Reuters
DeepSeek’s shock arrival triggered a trillion-dollar meltdown on Nasdaq and led to Nvidia’s $600 billion sell-off on January 27, the worst single-day loss for any stock in Wall Street history.
Its implications for the venture capital ecosystem in Silicon Valley will be profound.
After all, one-third of all venture capital funding in 2024 went to artificial intelligence (AI) startups, which raised an epic $100 billion. Valley insiders guesstimate that at least $20 billion of this amount originated from the GCC.
The next twist in the AI tale thus has compelling relevance for the strategic and financial destiny of the Gulf’s top sovereign mega funds.
In the past year, sovereign wealth funds, institutional investors and family offices from Saudi Arabia, UAE, Kuwait and Qatar have been major cap-table investors in the pre-eminent AI startups in Silicon Valley, led by OpenAI, Anthropic, xAI and Mistral AI.
PitchBook, Silicon Valley’s trade journal, estimated that GCC funding for AI startups in the US alone rose fivefold since early 2023.
In fact, the UAE even established a dedicated fund, MGX, to invest in private artificial intelligence deals worldwide in 2024. Its board includes a senior Abu Dhabi royal family member and the vice chairman of Mubadala.
It is logical to expect that the parabolic increase in valuations of companies such as Anthropic and xAI are simply not sustainable
The crème de la crème of GCC sovereign investors view AI as a core segment of their economic diversification strategies but also a critical component of their futuristic technology vision.
Saudi Arabia’s PIF has established a dedicated AI venture fund in Riyadh and partnered with prominent venture capital firm Andreessen Horowitz in this domain.
The strong geopolitical links between the GCC oil-exporting states and Washington has meant that the US has welcomed their cash into such a sensitive segment with national security implications as AI. At the same time, the Trump White House has pivoted to an anti-China stance in Silicon Valley funding rounds.
DeepSeek’s seismic impact on Wall Street is a proverbial “Sputnik moment” for the Cold War 2.0 apostles in Washington and Sand Hill Road, Silicon Valley’s venture capital epicentre. No wonder a Goldman Sachs partner termed Saudi Arabia and UAE as geopolitical swing states for AI funding.
DeepSeek exposes the downside risk to this petrodollar spigot if it devalues the valuation metrics of Silicon Valley’s largest VC-funded AI incumbent models. For instance, OpenAI, whose last funding round four months ago at a $150 billion valuation attracted the A-list of GCC sovereign wealth funds, was trading at $158 billion in the private market on the eve of the DeepSeek bombshell.
If OpenAI were a public company, it would have lost at least 20-25 percent of its value since a $158 billion valuation for a business losing $5 billion a year and spending hundreds of millions of dollars for each new AI model is skating on very thin ice when the innovation curve shifts, as does its cost rationale.
After all, SoftBank, once the strategic partner of the GCC’s top sovereign wealth funds, estimated WeWork’s value at $49 billion in 2019. Six years later, WeWork is bankrupt.
Is a Darwinian shakeout in AI a credible risk? Yes. The spectacular success of OpenAI amid the AI mania on Wall Street triggered a tsunami of funding for AI startups in Silicon Valley, with 300 odd companies founded in the past two years alone.
GCC investors have financed many early-stage funding rounds in dozens of AI startups, whose valuations may now have to be reassessed after the DeepSeek shock and whose mortality risk is now definitely not zero.
For instance, Elon Musk’s xAI raised $6 billion in a late 2024 funding round, including Qatar’s QIA at a $50 billion valuation, just 16 months after its founding. OpenAI took nine years to reach a valuation of $50 billion.
I remember the billions of dollars lost forever in money heaven in Silicon Valley’s speculative bubbles in the late 1990s, from the dotcom mania to the fibre optic infrastructure craze.
Remember pets.com, JDSU, Global Crossing and the CLECs? I know, I was there – in Palo Alto circa 1999.
I expect GCC funds will increase allocations to software and cybersecurity startups as DeepSeek will accelerate the development cycle if it lowers future AI models’ cost, efficiency and energy usage.
However, it is logical to expect that the parabolic increase in valuations of companies such as Anthropic and xAI are simply not sustainable. Gulf funds must brace for down-rounds in the AI constellation this year.
The AI revolution is not remotely over but thanks to DeepSeek, we may be witnessing the peak of yet another classic Silicon Valley boom-bust cycle.
Matein Khalid is an investor in global financial markets and board advisor to leading family offices in the UAE and Saudi Arabia