The Magic behind DeepSeek & Qwen; Perplexity's Merger with TikTok U.S.
January Week 4: Jan 28 - Feb 3
Hi friends 👋,
In this week’s edition of Coconut Capitalists, we’re diving into:
How China is recreating Silicon Valley’s Magic
Perplexity, & a possible Merger with TikTok U.S.
Quick-Fire Startup News from Around Asia
Let’s get into it.
How China is recreating Silicon Valley’s Magic
The Scoop
China is massive, home to over 1.4 billion people and 120 cities containing at least 1 million people. Yet, the two AI labs with the current state-of-the-art, open-source models – DeepSeek (known for R1) and Alibaba’s DAMO (known for Qwen) – are within walking distance of each other.
The city of Hangzhou, about 45 minutes south of Shanghai by bullet train, is home to one of the world's highest concentrations of AI researchers. In fact, you don't have to visit to believe it - the Chinese Government has officially named the city's main engineering district "AI Town."
If you’re reading this newsletter from the U.S., maybe you’re not familiar with Hangzhou but rather with Shenzhen, known in the western world as the “Silicon Valley of China.” However, this statement is incorrect. Shenzhen, which is located just 14 minutes north of Hong Kong by bullet train, is not like today’s Silicon Valley but rather resembles the hardware-driven Silicon Valley of the past (back in the days of Shockley & Fairchild semiconductors). Today’s Silicon Valley is now software-driven - bits instead of atoms, while in contrast, Shenzhen is loved by hardware-driven companies like BYD (vehicles), Huawei (phones), and DJI (drones). The reason being that there’s nowhere else in the world where you can go from design to production in a matter of hours. For many Chinese companies, their entire supply chain sits within a 10-mile radius of where they operate.
In contrast, Hangzhou - specifically the "AI Town" district - resembles today's software-driven Silicon Valley in the U.S. And while DeepSeek and Alibaba's DAMO lead the charge, 12 other AI labs, each with over $10 million in VC funding, are located in "AI Town" as well (according to a local Hangzhou reporter I talked with on WeChat).
A Deep-Dive into AI Town
Spanning over 2.13 miles (3.43 km), the district is like a massive college campus. But instead of psychology, math, and social studies students scurrying around, it’s filled with AI engineers, researchers, and founders. Here are just a few highlights of AI Town and why many of the best & brightest in China move there:
First, individual researchers are often given free "computing vouchers" from the Chinese Government & Alibaba Cloud worth between $500k USD and $4 million USD to fund their initial model development.
Second, there are over 17 academic research institutions with labs in the town, creating a cross-pollination of the best research ideas.
Third, the government supplies AI Town with one of the world’s fastest internet infrastructures, delivering peak speeds of 10Gbps. For comparison, in the U.S. the average download speed is 186Mbps.
Fourth, Luckin Coffee, which makes a kickass Coconut Latte, will reportedly deliver your morning beverage via drone delivery. This way an AI researcher can stay close to their best friend - the H800 GPU - at all times.
It's worth noting that in Hangzhou, next to AI Town - where both DeepSeek and Alibaba's DAMO are located - there's also Dream Town. Yes, Dream Town. I know…this is starting to sound more like something you'd find at Shanghai Disneyland.
For our friends in the U.S., Dream Town is China’s version of Sand Hill Road in Palo Alto or South Park in San Francisco - a playground of sorts for Chinese venture capitalists. But Dream Town is home to more than just VCs; it’s divided into two areas: the “Internet Village” (solely for entrepreneurs, with over 5,210 startups working from WeWork-like complexes) and “Angel Village” (which houses over 180 VC firms).
Why it Matters
It’s worth noting that the city of Beijing arguably has more raw AI firepower, with unicorn-status startups like Baichuan ($1.4 Billion raised), Zhipu ($1.17 Billion raised), Moonshot ($1.0 Billion raised), and 01.AI ($400 million raised), all having their primary research labs in the city. However, if we talk about global impact, it’s DeepSeek with R1 and Alibaba’s DAMO with Qwen2.5-72B-Instruct that have really stolen the spotlight as of late (this is because open-source models often gain rapid adoption online within engineering communities, and subsequently spread like wildfire on places like Twitter & Reddit).
As Y Combinator’s Paul Graham stated in a 2006 essay, all you need to recreate Silicon Valley in a new location is two things: First, lots of money (e.g., Angel Village) and Second, lots of nerds (or in other terms, researchers & engineers) (e.g., AI Town & Internet Village). Many technology hubs like Tel Aviv (Israel), Bengaluru (India), and even cities in the U.S. like Austin & Miami have set out on a quest to recreate the magic of Silicon Valley, but Hangzhou seems to have the most pixie dust so far.
Perplexity, & a possible Merger with TikTok U.S.
