Chinese artificial intelligence startup DeepSeek has initiated its first-ever external fundraising round, a move primarily designed to set a market valuation benchmark and curb the loss of talent to well-funded competitors, according to sources familiar with the matter. The limited funding round, reported by multiple outlets, aims to provide employees with greater clarity on the value of their stock options, thereby reducing departures amid an intensifying war for AI professionals in China.

DeepSeek, which operates under the umbrella of Hangzhou-based hedge fund High-Flyer, is not currently in urgent need of capital. High-Flyer was the second most profitable hedge fund in China last year, according to industry figures, giving DeepSeek access to substantial internal resources. However, the startup sees the funding round as a strategic necessity to align employee incentives and establish a credible external valuation in a rapidly evolving market.

First Funding Round Details

DeepSeek is seeking to sell no more than 3 percent of its equity, preferring to place shares with state-backed and industrial investors. The company is targeting local government guidance funds and affiliated technology platforms that can provide strategic resources, such as access to advanced artificial intelligence infrastructure. This approach contrasts with a typical venture capital round, where market-oriented funds often take the lead.

Three investors who spoke to the South China Morning Post indicated that private, market-oriented funds are more likely to be included in subsequent funding rounds. The capital-intensive nature of AI development, particularly for large language models and foundational models, requires sustained financing over the long term. DeepSeek's limited initial external offering is seen as a first step toward a more traditional fundraising path as the company scales.

The Information earlier reported that DeepSeek was aiming to raise at least $300 million (approximately £222 million) at a valuation of at least $10 billion. In a separate development, Tencent Holdings and Alibaba Group were said to be in discussions to invest in the startup at a valuation exceeding $20 billion. One investor who spoke to the Post suggested that DeepSeek's estimated valuation could eventually surpass $100 billion, reflecting the high expectations for its AI capabilities and market position.

Strategic Investors and Valuation

The choice of investors is critical for DeepSeek. State-backed funds and industrial partners can offer more than just capital—they provide access to critical AI infrastructure, including computational resources, data centers, and cloud services. With US export restrictions limiting Chinese companies' access to advanced semiconductors, such as NVIDIA's high-performance GPUs, strategic partnerships become essential for securing the hardware needed to train and deploy large AI models.

High-Flyer founder Liang Wenfeng has been vocal about the company's primary constraint: it is not money, but access to advanced chips. The US government's export controls on sophisticated semiconductor technology have forced Chinese AI firms to innovate with less powerful hardware, while also seeking alternative sources. DeepSeek's ties to High-Flyer, a quantitative trading powerhouse, give it unique insights into optimizing computational efficiency, but long-term success depends on reliable infrastructure.

The limited equity sale also serves as a retention tool. In China's fiercely competitive AI talent market, employees at startups are often lured away by higher salaries and stock packages from giants like Baidu, Alibaba, and Tencent. By providing a clear valuation for its options, DeepSeek hopes to give its team a compelling reason to stay. The move mirrors similar strategies employed by other high-profile startups in the region.

Chip Constraints and the AI Talent War

DeepSeek's funding round unfolds against a backdrop of geopolitical tensions and a rapid race to develop advanced AI systems. The startup has gained recognition for its open-source language models, such as DeepSeek-V2, which has shown competitive performance against models from well-funded rivals. However, the ability to continue improving these models depends on access to cutting-edge hardware and top-tier talent.

US export restrictions, first imposed under the Trump administration and expanded under the Biden administration, have limited the types of AI chips that can be shipped to Chinese companies. This has led to a scramble for domestic chip alternatives and cloud-based solutions. DeepSeek's parent, High-Flyer, has historically invested heavily in computing infrastructure, but the startup itself faces the same supply constraints as other Chinese AI players.

The talent war is equally intense. Chinese AI engineers and researchers are among the most sought-after in the world, and companies are offering lucrative packages to attract them. DeepSeek's decision to tie employee compensation to a public valuation is an attempt to create long-term incentives. The startup reportedly has a team of around 150 people, a relatively small number for the ambitious AI projects it pursues.

DeepSeek's first funding round also highlights the broader trend of Chinese AI startups seeking external validation. While many are backed by large internet firms or state entities, independent valuation benchmarks help them compete for partnerships, customers, and talent. The deep-tech nature of AI development means that capital efficiency and strategic partnerships are often more important than sheer funding size.

In the coming months, DeepSeek is expected to close the round with a mix of government-backed and industrial investors. The exact valuation will depend on market conditions and the competitive landscape. If successful, the startup could use the new capital to expand its infrastructure, accelerate research, and potentially launch new products. The long-term goal remains to establish DeepSeek as a leading AI laboratory in China, with technologies that can rival those of Western firms.

DeepSeek's journey also reflects the changing dynamics of the global AI industry. As Chinese companies advance their own foundational models, they are increasingly becoming players in the international arena. The success of DeepSeek's funding round will be watched closely by investors, policymakers, and competitors alike, as it could signal the direction of AI development in China for years to come.

Source: Silicon UK News