by Andrew Kelsen, Chief Investment Officer
Monday, January 27th, 2025…..a day that may prove to be a very consequential day for the world of artificial intelligence (AI). In one fell swoop, a whole industry operating at the edge of innovation was itself dramatically disrupted by a “new” competitor: DeepSeek. However, understanding what was happening in the world/industry of AI leading up to 1/27 is important. Therefore, some recent history may be helpful here.
First, TikTok, a very popular social media application that has approximately 170 million subscribers in the U.S., is at serious risk of being de-platformed and the U.S. version may be taken away from China’s direct control. President Trump returned to office and granted TikTok a short reprieve pending closer examination of who will be allowed to buy it. With that direct access point to half the U.S. population in danger, another Chinese startup with approximately 200 employees in the same China we may very well take TikTok from, now has the #1 app in the U.S. and is being downloaded by the same people who may well lose TikTok. (That download count can’t be verified as to what downloads are real users and what are from bot “farms”).
Second, StarGate was announced creating a powerful $500 billion infrastructure initiative including leading names like OpenAI, Oracle, SoftBank. It was in many ways, the new administration enshrining America’s leading role as the epicenter of the AI wave we are in. Notably absent was any Chinese involvement.
This brings us to this past Monday. The basic story is that Chinese startup, DeepSeek, built an AI app for a paltry $6 million (estimated) using inferior chips and apparently doing more with less than competitors such as OpenAI. This news prompted questions and observations throughout the minds of investors, such as:
- If DeepSeek is real, then shouldn’t NVIDIA investors be more bullish not less ? If they built this with weaker chips, what could it do with the best chips ? Would this not put AI implementation into hyperdrive?
- Given the propensity for China to “borrow” technology from other countries, what part of this technology was created or just reproduced on the shop floor?
- Ask DeepSeek about “the man” and the tank in Tiananmen Square and it would rather not answer. It will give detailed responses about many world leaders but would rather not talk about Chairman Xi.
- Is AI developed by some potential affiliate of the Chinese Communist Party really attractive to the masses? If not, why the consternation over Tik Tok?
- How does the conversation about framework, regulation and guardrails for AI evolve from here? How do other leaders now think about this in light of DeepSeek?
All these questions will likely be answered shortly, since the changes and narrative around AI are likely to be measured in single digit years, not in 2035, or decades out. It is playing out in real time around us.
Anyway, this is a huge story that has a lot of runway. It has the right amount of techno-intrigue, science, corporate espionage and national security to it. It has led to huge volatility in markets. NVIDIA, the stock that is up over 285X over the last ten years, was down almost 17% on Monday before rebounding the next day by nearly 9%. Given the magnitude of NVIDIA’s gains, it felt like a sorely needed correction requiring a clear catalyst.
This is a textbook example why we do not get too deep in the single stock trading or research world. We build diversified portfolios of high-quality assets using long term asset allocation models designed to weather the near-term storms. This is one. As we have said over the last few years, broad selloffs give our managers and prudent investors in single name stocks the opportunity to buy those names that have felt too expensive as well as to rebalance their portfolios.
The story of DeepSeek is just beginning. We will remain attentive as the narrative develops, seeking clear information when it becomes available, and we will keep you informed as we learn more. For further insights, we have included comments from a couple of our investment partners regarding this news.
- Venture Capital Fund-of-Fund Manager: “In terms of our thoughts on the launch of DeepSeek, I think it reinforces how dynamic the AI market is and will continue to be. A lot of capital has been invested in LLMs, and last week’s announcement of a further $500B of private capital being invested in coordination with the government was certainly a dramatic moment for the space as well. While the frenzy surrounding the subsequent launch of DeepSeek is only a point in time, it supports the contention that just because a couple of existing models are well capitalized, one can’t draw the de facto conclusion that they will be the ultimate winners in the space.”
- AI Venture Capitalist: “There is likely a future where a number of things shift. Will the large AI labs stop releasing their full, large models and instead release smaller, distilled versions? Will every vendor move towards open-sourcing their models? Will the “product” from the AI labs shift from the model (API) as the product to “products built around the model” as the product? Meta started applying pressure when they open-sourced Llama. DeepSeek took it to the next level with R1 (and their other models). There’s very little / no room for closed source models that aren’t state of the art. The future is dynamic, and it’s never been more fun to dive in and research. All I know is AI is becoming more powerful at the same time it’s becoming more accessible. That’s a great thing!”
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