The Scoop
On January 20th, 2025, newly elected U.S. President Donald Trump signed an executive order to delay the "TikTok ban" for 75 days. Ideally, this would allow the new administration time to negotiate a four-way deal between ByteDance, the Chinese Government, itself (the U.S. Government), and a third-party U.S.-based M&A candidate (acquirer) that would take over domestic operations in the U.S.
Among the many companies that have thrown their hats in the ring, Perplexity's proposed merger may be the most compelling. For context, Perplexity is the $9‑billion-dollar U.S.-based AI search startup that wants to merge with TikTok U.S.
A Quick Recap of the Events
Just to catch you up to speed; here's a timeline of recent events regarding TikTok U.S. and how it relates to Perplexity.
First, on January 18th, 2025 - U.S.-based Perplexity submitted a confidential bid to ByteDance, proposing a merger between itself and TikTok U.S.
Second, on January 19, 2025, the TikTok Ban went into effect in the U.S. This created a cascade of events; the app was pulled from the Apple and Google App stores, TikTok was shut down for 14 hours, then finally, Donald Trump, on his first day in office, signed an executive order allowing for a 75-day extension on the bill that initially banned TikTok.
Third, on January 27, 2025, Perplexity updated its bid, in an attempt to create a more compelling offer for the Trump Administration - now proposing a U.S.-based holding company called "NewCo" that would combine TikTok U.S. (excluding its core recommendation algorithm) and Perplexity AI.
This updated bid from Perplexity, at least on paper, is quite compelling for the Trump Administration - let me explain - first, I need to give some background context; in a recent press conference, President Trump said, and I quote: ”Without U.S. approval, there is no TikTok. With our approval, it is worth hundreds of billions of dollars - maybe trillions. Therefore, my initial thought is a joint venture between the current owners and/or new owners whereby the U.S. gets a 50% ownership in a joint venture set up between the U.S. and whichever purchaser we so choose.”
The updated Perplexity offer is structured in such a way that would fulfill President Trump’s request; the federal government would have the option to acquire up to 50% of "NewCo" at a future date, aligning the incentives. Essentially, ByteDance (the Chinese parent company) would transfer TikTok U.S. assets to NewCo in exchange for equity (without any voting rights), while Perplexity’s investors would receive shares in the merged entity.
Even though the chances of a deal happening between Perplexity & TikTok U.S. are completely unknown - and that's not an indictment against Perplexity, but simply a testament to how difficult it is to get a multi-billion-dollar M&A deal across the finish line - it's still worth investigating why this deal actually makes so much sense.
Antitrust Standpoint
When we consider American companies buying the TikTok U.S. asset, the big 4: Meta, Microsoft, Amazon, and Google are probably off the table. Even though they have the financial resources to acquire TikTok U.S. and the engineering capabilities to rip out & replace the “algorithm”, there's a very slim chance that the Federal Trade Commission (FTC) will let a supposed "monopoly power" acquire TikTok U.S. And next up on the list, there's Walmart and Oracle. The leadership of both companies have close ties to ByteDance executives. As evidence, back in 2020, both Walmart and Oracle even tentatively agreed to acquire a combined 20% stake in TikTok before the Biden Administration blew up the deal. However, as of today, Walmart has a market cap of $788.56 billion and Oracle has a market cap of $475.65 billion - these are massive companies! And given their sheer size, they would probably face the same antitrust scrutiny as the big 4.
Perplexity, on the other hand, is worth $9 billion - and is currently seen as the underdog in the AI Search war between Google-Gemini and Microsoft-OpenAI. Given this, Perplexity would pass the antitrust test.
Technology Standpoint
The next question is whether Perplexity can cleanly rip out and replace the TikTok "algorithm" with a new one at a similar level of performance and quality without the average user in the U.S. ever noticing.
I use "algorithm" in air-quotes as that word makes the TikTok recommendation system sound overly simplistic - almost like hot-swapping the engine of a car - but instead the "algorithm" is an incredibly complex system, probably containing hundreds of custom AI models, graph databases built specifically for TikTok's multi-modal data structure, dynamic recommenders running billions of A/B tests in parallel, and so many more inventions that make up the core intelligence of this "algorithm".
But, the Perplexity team has some of the best engineering talent in the world, and they're battle-tested in scaling a platform to tens of millions of users. Given this, one could argue that they would pass the technology test.
Product Standpoint
Moreover, Perplexity's AI Search product is already incredibly useful today, with its ability to instantaneously answer even the most complex of questions, and often in less than a second. However, the answer quality would reach a new height if Perplexity could tap into the real-time inflow of user-generated data from TikTok.
A great case study is X.AI's Grok (Elon Musk's company). Grok itself is an incredible language model, but in isolation, the model doesn’t feel like a step-change from anything Anthropic, OpenAI, or another frontier AI lab has created. However, when Grok is connecting to the firehose of real-time X/Twitter data, suddenly it shape-shifts into a truly unique product.
