The Elimination Wave of Large Model Startups Begins: This is the First $1 Billion Valuation Sacrifice
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Recently, Stability AI, the developer behind the AI painting tool Stable Diffusion, has undergone a series of changes, including the departure of CEO Emad Mostaque and other key executives and technical staff, with the company facing a cash flow crisis. Forbes cited internal documents from Stability AI and statements from over 30 current and former employees, investors, and industry experts, revealing multiple issues with the management led by former CEO Emad Mostaque:
Stability AI invested heavily in research and computing power but failed to develop a viable business model.
The company has not paid millions of dollars in invoices to cloud providers like Amazon Web Services. Negotiations with potential major clients such as Samsung, Snap, and Canva fell through.
Emad Mostaque overestimated himself and made some unrealistic promises, such as customized national AI models.
Several executives, including the core team behind Stable Diffusion, resigned in disappointment.
Records show that Stability AI was founded in 2020 by CEO Emad Mostaque, who holds a master's degree in Mathematics and Computer Science from the University of Oxford. Previously, he worked as an analyst at several hedge funds before transitioning to more public-facing roles. Mostaque stated that his motivation for starting the company was his personal fascination with AI and his belief that the open-source AI community lacked "organization." In interviews, Mostaque mentioned, "The plan is to use our computing power to accelerate open-source foundational AI." In September 2022, Stability AI publicly released the pre-trained model weights of Stable Diffusion, a text-to-image AI model capable of generating realistic 512x512 pixel images based on textual prompts. Prior to the public release of the model weights, its code had already been made available, and the model weights were initially shared with the research community. In the latest version, any user can download and run Stable Diffusion on consumer-grade hardware.
In October 2022, Stability AI announced securing $101 million in funding. This round was led by Coatue and Lightspeed Venture Partners, with participation from O'Shaughnessy Ventures. The raised funds will be used to accelerate the development of open AI models for global consumer and enterprise applications, including image, language, audio, video, and 3D technologies. Additionally, the funding will support talent acquisition. Following this funding round, Stability AI's valuation reached approximately $1 billion, making it a newly minted AI unicorn. However, Stability AI's cash burn rate far exceeds its revenue level. According to a recent report by the Financial Times, the company's revenue in February was only $5.4 million, while its costs reached $8 million. Multiple sources have expressed concerns about how the company will continue to pay salaries for its remaining 150 employees. Amid the chaos, many leadership positions have remained vacant for months, leaving Stability AI in a state of overall confusion about its future direction.
From an AI unicorn to its current downfall, Stability AI's decline took less than two years. What exactly happened to this once-prominent AI company?
Once valued at $1 billion, now deeply mired in financial crisis Stability AI was once one of the hottest startups in the AI field, but recently, the company has been deeply mired in financial crisis. Despite Emad Mostaque's exhaustive efforts, he couldn't secure sufficient funding, and even failed to settle the AWS service fees for Stability AI's core products.
Before resigning as CEO of Stability AI, Emad Mostaque delivered a public speech in California. In his speech, Mostaque painted a rosy picture. "AI is the jet plane of the mind, AI is our collective intelligence, a giant born of humanity," he claimed. He also mentioned that the high-speed Stable Diffusion image generator released earlier this month could "generate 200 cats wearing hats per second." However, when later asked about Stability AI's financial model, Mostaque evaded the question, only saying, "I can't answer publicly, but things are going well. We're performing better than expected."
Just four days after the speech, Mostaque resigned as CEO of Stability AI and posted on X, stating that he voluntarily stepped down from his leadership role to decentralize "the concentration of power in AI." But according to Forbes, sources revealed that the reality was different. Despite increasing external and internal pressure for him to step down, Mostaque had been fighting to maintain his position and control. Based on company documents and interviews with 32 current/former employees, investors, collaborators, and industry observers, his sudden departure was primarily due to poor business judgment and excessive spending. This eroded confidence in his vision and leadership, ultimately leaving Stability AI in dire straits. ## The Terrifying Computational Costs
According to an internal memo released during a company board meeting, Stability AI had less than $4 million in bank deposits as of October 2023. The increasing debt, including overdue payments to Amazon Web Services (AWS) for several months, has already plunged the company into losses. The document explained that to avoid legal sanctions for failing to pay US employees' salaries, this London-based startup is even considering delaying tax payments to the UK government.
