The lessons and laments of DeepSeek, according to VCs

AI, after all, is entwined in some way or another in just about every VC firm’s investment thesis, to say nothing of the nose-bleed valuations of the private and public market AI leaders. 

The bear case, as reflected in Nvidia’s $600 billion loss in public market value, is that DeepSeek has instantly and completely obliterated the assumptions in Silicon Valley’s AI playbook. VCs are a special breed of investor, however, and given the breadth of AI startups they’re betting on, many are approaching the current upheaval with an analytical—almost detached—eye, looking for specific takeaways rather than outright panic or doom.

Jenny Xiao, Leonis Capital partner and former OpenAI researcher, sees DeepSeek’s rise as the triumph of open source over closed source—which puts OpenAI in the crosshairs. 

“The fundamental justification for why OpenAI deserves to exist as a closed source company is that there’s a moat in AI,” said Xiao, who left OpenAI to start her own fund a week after ChatGPT came out. “‘Therefore, we can invest all this money into building these models, then be the first AGI company.’ That’s their justification for their ecosystem, and now that’s being undermined.”

But she’s not panicked by any means. And many VCs I spoke to aren’t, because there’s still a lot we just don’t know. (For his part, Sam Altman wrote on X last night: “deepseek’s r1 is an impressive model, particularly around what they’re able to deliver for the price. we will obviously deliver much better models and also it’s legit invigorating to have a new competitor!”)

Startups like OpenAI, Anthropic, and xAI have commanded huge valuations, and it’s reasonable to wonder if changing market fundamentals could impact them negatively. Time will tell, but there’s an argument to be made that the DeepSeek tide could lift all boats, according to Michael Mignano, U.S. consumer partner at Lightspeed.

For large LLM startups that have raised billions, the AI advances that DeepSeek claims to have achieved with minimal costs, means that their money could go further than they originally anticipated, and they have the cash, customers, and brand trust to move forward fast. 

“It means their balance sheets can go a lot further,” said Mignano. “The companies that are already in a stronger position are in the place where they can push that lead even further.”

Mignano told Fortune that DeepSeek will make it tougher for new entrants to compete at the model layer, but easier for startups operating at the application layer. (I think we could, theoretically, see even more investing directed at AI apps after this.)

“If the cost of AI is reduced, it’s going to mean that a lot more startups can get in the game,” said Mignano. “It’s going to mean that customers have to pay less, which should only lead to an increase in competition.”

(Reports emerged recently that Lightspeed has led a new funding round in Anthropic. Mignano and Lightspeed declined to comment.) 

Despite yesterday’s frenzy, DeepSeek has been around since 2023, points out Leonis Capital’s Xiao. This is a reminder, perhaps, that Americans could stand to pay more attention to Chinese AI. (For example, ByteDance’s chatbot Doubao is proving to be a consumer favorite in China and could be covered more, she says.)

“It’s a powerful reminder that engineering talent is everywhere, and no nation has a monopoly on it,” said Peter Barrett, Playground Global general partner, via email. “And this is just the beginning. Breakthroughs like this will continue to emerge from companies of all sizes, across the globe. We’re in a dynamic period of rapid change, where it feels like there’s a DeepSeek moment every week. It’s clear: Nobody has won AI yet.”

The game is still very much on. And personally, I think DeepSeek itself, for now, is a small part of this story. Monday’s DeepSeek selloff lays bare geopolitical anxieties, along with the anxiety that we’re spending too much on AI—and, simultaneously, the anxiety that we’re falling behind and haven’t done enough. Watching the public markets spiral and social media explode, I thought: “Is this what the Cold War was like?”

The phrase AI Cold War is very much out there already, and whether I feel uneasy about it or not, that’s linguistically where we are right now. Marc Andreessen called this “AI’s Sputnik moment,” President Trump called DeepSeek “a wake-up call,” and the Trump administration’s AI infrastructure initiative is called Stargate. 

It’s the language of the Space Race. In a way, China has launched a satellite into orbit and, back in the U.S., the ground is no longer stable. 

And as Barrett points out, it’s still just the beginning.

See you tomorrow,

Allie Garfinkle
X: @agarfinks
Email: alexandra.garfinkle@fortune.com
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VENTURE DEALS

- Quibim, a Valencia, Spain-based imaging biomarkers developer, raised $50 million in Series A funding. Asabys and Buenavista Equity Partners led the round and were joined by UI Investissements, GoHub Venturesm, existing investors Amadeus Capital Partners, APEX Ventures, Partech, and others.

- The Helper Bees, an Austin-based care and services provider for older adults, raised $35 million in Series C funding. Centana Growth Partners led the round and was joined by existing investors Silverton Partners, Impact Engine, Northwestern Mutual Future Ventures, Alumni Ventures, and others.

