Elon Musk's New AI Venture xAI Sparks Investor Frenzy with $3 Billion Call

Elon Musk, a name synonymous with groundbreaking ventures such as SpaceX and Tesla, is now steering a new startup, xAI, into the competitive field of artificial intelligence.

by Faruk Imamovic
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Elon Musk's New AI Venture xAI Sparks Investor Frenzy with $3 Billion Call
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Elon Musk, a name synonymous with groundbreaking ventures such as SpaceX and Tesla, is now steering a new startup, xAI, into the competitive field of artificial intelligence. An email circulated this week reveals that Musk's latest endeavor, born from the remnants of Twitter, aims to draw significant investor interest through a $3 billion funding round.

This round would propel xAI's valuation to an ambitious $18 billion post-money. The email, which outlined the investment terms, highlighted the opportunity to invest in xAI at a pre-money valuation of $15 billion. However, the entry comes at a steep price.

Investments of $10 million or more would be channeled through special purpose vehicles (SPVs), granting investors a favorable position on xAI's capitalization table. These privileges aren't without costs, carrying a 5% upfront fee, a 1% management fee, and a 10% carried interest.

Heftier commitments might even see management fees doubled and carried interest reaching 20%.

Investment Strategy and Market Response

Musk's strategic use of SPVs allows various venture capitalists to consolidate their investments into a singular entity, enhancing their bargaining power and investment appeal.

Yet, this strategy is not just about streamlining investment processes; it also imposes significant fees that could deter smaller investors but seems tailored to attract heavyweight financiers who can absorb these costs. According to Business Insider, the offer has already attracted a notable lineup of limited partners (LPs), with many having anticipated the deal since December 2023.

The urgency of the investment opportunity is clear, as xAI plans to close the funding within the next two to three weeks on a first-come, first-served basis. This rush underscores the aggressive growth plans Musk envisions for xAI, even though it currently operates with a modest team.

A source familiar with the company disclosed that about 10 engineers are diligently working with between 5,000 to 10,000 GPUs to advance xAI’s capabilities. Currently, xAI's only product is an AI chatbot named Grok, trained on Twitter data, including tweets from Musk, to mimic his communication style.

This innovative approach to AI development, focusing on personalized and recognizable AI interactions, illustrates Musk’s unique strategy in a crowded market. Despite its small size and the hefty investment fees, the attraction of xAI lies in its potential to leverage Musk's vision and the robust AI market demand.

The proposed SPV investment structure, while complex, underscores a keen interest in fostering a strong initial financial foundation, setting xAI on a potentially prosperous trajectory.

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