Is Deepseek The Worst Nightmare For Vcs? Venture Investors Are Rattled, But Some See A Silver Lining.

DeepSeek is ringing alarm bells at VC firms.

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• Venture investors have been pouring billions into AI model builders such as OpenAI, Anthropic, and xAI.
• Developed in China, DeepSeek costs 20 to 40 times less to run than OpenAI.
• Some VCs left out of hot AI funding rounds see a silver lining because it will reduce concentration.

Venture investors have been pouring billions of dollars into large AI model providers such as OpenAI and Anthropic to create an impenetrable moat around the building blocks of generative artificial intelligence. Those assumptions are being tested by DeepSeek, a Chinese startup that says it developed powerful AI models more cheaply than US rivals.

It is a scary prospect for a VC industry that suffered busts like Web3 not long ago. After all, AI has been largely responsible for propping up valuations for the entire tech industry.

Much about DeepSeek remains unknown, but VCs who have bet the farm on expensive LLM startups are taking notice.

"DeepSeek is threatening because they open-sourced a model that's near state of the art that is priced far below anything the US labs had planned," said Deedy Das, a principal at Menlo Ventures, which has backed OpenAI rival Anthropic. "That's a competitive threat to the business model even in the face of the declining costs of LLMs."

DeepSeek was started as a side project at High-Flyer, a Chinese quantitative hedge fund, which remains its sole investor. If hypothetically it was a US startup, Das estimates DeepSeek would already be valued at as much as $10 billion.

Shares of Nvidia tumbled as much as 17% Monday amid a broader sell-off in US technology stocks over fears DeepSeek could signal companies do not have to spend nearly as much on GPUs to stay ahead in the AI race. Some DeepSeek models are 20 to 40 times cheaper to use than comparable ones from OpenAI, according to Bernstein Research.

More than just DeepSeek itself, the app's rapid progress demonstrates the threat of inexpensive open-source development, according to Iris Sun, an investor at 500 Global.

"DeepSeek not only levels the playing field in terms of performance and cost but also could bring about structural changes to the entire AI value chain," Sun said. "It raises questions about the viability of the capital expenditures behind top companies hoarding computing power."

A silver lining?

Ever the optimists, some VCs see a silver lining in DeepSeek.

For VC firms that have been priced out of hot funding rounds for the likes of OpenAI and Anthropic, DeepSeek could be a positive sign, according to Hadley Harris, cofounder and General Partner at Eniac Ventures.

"Many of the largest VCs have poured money into the big, closed-source model providers, typically as a hedge in case those models become the primary source of value in AI," Harris wrote on X.

"The prospect of this layer being democratized by cheap, open-source models is bad news for them. Meanwhile, smaller VCs (like Eniac), who are too small for those types of investments, have focused on application-layer companies that stand to benefit greatly from not having to pay a hefty tax to OpenAI and Anthropic."

DeepSeek's apparent progress should embolden rather than frighten the leaders of top LLM companies, according to Jon Turow, a partner at Madrona Ventures.

"I wouldn't frame DeepSeek as a direct threat to OpenAI, Anthropic, or xAI's market position," Turow said. "It reinforces that their competitive advantage lies in constantly pushing the frontier. If they ever slow down or rest on their laurels, they're in trouble - that was always true, and DeepSeek makes it more apparent than ever."