- Stratus, a Larkspur, Colo.-based fabrication optimization software provider for construction contractors, raised $32 million in Series B funding from Radian Capital.

- Atomicwork, a San Francisco-based AI agents management solutions provider, raised $25 million in Series A funding. Khosla Ventures and Z47 led the round and were joined by Battery Ventures, Blume Ventures, and Peak XV Partners.

- Manas AI, a New York City-based AI-powered medicine discovery company, raised $24.6 million in seed funding. General Catalyst and Reid Hoffman led the round and were joined by Greylock.

- Earth AI, a San Mateo, Calif.-based AI-powered clean energy metals discovery and drilling technology developer, raised $20 million in Series B funding. Tamarack Global and Cantos Ventures led the round and were joined by Overmatch, Alpaca, Sparkwave Capital, and existing investors including Y Combinator and Scrum Ventures.

- Humanity Protocol, a Cayman Islands-based decentralized identity blockchain, raised $20 million in funding. Pantera Capital and Jump Crypto led the round and were joined by others.

- Gaia, a New York City-based fertility company, raised $14 million in funding. Valar led the round and was joined by Heliad, Chaucer, existing investors Atomico, Kindred & Optum, and angel investors.

- Kwetta, a Napier, New Zealand-based electric vehicle charging solutions developer, raised $10.5 million in Series A funding. Blackbird Ventures led the round and was joined by Virescent Ventures, Icehouse Ventures, and existing investors.

- Sightline, a London-based AI-powered climate economy market intelligence platform, raised $5.5 million in seed funding. The Westly Group and Molten Ventures led the round and were joined by existing investors AccelR8, Red Sea Ventures, John Doerr, Tom Steyer, and others.

- Mobly, a Salt Lake City-based event marketing technology developer, raised $4.3 million in seed funding. Jump Capital led the round and was joined by Eniac Ventures and existing investors Peterson Ventures, Tenzing.vc, and Element Ventures.

- Aligned Marketplace, a New York City-based primary care services provider for self-insured employers, raised $3 million in seed funding from A* and Maverick Ventures.

PRIVATE EQUITY

- Arax Investment Partners, backed by RedBird Capital Partners, acquired Cedrus Financial, a Littleton, Colo.-based RIA. Financial terms were not disclosed.

- Blackford Capital acquired Ace Controls, a Houston-based industrial control panels developer. Financial terms were not disclosed.

- ICV Partners acquired a majority stake in Environmental Remedies, a Hayward, Calif.-based asbestos abatement services provider.

- LawnPRO Partners, backed by HCI Equity Partners, acquired Gro-Masters, a Savannah-based lawn care services provider. Financial terms were not disclosed.

- Northlane Capital Partners acquired a majority stake in Plus Delta Partners, a Carlsbad, Calif.-based fundraising tools provider for nonprofits. Financial terms were not disclosed.

- The Colt Group, backed by Capstreet, acquired RJ Stacey, a Lake Orion, Mich.-based pipeline repair services provider. Financial terms were not disclosed.

EXITS

- OPEXUS, a Washington, D.C.-based government process management software provider, backed by Gemspring Capital, merged with Casepoint, a Washington, D.C.-based data discovery technology developer for litigation and more. Thoma Bravo acquired a majority stake in the combined company from Gemspring Capital.

- Stellex Capital Management agreed to acquire the U.S. assets of Rokstad, a Coquitlam, Canada-based power infrastructure transmission and distribution services provider, from FTI Consulting Canada. Financial terms were not disclosed.

OTHER

IPOS

- Metsera, a New York City-based obesity treatment developer, plans to raise $292.4 million in an offering of 17.2 million shares priced between $15 and $17 on the Nasdaq. ARCH Venture Partners, Population Health Partners, FMR, GV, MC Longevity, Newpath Partners, and SoftBank back the company.

- Maze Therapeutics, a South San Francisco-based renal, cardiovascular, and metabolic diseases precision medicine developer, plans to raise $132.6 million in an offering of 7.8 million shares priced between $15 and $17 on the Nasdaq. The company posted $168 million in license revenue for the year ending Sept. 30, 2024. ARCH Venture Partners, GV, Third Rock Ventures, Matrix Capital Management, and Foresite Capital back the company.

PEOPLE

- AlleyCorp, a New York City-based venture capital firm, added Alexi Nazem as a general partner. Previously, he was at Nomad Health. Nazem takes the place of Brenton Fargnoli, who is joining Lightspeed Venture Partners, a Menlo Park, Calif.-based venture capital firm, as a partner.