(Yicai) July 3 -- Kuaishou Technology is spinning off its artificial intelligence-based video generation platform, Kling AI, into an independent company, the Chinese short-video platform said yesterday. The new entity plans to raise up to USD3 billion through a capital increase to give it a post-investment valuation of about USD18 billion. The deal marks the largest single fundraising ever completed by a video foundation model company globally.

Kuaishou signed capital increase agreements with multiple investors yesterday, the Beijing-based firm said. The transaction will be done in two stages.

In the initial subscription phase, the initial group of investors will invest a total of CNY13.8 billion (USD2 billion) in cash in exchange for Kling AI’s newly issued registered capital. In the additional subscription phase, 15 additional investors will sign agreements on the same day to invest a combined CNY5.2 billion (USD766 million) in cash.

Kling AI may introduce additional investors during a 60-day subscription period following the signing date, raising up to an additional CNY1.4 billion (USD206.4 million). This would bring the total proceeds to a maximum of CNY20.4 billion (USD3 billion), making up 16.6 percent of Kling AI’s registered capital after the capital increase.

A total of 34 investors participated in the financing round. Lead investors include CPE, Guofang Venture Capital, BlueFive, Zhongguancun Science City Science and Technology Growth Fund and CITIC Securities. Co-investors include Alibaba Group Holdings' cloud computing arm and search engine giant Baidu, as well as leading entertainment firm Huace Film and TV.

Internet behemoth Tencent took part through its subsidiaries Shanghai Qishan Investment and Parallel Mars Investment. The investor group also includes national and regional industrial investment funds such as the China Internet Investment Fund and the Beijing Artificial Intelligence Industry Investment Fund. Lighthouse Capital is serving as the exclusive financial advisor for the transaction.

Under the shareholders’ agreement, investors have been granted repurchase rights. If Kling AI fails to complete an initial public offering by Oct. 30, 2031, or if a planned corporate restructuring is not completed within the agreed timeframe, investors have the right to request Kling AI to buy back their shares at the original investment price plus an 8 percent annual simple return. Kling AI shall bear joint liability for these obligations.

Industry insiders said the spin-off is more than a simple capital markets transaction, but rather a strategic necessity for Kuaishou amid the combined pressures of rising costs, valuation headwinds and intensifying industry competition. The company has directed nearly all of its capital expenditure toward AI computing infrastructure, resulting in a decline in adjusted net profit.

While the independent financing provides Kling AI with greater financial resources, it also positions the company in direct competition with the increasingly crowded AI video generation market, the insiders said. USD3 billion should provide sufficient capital to support technology development in the short term, however investors are increasingly evaluating AI firms based on profitability and marginal benefits, rather than on technical demonstrations.

Kling AI will need to quickly establish differentiated use cases that distinguish it from other leading video foundation model providers and convert capital resources into substantial cost advantages, the insiders added. This tough battle is only just beginning.

Kuaishou’s share price [HKG:1024] closed flat today at HKD42.60 (USD5.40).

Editor: Kim Taylor