Elon Musk's X.ai in Talks to Raise $3B at a Valuation Matching Anthropic

Could Amazon be an ideal investor?

An SEC filing in December 2023 indicated X.ai had raised $135 million of a planned funding round of up to $1 billion. There was no reported valuation for that initial funding round. The Wall Street Journal reported yesterday that early investors in SpaceX and Tesla are considering investment in a new $3 billion funding round that values the company at around $18 billion. According to the Journal:

Investors close to Elon Musk are in talks to help xAI raise $3 billion in a round that would value the tycoon’s artificial-intelligence startup at $18 billion, people familiar with the matter said. 

The venture-capital firm Gigafund and Steve Jurvetson, a prominent Musk backer and co-founder of another venture firm, are among the backers considering investing in the round, the people said.

Jurvetson is a longtime Musk friend who sits on the board of his rocket company, SpaceX, and was a director at Tesla until 2020. Gigafund was co-founded by Luke Nosek, also a SpaceX director, who like Musk is a member of the “PayPal mafia” group that started the payments company. Musk and Nosek together once tried to buy DeepMind, the AI company that is now part of Google.

Terms of the xAI fundraising haven’t been finalized and the plans could change.

The news follows two recent announcements that suggest rapid progress in X.ai’s large language models (LLM). In March, X.ai released the Grok-1 base model as open-source under an Apache 2.0 license. Last week, the Grok-1.5 LLM was released, which showed significant performance improvements as measured by public AI benchmarks. The results compared favorably in select benchmarks to the leading frontier AI foundation models, OpenAI’s GPT-4 and Anthropic’s Claude 3 Opus.

Matching Anthropic

X.ai was announced in July 2023 and released its first model in November and update earlier this month. OpenAI was founded in 2015 and Anthropic by former OpenAI researchers in 2020. It is remarkable what X.ai has achieved in about nine months.

Significantly, an $18 billion valuation for X.ai would match the $18.4 billion valuation of Amazon’s investment in Anthropic. Granted, it could be $15 billion pre-money and $18 billion post, or the figures could change. However, there may also be a “Musk premium” and “Twitter premium,” given Musk’s track record and access to data from the X social media platform, which could be a competitive advantage for data-hungry LLMs.

AI foundation model developers need three things: talented staff, access to data, and financial capital. X.ai already had the first two elements. The funding rumors suggest the company may also have access to significant capital beyond Musk’s bank account.

The Anthropic comparison is important, as it is the second in funding and valuation only to OpenAI among foundation model startups. X.ai may be leapfrogging many other LLM developers that have been around much longer. All these companies, along with Anthropic, have been vying for the position of key alternative to OpenAI. Anthropic has the most substantial claim to this title today, and X.ai is not known to have any customers other than X (i.e., Twitter). However, it has entered the conversation near the top tier of AI model developers.

Open Source Halo

Elon Musk was a co-founder of OpenAI and broke with the non-profit when it converted to a private company and abandoned its open-source strategy in favor of developing proprietary models. X.ai is also a private company, but Musk has made good on the open-source promise with the release of the Grok-1 model. The 1.5 version will presumably become open-source as well.

Musk has indicated that open-source is critical so tech giants don’t solely control the technology. Microsoft reportedly owns 49% of OpenAI, while Anthropic’s two largest investors are Google and Amazon. Meta developed the most prominent open model, which has a permissive licensing model slightly more restrictive than traditional open-source. X.ai stands outside of that tech giant and proprietary segment.

The open-source angle is important. Anthropic is competing for customers in the proprietary AI model market segment that pits it against OpenAI and Google. Grok users could also come from that segment, but it also has access to the segment preferring open-source. That means it is competing primarily against Meta and key open-source alternatives, such as Databricks.

The Grok Assistant

X.ai also has another advantage over its rivals. The Grok assistant is the exclusive solution offered to X social media users. While it is restricted to paid users at this time, the social media platform offers it a ready audience of users and multiple monetization angles. That can also be advantageous for observing usage patterns and potentially for additional training data. It also raises awareness of the technology.

Cloud Access

The funding round suggests that X.ai intends to make its models more widely available to enterprise users. It is currently at a disadvantage to its key rivals, as they all have cloud computing partners that make APIs available to developers for their LLMs. Post-funding, this will be an important area of expansion for X.ai. In fact, a cloud hyperscaler may participate in its funding round.

Amazon’s AWS is Grok's logical cloud computing partner. Amazon has invested $4 billion in Anthropic but does not have an exclusivity agreement. Through Amazon Bedrock and AWS Sagemaker, it provides access to Meta’s Llama 2 and other models. With that said, the company also believes its strategic advantage is being the “all of the above” provider for foundation model access. However, it is, in reality, the “all of the rest” AI model provider, as AWS does not have access to OpenAI or Google models.

This situation may make Grok particularly interesting to Amazon. Google is also a large investor in Anthropic, and it would be logical for Amazon to hedge its bets. Due to Musk's involvement, Microsoft and Google may also be hesitant to support Grok through Azure or Google Cloud.

Amazon's market approach is less ideological, and it would like a differentiating element for its generative AI offering. Musk will look for a cloud hosting provider to facilitate distribution and provide discounted access to NVIDIA GPUs for model training. A funding round would be an ideal vehicle to solidify this type of arrangement.

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