Baichuan Intelligence¶

In October 2023, this artificial intelligence startup, which was established only six months ago, secured $300 million in funding, allowing it to catch up rapidly with early competitors thanks to its relationship with Tencent.

Highlights¶

The chatbot startup Baichuan Intelligence, founded just six months ago, has completed a $300 million funding round with participation from Tencent, Alibaba, Baidu, and Xiaomi.

The founder has a close relationship with Sogou, a subsidiary of Tencent, and the company has already launched six products.

Once again, a Chinese artificial intelligence (AI) startup has received substantial funding.

This time it is Baichuan Intelligence. An announcement on the company's WeChat public account last week revealed that it secured a new round of $300 million (2.2 billion yuan) in funding just six months after its founding. With an earlier angel funding round of $50 million, the company's total funding has reached $350 million in a short period.

For a young company, this is quite good, despite the fact that AI startups are notoriously cash-hungry.

What stands out about Baichuan Intelligence is its close ties with the internet giant Tencent Holdings (0700.HK). These relationships are mostly positive, but they also come with mixed feelings, which we will explain later.

The most obvious point is that this relationship means Baichuan Intelligence should be able to secure ample funding to drive growth. Like many other popular AI startups in China, the list of other investors in Baichuan Intelligence reads like a roster of top Chinese tech companies, including Tencent, Baidu (BIDU.US; 9888.HK), Alibaba (BABA.US; 9988.HK), and Xiaomi Group (1810.HK).

Baichuan Intelligence's website also notes that as of the announcement last week, it has 170 employees from many of China's top tech companies, including Baidu, Huawei, Microsoft, Tencent, and ByteDance. Founder Wang Xiaochuan is one of China's earliest internet entrepreneurs, having developed the Sogou search engine nearly twenty years ago.

Notably, the investor list so far consists entirely of Chinese institutions, which is not a coincidence, as the U.S. has recently taken measures to restrict Western venture capital and private equity investments in Chinese AI companies. AI and high-tech microchips are two critical areas where Washington is attempting to limit China's access to Western technology and funding.

As a new company, Baichuan Intelligence has not yet faced any specific restrictions from the U.S. However, we expect that it will eventually be placed on the "entity list" by the U.S. Department of Commerce, limiting its access to cutting-edge Western technology. In the past two years, two other more advanced AI companies in China, SenseTime (0020.HK) and Fourth Paradigm (6682.HK), were placed on that list around the time of their Hong Kong IPOs, which negatively impacted demand for their stocks.

More importantly, SenseTime was also placed on another blacklist by the U.S. Treasury, prohibiting American investors from purchasing its stock. Fourth Paradigm has not yet been placed on that list, but that outcome seems inevitable.

Baichuan Intelligence's latest funding announcement did not mention a valuation, but we suspect it may still be below $1 billion, which is the threshold for becoming a "unicorn." Nevertheless, due to its background and close ties with Tencent, the company still appears to be worth watching.

Relationship with Tencent¶

In China's tech community, Baichuan Intelligence's founder Wang Xiaochuan is known for his experience with Sogou. For most of the time since Sogou's establishment, it was part of one of China's earliest portal websites, Sohu (SOHU.US). In some ways, this is a significant achievement, but it also comes with some negative aspects.

Despite starting early and receiving strong support from well-known internet companies like Sohu and Tencent, Wang Xiaochuan has never managed to turn Sogou into a major player in the Chinese internet search market. In the early days, Google dominated this market, but after refusing to remove sensitive content, Google ultimately exited the Chinese market in 2010.

However, before its exit, Google's market share in China had already been surpassed by Baidu, which had dominated the lucrative Chinese search market for over a decade. Sogou and several other challengers struggled for years in Baidu's shadow without achieving success. In 2013, Sogou merged with Tencent's search engine Soso, with Tencent becoming the main investor in the merged company, which significantly boosted Sogou's development.

Sogou went public in New York in 2017 and completed its merger with Tencent in 2021, delisting from the U.S. market to become a wholly-owned subsidiary of Tencent. Yet, even with these advantages, Sogou still lagged far behind Baidu, holding only 10% of the Chinese search market as of August.

Sogou once had several excellent opportunities to capture market share from Baidu, especially after Baidu was embroiled in a major scandal in 2016, where it mixed paid content with organic search results without disclosing the relevant facts to users.

Ultimately, Wang Xiaochuan had a great opportunity to become a true giant in China's internet landscape but has never realized that potential. So, will he have better luck with Baichuan Intelligence?

According to the company's website, despite its short existence, it has already launched six products. They are all large language model (LLM) chatbots, similar to ChatGPT. The rapid rollout of so many products by Baichuan Intelligence indicates that its emergence is closely tied to its collaboration with Sogou, even though Wang Xiaochuan officially left Sogou in 2021. When Baichuan Intelligence was launched in April this year, Wang Xiaochuan mentioned in an interview that a significant portion of his founding team came from Sogou, although he added that it was not more than half of the total.

This means that Tencent remains the largest force behind the company, which will undoubtedly help its development.

In addition to allowing so many products to go live and operate quickly, another noteworthy aspect of Baichuan Intelligence is that by the end of August, it became one of eight companies to publicly release chatbots approved by the government. This also seems to indicate a close relationship with the government, which is very important in China due to the sensitivity surrounding chatbots.

In summary, Baichuan Intelligence is just one of the many Chinese AI startups that have emerged recently and has entered this cash-intensive industry relatively late. Its close ties with Tencent seem to increase its chances of success, which many other independent companies lack, but true success will require market recognition, something Wang Xiaochuan has never been able to achieve with Sogou.