Hurricane DeepSeek ripped through the venture capital world with a furor on Monday.
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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