The Squeezed Middle: Why China's AI Startups Get Trapped
Between the platform pole and the frontier pole lies a dangerous middle ground โ home to well-funded but structurally vulnerable AI startups that lack both the distribution moats of Big Tech and the frontier capabilities of DeepSeek.
These companies face pressure from both directions simultaneously. Big Tech can subsidize indefinitely and has distribution lock-in.
The Universal Warning
This isn't uniquely Chinese. Any startup pursuing horizontal AI without a clear answer to two questions is at risk: What is your owned distribution surface? and What is your…
Real-World Examples
Alibaba
Key Insight
Between the platform pole and the frontier pole lies a dangerous middle ground โ home to well-funded but structurally vulnerable AI startups that lack both the distribution moats of Big Tech and the frontier capabilities of DeepSeek.
Exec Package + Claude OS Master Skill | Business Engineer Founding Plan
FourWeekMBA x Business Engineer | Updated 2026
Between the platform pole and the frontier pole lies a dangerous middle ground โ home to well-funded but structurally vulnerable AI startups that lack both the distribution moats of Big Tech and the frontier capabilities of DeepSeek.
The Trapped Startups
Moonshot (Kimi Chat): Backed by Alibaba and Tencent โ the same companies it would need to compete against for consumer distribution
Zhipu AI (ChatGLM): Part of the Big Tech portfolio โ technically independent but strategically constrained
MiniMax (Hailuo AI): Tencent-backed โ building on a platform that could absorb its capabilities at any time
These companies face pressure from both directions simultaneously. Big Tech can subsidize indefinitely and has distribution lock-in. DeepSeek can out-research on efficiency with its hedge fund resources and singular focus.
Why the Middle Gets Squeezed
The structural logic is stark:
They can’t out-distribute the platforms. Without super-app integration, standalone AI apps struggle to build habit and retention
They can’t out-research DeepSeek. Without research independence and singular focus, Big Tech-backed startups produce incremental improvements, not breakthroughs
They’re becoming infrastructure suppliers. Their models and tools feed into Big Tech platforms but don’t capture independent value
Three Options
Accept the supplier role: Optimize for providing infrastructure to Big Tech โ viable but modest ambition
Pursue vertical specialization: Go deep into specific domains where Big Tech has limited advantage โ healthcare, manufacturing, financial services
Achieve frontier breakthrough: Compete on pure research capability โ extremely difficult and high-risk
The Universal Warning
This isn’t uniquely Chinese. Any startup pursuing horizontal AI without a clear answer to two questions is at risk: What is your owned distribution surface? and What is your durable capability advantage?
If you are not at a pole, you are the product. There is no durable horizontal middle without either an owned distribution surface or a breakthrough capability advantage.
What is The Squeezed Middle: Why China's AI Startups Get Trapped?
Between the platform pole and the frontier pole lies a dangerous middle ground โ home to well-funded but structurally vulnerable AI startups that lack both the distribution moats of Big Tech and the frontier capabilities of DeepSeek.
What is the trapped startups?
These companies face pressure from both directions simultaneously. Big Tech can subsidize indefinitely and has distribution lock-in. DeepSeek can out-research on efficiency with its hedge fund resources and singular focus.
What is Why the Middle Gets Squeezed?
They can't out-distribute the platforms. Without super-app integration, standalone AI apps struggle to build habit and retention. They can't out-research DeepSeek. Without research independence and singular focus, Big Tech-backed startups produce incremental improvements, not breakthroughs. They're becoming infrastructure suppliers.
What are the three options?
Accept the supplier role: Optimize for providing infrastructure to Big Tech โ viable but modest ambition. Pursue vertical specialization: Go deep into specific domains where Big Tech has limited advantage โ healthcare, manufacturing, financial services. Achieve frontier breakthrough: Compete on pure research capability โ extremely difficult and high-risk
What is the universal warning?
This isn't uniquely Chinese. Any startup pursuing horizontal AI without a clear answer to two questions is at risk: What is your owned distribution surface? and What is your durable capability advantage?
Gennaro Cuofano is a CRO and tech executive who has worked in AI since late 2015, starting with bringing NLP, natural-language generation, voice and chatbot products to the marketing industry. His background is in law and finance: he holds a Master's degree in Law and an International MBA with an emphasis on corporate finance (LUISS Business School and the University of San Diego, 2012), and worked as a financial analyst at a real-estate investment firm in San Diego and as an assistant controller. His work focuses on business model strategy, business engineering and, more broadly, structural analysis: how companies make money, read from their own filings. He created FourWeekMBA and leads research there and at The Business Engineer, his newsletter on AI and business strategy, with over 95,000 subscribers and more than 1,000 published analyses. His writing has also appeared on Entrepreneur (for example, How to Digitize a Family Business in Europe) and HackerNoon. Find him on LinkedIn and Substack. See how we source.
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