In a world that has little and controlled information trickling out of China, we recently found that some US-based VC firms were investing in AI companies in China. On a regular day, this information may have been largely inconsequential, but when put in the current geopolitical context of escalating tensions between the two countries, it becomes news. 

Since the beginning of this year, US President Joe Biden’s government has been mulling over tightening the rules on US’ investment in China. This includes technologies like AI and semiconductors. The US has made it amply clear that it wants to draw the line between funding healthy competition and funding national security threats. 

However, this has not deterred VCs from pouring funds into companies in China. According to reports from The Information, Sequoia Capital China, the Chinese affiliate of Sequoia Capital, invested in a brand new AI startup in China, which is led by an ex-Google employee Zhilin Yang and is building a rival to ChatGPT. Sequoia had also backed Yang’s previous stints like Recurrent AI.

The report also mentions other American investors, including the US endowments, which are backing VC firms such as Matrix Partners China and Qiming Venture Partner, are funding Beijing-based AI startup Frontis. The company compares its product to ChatGPT. Clearly, US VCs are funding local startups in China with the money that could have been pumped into US’ startups instead. 

It seems that the investing trend hasn’t stopped since 2018. That year, US-based Tiger Global was part of the $620 million Series-C investment in SenseTime, an AI company in China. Today, the company has emerged as the latest competitor to OpenAI. 

SenseTime, also backed by Alibaba Group Holding Ltd, has unveiled its product SenseChat, which can write code and have conversations in English and Chinese. In addition to that, the company has introduced several other technologies in generative AI like Miaohua, the text-to-image generator, competing with DALL-E. 

Even then, since the US has put sanctions on SenseTime, restricting it from attracting investments globally, it would be interesting to see how the company competes with the giants. 

Investing in arming the enemy

This may not sound so good for the US, but for China, this is an ideal situation. Keith Rabois, a general partner at Founders Fund, tweeted his agony: “This needs to be illegal,” he said. After several users pointed out that these are Chinese VC firms, Rabois replied that the firms “should not be allowed to take any LP money from the US.”

There has been a lot of outrage around this. In a recent discussion on Bloomberg Technology, Brian Brackeen from Lightship Capital and Ed Ludlow explained how it is important for investors to prioritise AI development in their own countries, and not fund the enemy. 

What seems obvious is that with the ongoing cold war between the countries, if VCs are pouring funds to the other side, even if it’s just for AI research, it sounds unethical. Moreover, now AI too is considered a deadly weapon by the governments of the world, and they are getting increasingly alarmed about it. 

The Alarms Go Off

On the other hand, China has been stern and very clear about things. For instance, it banned OpenAI’s GPT technology in its country citing privacy and security concerns. Even more recently, Baidu filed a lawsuit against Apple and other “relevant” app developers for allowing fake versions of their chatbot Ernie on the App Store. 

Along similar lines, ChatGPT is facing troubles globally. It has been banned in Italy for failing to comply with the European Union’s General Data Protection Regulation citing “right to be forgotten”. It has been battling legal issues in other countries such as Australia and Canada as well. Meanwhile, Germany, France, and Ireland are requesting further information from Italy about the reasons for the ban.

Moreover, European countries’ startups such as Silo AI, LEAM, and others, are building alternatives to ChatGPT as well, which apart from inclusion of languages, will also be more private for the countries. There is no doubt that the tech-giants such as Google, Microsoft, and Meta, are competing in the AI arms race. But there is probably a larger “enemy” that unites them — China. With Alibaba announcing that they will soon release their own chatbot called Togyi Qianwen, it is clear that China is taking generative AI very seriously now. 

OpenAI is on its world tour, and interestingly, Sam Altman has decided to make strides to expand in Japan. The world of AI is all jumbled up, and China is definitely on the rise. The cold war stays on and looks like AI is the new nuclear weapon for the countries. And yet again, VCs care only about money.