I’ll give an example: if you wanted to learn about the technical architecture behind DeepSeek’s new R1 Model, Grok can actually pull tweets posted by the DeepSeek research team on X/Twitter and use that text data (that cannot be found anywhere else on the internet) as input context for giving the highest quality answer possible. For some specific questions (not all questions), this firehose of user-generated content is much more useful than information coming from a publication like Business Insider or The Verge (that’s instead reporting on DeepSeek). Instead, the information comes straight from the source.
Similar to X.AI's Grok, for Perplexity, integrating its AI search product with TikTok’s firehose of user-generated content would make the answers that much better. TikTok is one of the best repositories of real-time news and events on the internet (along with X/Twitter, Reddit, YouTube…etc), and represents a treasure trove of proprietary data. Given the potential of this data integration between Perplexity & TikTok U.S., the deal would definitely pass the product test.
Why it Matters
TikTok U.S. will need to work out a deal in the coming months; there’s a deadline of April 5, 2025. We can assume that there are lots of conversations happening behind closed doors, but as far as public M&A offers that have been made so far, Perplexity’s is the only one that passes the antitrust, technology, and product tests.
Also, to my friends at ByteDance - things are probably a little hectic right now. I hope you’re doing OK & hanging in there!
🇯🇵 Japan News
Sakana AI, Japan’s leading foundation model startup company, founded by two ex-Google DeepMind researchers and the former COO of Stability AI, recently made the cover of Forbes Japan. The team has been busy at work, from creating their very own Autonomous AI Scientist to creating a framework for The Merging of AI Models to creating Shape-Shifting LLMs with Transformer² where the AI models dynamically adjust their weights to solve various tasks.
Most recently, the company released a 1.5-Billion-parameter Japanese Small Language Model with a novel distillation method on HuggingFace - called TAID. The TAID process transfers knowledge from a huge, high-performing model to a much smaller one. The significance is that the 1.5 billion parameter student model has strikingly similar intelligence to its much larger (& more expensive) teacher model.
SoftBank’s Vision Fund 2, which has $56 billion in committed capital, is reportedly planning to invest $500 million into the robotics startup Skild AI, at a $4 billion valuation. The startup, which is only 2 years old, raised a previous funding round of $300 million at a $1.5 billion valuation last July from investors, including Jeff Bezos, Lightspeed Venture Partners, and Coatue Management. The company's main headquarters are in Bengaluru, India, Pittsburgh, USA, and San Francisco, USA.
Rakuten Group, the parent company of Japan's largest e-commerce company, has announced it will not proceed with the planned initial public offering of its securities arm, Rakuten Securities Holdings Inc., on the Tokyo Stock Exchange. The larger story here is that Japan's TSE is in need of a boost - while 130 IPOs in 2024 is commendable - the Japanese financial sector needs to regain its momentum in 2025 with a big year, as competitive foreign markets, have recently been soaring.
🇲🇾 Malaysia News
Sam Altman’s company, WorldCoin (he is a co-founder), which is most well-known for creating a blockchain-based “proof of human” verification system (similar to an advanced version of Apple’s Face-ID), has secured an MoU (type of contract) with the Malaysian government to integrate WorldCoin’s iris-scanning technology into Malaysia’s digital infrastructure. The technology behind WorldCoin, called World ID, works by scanning a person’s eyeball for verification - it’s a similar concept to a fingerprint scanner used for identification systems at airports.
🇸🇬 Singapore News
The Economic Development Board (EDB), a government-backed agency in Singapore, has a Corporate Venture Launchpad program that recently had an incredibly successful spinout. 129Knots, a fintech startup based in Singapore, has launched with US$10 million. The startup is targeting the intersection of blockchain and financial services, focusing on asset tokenization, audit trails (similar to Chainalysis), and real-time trade credits.
🇮🇳 India News
Slice Bank, a Bengaluru-based fintech company & hybrid bank (hybrid meaning a digital bank with a few physical branches as well), is seeking to raise between US$250 million and US$300 million from financial investors and family offices. The company, which is valued at between US$1.3 billion and US$1.5 billion, has an annual revenue run rate of US$138.94 million. In India, getting a banking license is incredibly difficult, with the central bank rejecting most applications in recent years; however, through a recent merger with North East Small Finance Bank, the startup was able to “acquire” a banking license and is now off to the races.
🇨🇳 China News
YuE (乐), which translates to “music” or “happiness” in Chinese, was recently released as a state-of-the-art, open-source music generation model developed by researchers at the Hong Kong University of Science and Technology (HKUST). The music generation model YuE is able to generate entire songs from scratch and is in a similar category to U.S.-based startups like Suno (US$125 million raised) or Udo (US$10 million raised).
The Bank of China announced that it will invest 1 trillion yuan (about US$137 billion) over the next five years into the Chinese AI ecosystem to counter the US. This announcement comes on the heels of the recent unveiling of Stargate; the $500-billion dollar joint-venture, between OpenAI, SoftBank, and Oracle. The Bank of China, which has total assets of US$3.09 trillion, plans to offer both debt financing and equity investments into various startups & infrastructure projects.