In 2023, the global frenzy surrounding artificial intelligence, fueled by the advent of ChatGPT, has swept the globe. In China, where OpenAI’s chatbot is not available, startups and tech incumbents have sought to develop their own AI models and applications, leveraging the American startup’s foundational pieces. Individual AI fans accessed ChatGPT through a web of black market sellers, keeping their accounts alive through often unauthorized virtual private networks.
At first glance, genetic AI is in full bloom in China, but a closer look shows otherwise. Despite the hype, the venture Capitalists were not as enthusiastic about the nascent technology as one might assume.
In 2023, China recorded about 232 investments in artificial intelligence, a 38% year-on-year decline, according to a research firm CBIsight. The total amount raised by Chinese AI companies was about $2 billion, down 70% from the previous year.
Another report from a Chinese database shows a larger amount of funding, although it shows the same downward trend. According ITJuzi, China recorded 530 AI funding events in the first 11 months of 2023, down 26% year-on-year. Those investments were slated for a total of 63.1 billion yuan ($8.77 billion), down 38 percent from a year earlier and significantly lower than the 2021 cap of 248.78 billion yuan.
The difference in investment sizes between the two reports can be attributed to their different methodologies for counting funding rounds. ITJuzi may have a better understanding of local funding activities than its foreign counterpart, mainly because China’s AI startups have become more discreet about their US dollar funding. Many now fear US regulatory scrutiny of US capital flows into their AI businesses.
Taking a broader view, the slowdown in China’s AI funding is not entirely unexpected given the continued sluggishness of global VC investment. However, China’s AI startups face a unique set of obstacles. American venture capital, which has historically been the main driver of growth in China’s internet sector, has plummeted since the start of the US-China decoupling. The perspective of lThe presence of Chinese tech companies on US stock markets has also softened amid geopolitical tensions, so investors have become more cautious about backing companies that have broken up without clear exit channels or revenue plans.
Additionally, the capital-intensive nature of AI startups, which cost significant computing power, coupled with their unproven business models, may deter local risk-averse RMB funds.
A handful of Chinese AI startups with pedigreed founders, such as Wang Xiaochuan’s Baichuan and Kai-Fu Lee’s 01.AI, are still able to raise significant funding, but the majority of smaller players face increasingly conservative investors . The task of developing China’s equivalent of ChatGPT has fallen to deep-pocketed tech giants piling up AI chips, while less inventive startups explore industry-specific applications based on open-source or homegrown models.
Meanwhile, the technological prowess of China’s big language models remains in question as developers face a prolonged shortage of artificial intelligence chips. Amid the escalating US-China tech war, Washington has banned exports of Nvidia’s high-end graphics processing units to China.
Domestically, strengthened regulations have led to higher compliance costs for AI startups. Unlike their larger, better-funded counterparts, many startups lack the financial and bureaucratic resources to obtain the required AI license or meet the country’s Internet censorship requirements. Some are thus shifting their focus to the global market, which introduces a different set of challenges. While regulatory and political uncertainty may be less obvious obstacles, these startups must navigate new user behavior and an Internet ecosystem completely cut off from their home market.
AI ventures may turn to foreign investors, most likely Americans, for funding and ultimately help with go-to-market strategies. But before they could to work with American institutions, they must have the right corporate structure, offshore data storage solutions, and even foreign passports for their founders so that Silicon Valley investors don’t have to worry about violating US restrictions on investment related to China.
With limited funding available, 2024 may be a year of reckoning for many AI startups in China.
