Investor Enthusiasm for AI Startups in China Subsides

Tech News February 5, 2024

In 2023, the global excitement surrounding artificial intelligence reached new heights, propelled by the emergence of ChatGPT. This phenomenon extended worldwide, and in China, where OpenAI's chatbot was not accessible, both startups and established tech companies hurriedly endeavored to create their own AI models and applications. They drew inspiration from the foundational elements pioneered by the American upstart. Meanwhile, individual AI enthusiasts sought access to ChatGPT through an intricate network of black market vendors, maintaining their accounts with often unauthorized virtual private networks.

Despite the widespread anticipation, venture capitalists did not exhibit the same level of enthusiasm for this emerging technology as one might expect. Although generative AI appeared to be flourishing in China on the surface, a more in-depth analysis revealed a different reality.

In 2023, China witnessed approximately 232 investments in the AI sector, marking a significant 38% decline compared to the previous year, as reported by the research firm CBInsight. The collective funding raised by Chinese AI companies totaled around $2 billion, reflecting a substantial 70% decrease from the preceding year.

Another report from a Chinese database presented a higher funding figure but highlighted the same downward trajectory. According to ITJuzi, China experienced 530 funding events in AI during the initial 11 months of 2023, depicting a 26% year-over-year decrease. These investments accounted for a total of 63.1 billion yuan ($8.77 billion), representing a substantial 38% reduction from the previous year.

The discrepancy in investment sizes between the two reports could stem from different methodologies in counting funding rounds. ITJuzi might have a better grasp of local funding activities, especially as China’s AI startups grow more discreet about U.S. dollar financings due to fears of U.S. regulatory scrutiny.

China's AI funding slowdown aligns with the global VC investment decline. Yet, Chinese AI startups face unique challenges, with a drop in American venture capital amid U.S.-China tensions affecting growth in the internet sector. Investors grew cautious due to uncertainties around listing Chinese tech firms on U.S. stock markets.

The capital-intensive nature of AI startups, coupled with unproven business models, deters risk-averse local RMB funds. While some well-established Chinese AI startups secure significant funding, smaller players face conservative investors. Deep-pocketed tech giants lead China's equivalent of ChatGPT development, while less resourceful startups explore niche applications on open source or homegrown models.

China's large language models face technological challenges amid an AI chip shortage exacerbated by the U.S.-China tech war. Strengthened regulations increase compliance costs for AI startups, hindering smaller players lacking financial and bureaucratic resources. Some shift focus to the global market, introducing different challenges such as navigating new user behavior and an internet ecosystem cut off from their home market.

In 2024, limited funding may lead to a reckoning for many AI startups in China. To attract foreign investment, especially from American institutions, startups need the right corporate structure, offshore data storage, and founders with foreign passports to address U.S. restrictions on China-related investments.