What has placed such a heavy financial burden on Stability AI is the powerful and expensive GPU chip infrastructure supporting its AI operations. These facilities, built by AWS, have long been one of the highlights Mostaque loves to boast about: he often claims it as one of the strongest ten supercomputers in the world. This infrastructure supports the top-tier AI image generation tools developed and maintained by Stability AI researchers, as well as being a critical prerequisite for generating audio, video, and 3D models. A former employee of the company stated, "But it must be acknowledged that Stability AI has released many models. Although the company itself may not have profited from them, they have brought significant benefits to the broader AI ecosystem." However, the terrifying computing costs are threatening the healthy development of Stability AI. According to the company's internal financial projections from October last year, the company's computing resource expenditure for 2023 was approximately $99 million. The documents also mentioned that Stability AI "failed to pay the July AWS bill (amounting to $1 million)" and "does not intend to pay AWS the $7 million usage fee for August by the end of October." Subsequently, the bills for September and January were also unable to be paid, along with $1 million owed to Google Cloud and $600,000 to GPU cloud data center CoreWeave.
Including an additional $54 million for salaries and operating expenses, Stability AI's projected total costs for 2023 reached $153 million. However, according to its October financial report, the full-year expected revenue was only $11 million. This means the monthly fixed losses are likely to exceed the annual revenue figure.
Financing difficulties: Stability AI quietly seeks buyers Stability AI's most recent financing round occurred in October 2022. In 2023, the company was reported to be seeking another round of financing at a $4 billion valuation, but progress has been challenging.
In July 2023, Mostaque shared an optimistic fundraising plan. The document detailed aspirations to raise $500 million from major investors like NVIDIA, Google, Intel, and the World Bank, along with an additional $750 million in computing facilities. In leaked Slack messages, Mostaque stated that Google was "willing to move quickly" and that the financing round "might be oversubscribed."
However, reality proved otherwise. According to reports, three individuals directly involved in the financing activities confirmed that while there was some interest in Stability AI, negotiations often stalled when faced with the company's financial data. Two of them noted that earlier this year, Mostaque simply stopped engaging with venture capital firms that requested to review financial figures. An internal document revealed that only one company actually invested at the time: Sound Ventures, led by actor Ashton Kutcher, which invested $35 million in the second quarter through convertible SAFE notes. According to two sources, although Mostaque managed to meet with NVIDIA and its CEO Jensen Huang, the meeting ended in disaster. "Under Huang's barrage of detailed questions, Mostaque broke down," the sources noted. Huang quickly concluded that Stability AI was not ready for NVIDIA's investment. In an interview email, Mostaque stated that he had not formally met with Huang since 2022, at most exchanging a few greetings. In July 2023, he mentioned a plan to raise $150 million from NVIDIA.
By September of last year, when Stability AI's executive team gathered in London for the CogX conference, the funding plan remained incomplete. Three individuals directly familiar with the matter revealed that a group of executives confronted Mostaque at the meeting, questioning the company's cash position and funding issues, but he ultimately failed to provide the clear answers they sought.
By October of last year, Mostaque had slashed the fundraising target by over 80%. Late last year, market rumors emerged about Stability AI potentially being sold. According to insiders, Stability AI has engaged in preliminary discussions with several companies regarding acquisition, with potential buyers including competitor Cohere and unicorn Jasper, though no deal has been finalized yet.
A well-known AI company confirmed that representatives from Mostaque had indeed contacted them to discuss acquisition. The source, who requested anonymity due to the confidentiality of negotiations, stated that the talks did not progress because "the numbers couldn't be agreed upon." Stability AI also considered attracting Samsung as a buyer and even renovated its office in preparation for a meeting with the South Korean electronics giant.
