," he added.
Overall, Asia still trails the U.S. in AI venture investment, with the American market logging a peak last year of 4,369 deals totaling $100.5 billion. This dwarfs the $13.53 billion in transactions for all of Asia in 2024, according to data from PitchBook.
