Baichuan raises $300 million

The AI startup raised $300 million just six months after its founding, as it draws on its ties with Tencent to play catchup to older rivals

Key Takeaways:

  • Six-month-old chatbot startup Baichuan has raised $300 million, including backing from Tencent, Alibaba, Baidu and Xiaomi
  • The company already has six products on the market, and is drawing heavily on its founder’s close ties to Tencent’s Sogou search engine

  

By Doug Young

Another day, another artificial intelligence (AI) startup in China lands major new funding.

This time it’s Baichuan AI, which last week disclosed it raised $300 million in new funding just six months after its establishment in April, according to an announcement last week on its WeChat public account. That brings the company’s total funding to $350 million in its short lifetime, following its raising of $50 million in an earlier angel investment round.

That’s not bad for such a young company, though AI startups are notorious for their huge appetites for cash.

Baichuan is most notable for its close ties to internet titan Tencent (0700.HK). Those ties are mostly positive, but they are also a mixed bag for reasons we’ll explain shortly. Most obviously, such ties mean Baichuan should have plenty of access to cash to fuel its growth. Like many of China’s other hotshot AI startups, Baichuan’s list of other investors reads like a who’s-who of top Chinese tech firms, including not only Tencent, but also Baidu (BIDU.US; 9888.HK), Alibaba (BABA.US; 9988.HK) and Xiaomi (1810.HK).

Baichuan’s website also points out its employees, which numbered 170 at the time of last week’s announcement, come from many of China’s top tech names, including Baidu, Huawei, Microsoft, Tencent and ByteDance. Its founder, Wang Xiaochuan, is one of China’s earliest internet entrepreneurs, having founded the Sogou search engine about two decades ago.  

It’s notable, and not coincidence, that the list of investors so far is an all-China affair, since the U.S. has taken recent steps to restrict Western venture capital and private equity from investing in Chinese AI companies. AI, as well as high-tech microchips, are two key areas where Washington is trying to restrict Chinese access to Western technology and investment dollars.

Baichuan has yet to face any specific U.S. restrictions due to its newness. But we expect it’s just a matter of time before the company lands on the U.S. Commerce Department’s “entity list,” which will restrict its access to most cutting-edge Western technology. Two of China’s more advanced AI companies, SenseTime (0020.HK) and Fourth Paradigm (6682.HK), both landed on the list right around the time of their Hong Kong IPOs over the last two years, dampening demand for shares.

What’s more, SenseTime has also landed on another blacklist maintained by the U.S. Treasury Department, which bans U.S. investors from buying the company’s stock. Fourth Paradigm has yet to be added to that list, though such an addition also seems inevitable.

No valuation was given with Baichuan’s latest funding announcement, though we suspect it’s probably still below the $1 billion threshold that gives companies bragging rights to “unicorn” status. Still, this company looks like one to watch due to its background and close ties with Tencent.

Tencent ties

Baichuan founder Wang Xiaochuan is well known in China tech circles for his role at Sogou, which for most of its life was part of Sohu (SOHU.US), one of China’s earliest web portals. That’s a major accomplishment in some ways, but also carries some slightly negative baggage.

Despite its early start and strong backing by big-name internet companies, first Sohu and later Tencent, Wang was never able to transform Sogou into a major player in China’s huge internet search market. In the early days that market was dominated by Google, which ultimately left China in 2010 after refusing to continue removing sensitive content in line with Beijing requirements.

But Google was already rapidly losing ground in China to Baidu by the time it left, and the latter has dominated the country’s lucrative search market for more than a decade now. Sogou and several other challengers labored for years in Baidu’s shadow without success. But Sogou got a major boost in 2013 when it combined with Soso, the search engine owned by Tencent, which become a major investor in the combined company.

Sogou would go on to make a New York IPO 2017, though it was later privatized in 2021 by Tencent and became a wholly-owned Tencent unit. But even after all those benefits, Sogou remained a distant second to Baidu with just 10% of China’s search market as of August.

Sogou certainly had several good opportunities to steal market share from Baidu, most notably after a major scandal rocked the company in 2016 by exposing Baidu’s common practice of mixing paid content with organic search results without disclosing that fact to users.

The bottom line is that Wang had a golden opportunity to become a true titan of China’s internet, but never managed to realize that potential. So, will he have better luck in his 2.0 version with Baichuan?

Despite its youth, the company already has six products on the market, according to its website. All are large language model (LLM) chatbots similar to the one made famous by ChatGPT. Its ability to bring so many products to market so quickly implies that Baichuan was actually hatched in close collaboration with Sogou, even though Wang officially left the company in 2021. Wang said in an April interview at the time of Baichuan’s launch that a big part of his founding team was from Sogou, though he added the number of people was less than half.

All this implies that Tencent is still the biggest force behind this company, which should certainly help its development.

In addition to getting so many products up and running so quickly, Baichuan is also notable for being one of the first eight companies approved by Beijing to make their chatbots publicly available at the end of August. That also appears to show the company is well connected in the government, which is hugely important in China due to the sensitivity of chatbots.

At the end of the day, Baichuan is just one of many Chinese AI startups to emerge recently, and is relatively late to the game in a sector that’s a huge consumer of cash. Its strong ties to Tencent seem to give it better chances for success than many other independent players, though it will need market recognition to truly succeed – something that Wang could never do at Sogou.  

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