Separately, insiders revealed that Coatue had been urging Mostaque to step down as CEO for months. However, as a major shareholder of Stability AI, Coatue and other investors could not directly remove him. Two other sources mentioned that investors attempted alternative strategies, including offering lucrative equity packages in exchange for Mostaque's resignation, which he rejected. By October last year, Coatue and Lightspeed had reached their limit. Coatue left the board, and Lightspeed gave up its observer seat. A current executive at Stability AI stated, "Mostaque has severely angered our early investors, making it impossible for us to raise more funds under acceptable conditions."
It's worth noting that in February of this year, Stability AI sold its AI image generation app Clipdrop to AI startup Jasper, less than a year after acquiring it.
Core Technical Team in Turmoil Beyond financial crisis, Stability AI also faces turbulence in its core technical team.
In March this year, three key researchers at Stability AI—Robin Rombach, Andreas Blattmann, and Dominik Lorenz—left the company. It is reported that these three individuals previously conducted the core research for Stable Diffusion at a university in Germany before being hired by Stability AI. In February this year, they also contributed to the release of Stable Diffusion 3, which for the first time combined the Diffusion architecture used in earlier versions with the transformer architecture employed in OpenAI's ChatGPT. According to sources, Robin Rombach had been considering leaving for several months. Last summer, affected by failed fundraising efforts, he first threatened to resign. In fact, since last year, the list of senior technical personnel leaving Stability AI has grown increasingly long, including Vice President of Product Christian Cantrell, Head of Engineering Scott Draves, Head of Research Patrick Hebron, and Head of Applied Machine Learning Joe Penna.
Additionally, Research Director David Ha, LLM lead Stanislav Fort and his successor Louis Castricato, General Counsel Adam Avrunin, Chief People Officer Ozden Onder, Chief Operating Officer Ren Ito, and VP of Communications Jordan Valdés, along with VP of Audio Ed Newton-Rex, all departed last year. Newton-Rex stated in an interview that he resigned because he disagreed with Stability AI's stance that training AI models on copyrighted works without consent constitutes fair use.
At Stability AI, many employees have expressed concerns about the company's cash flow and accountability. Mostaque's lax attitude in ensuring that Stability AI's products would not be used to generate child sexual abuse imagery has also drawn severe criticism. The company's Integrity Senior Vice President Ella Irwin stated in a declaration, "Stability AI is committed to preventing the misuse of AI technology and prohibits the use of our image models and services for illegal activities, including attempts to edit or create child sexual abuse imagery." Meanwhile, Stability AI began quietly laying off employees at the beginning of this year. Sources reveal that at least 10% of the workforce was let go.
Will Stability AI perform better after the CEO's departure?
Currently, Mostaque has announced his resignation. On X, Mostaque stated that he still holds the majority of the company's shares but will step down from the board. Just two hours after Mostaque announced his plan to step down as CEO, Stability AI issued a press release confirming his departure. The company's top leadership will be temporarily assumed by Chief Operating Officer Shan Shan Wong and Chief Technology Officer Christian Laforte. In a statement email, the duo mentioned that the company remains focused on commercializing "world-leading technologies" and making them "available to partners in the creative industries." Board Chairman Jim O’Shaughnessy stated in a declaration that he believes the two will "competently guide the company in advancing generative AI product development and commercialization in the industry."
During a recent all-hands meeting, Stability AI's new leadership detailed the company's future direction. One attendee noted that the focus is on developing a more robust resource and expenditure management plan. Meanwhile, Mostaque's resignation has brought hope to some employees. A former Stability AI executive commented, "Mostaque is the least organized leader I've ever worked with in my entire career. He had no vision at all, changing directions every week based on what he saw on Twitter." A current employee said, "The torture of Mostaque's hour-long ramblings is finally over. Some employees who had considered leaving are now 100% willing to give Stability AI another chance."
Shortly before Mostaque announced his resignation, a Stability AI executive mentioned in an interview that they were optimistic his departure would help the company regain appeal, whether through raising small investments or being acquired by a friendly buyer. The executive stated, "Some companies that have raised hundreds of millions of dollars are far less valuable than Stability AI. We're looking forward to the arrival of a white knight."