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Stability AI Teeters on the Brink as Financial Woes Mount

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Stability AI

Since its inception, Stability AI has been the subject of attention and curiosity as an entity building open AI tools that would help us reach our potential. It has positioned itself as the global leader among open-source generative AI providers that can deliver groundbreaking, open-access AI models with the fewest resources in imaging, language, code, and audio.

It was growing so fast that it had to go for two acquisitions – one that of Init ML and the other of ClipDrop – within the first four years of its launch. 

Over the years, it kept launching cutting-edge open-access language models, high-quality single image-3D object generation solutions, best-in-class audio diffusion technology, generative AI video models, and more. 

Despite all these achievements, things were not going well. Reports started coming out about its financial instability. Lawsuits aggravated the situation further. And now, it is widely known that Stability AI, founded by Emad Mostaque in 2019 and headquartered in London, is under significant financial stress. 

We will look into the character of this stress-building process in detail and how it got compounded with events unfolding one after another. 

Click here to learn why 2023 was a breakthrough year for artificial intelligence. 

Reserves Depleting in Maintaining Cloud GPUs

One of the pivotal reports to come out at the beginning of April suggested that Stability AI had run out of cash to pay its bills for rented infrastructure. More specifically, it faltered when it came to paying for the infrastructure it obtained from AWS, Google Cloud Platform, and CoreWeave, a GPU-centric cloud operator. 

The rent was around US$99 million a year, which was in addition to the US$54 million the company had to pay for wages and operating expenses. 

The report stated that the company only had US$4 million in its reserves by the end of October last year. Its spending obligations did not match up to the revenue it was generating or the funding it was to receive. Against a total spending obligation of US$153 million, as cited above, the entity was projected to earn a mere US$11 million for the 2023 calendar year. 

Although the startup and its founder tried to secure a deal with Intel that could have resolved its issues to a large extent, that deal partially fell through. We will look into the details of that specific instance in one of the next segments. 

Meanwhile, Stability continued to witness an increase in its debt levels. There were allegations that the company underpaid its July 2023 bills to AWS by US$1 million and speculations that it had no intention of paying its August bill for $7 million. Google Cloud and Coreweave also had outstanding amounts of US$1.6 million. 

Reports suggested that the company was prioritizing its liabilities and was more keen to delay its tax payments to the UK government rather than put a hold on its American payroll, which could result in severe legal penalties. 

Talking of legal penalties and lawsuits was another cause that contributed to the worsening of Stability's situation. 

Lawsuits and other Legal Troubles

Lawsuits

Last December, the lawsuit from Getty Images – against Stability AI and its product Stable Diffusion – obtained the necessary ruling from a UK court to move on to trial. Getty had alleged that its proprietary material was used to train AI models, whereas Stability argued that the case should not be heard in a UK court. The logic they put forth was that no one involved in the training and development of Stable Diffusion was based out of the UK. 

However, the evidence presented in court by Stability AI was deemed inadequate. The court also pointed towards Stability's involvement in helping ‘fast track' UK residency applications of Russian and Ukrainian developers who worked on the Stable Diffusion product. 

During the same time, Stability AI was also found to be involved in another lawsuit filed by a group of visual artists. They alleged that their creative work was misused by a bunch of AI tools, including Stability. The other entities facing the same allegations were Midjourney, DeviantArt, and Runway AI. The lawsuit, an amended class action case, said that these AI tools had developed systems that could create art in the style of the artists when their name was fed as prompts. 

If these allegations of devouring genuine artworks as feed were not enough, Stability AI was witnessing a large chunk of its senior executives leaving the company, often raising concerns about the product and solutions. 

Flurry of Exits

In November 2023, Ed Newton-Rex, Stability AI's head of audio, declared his decision to resign over concerns relating to the company's use of copyright-protected material in training its Gen-AI products. According to his tweet, Newton-Rex disagreed “with the company's opinion that training generative AI models on copyrighted works is ‘fair use.'”

A week after this high-profile exit, two more senior execs decided to leave the company. These two were Jordan Valdés, who joined Stability AI in 2023 as VP of comms, brand, creative, and social media, and Joe Penna, who joined as VP of applied machine learning in 2022.

A report published in August 2023 already hinted that Stability was failing miserably to retain its workforce. By then, as many as ten senior employees of the startup had left the company. Their roles ranged from Engineering to product and HR. 

The list of people who left the company included Christian Cantrell, VP of Product; Scott Draves, VP of Engineering; David Ha, Head of Research; Patrick Hebron, VP of R&D; Ren Ito, COO; Kenneth Lee, Head of Talent Acquisition, and Nathan Lile, Chief of Staff. 

However, the final blow for many who tracked the company came in the form of the CEO's resignation. 

The Stepping Down of the Founder and CEO

It was during the third week of March this year that news broke out of the Stability AI founder and CEO Emaad Mostaque stepping down from his role and the startup's board. Immediately after he stepped down, COO Shan Shan Wong and CTO Christian Laforte were installed as co-CEOs. 

The unicorn cited Mostaque's decision to pursue decentralized AI as the reason for its CEO stepping down. Mostaque made a series of tweets supporting his belief that centralized AI cannot be beaten with more centralized AI. While elaborating on his decision to quit the company, Mostaque said:

“We should have more transparent & distributed governance in AI as it becomes more and more important. It's a hard problem, but I think we can fix it…” 

He further added:

“The concentration of power in AI is bad for us all. I decided to step down to fix this at Stability & elsewhere.” 

However, Mostaque's exit seems to have been driven by the startup's inability to drive revenue. Mostaque tried to argue against what was a revenue-obsessed culture, according to him. In one of his tweets, he called out the Gen-AI space's “strange focus on revenue.” 

He cited companies and sectors that took a long time to generate revenue and had the support of investors during that period. He cited the example of MagicLeap and the industry of self-driving cars. According to him: 

“The payoffs on proper generative AI R&D are clearer and faster to market than just about anything we've seen. It's going to create way more economic value than self-driving cars. For example, the total investment has been $100 billion with no revenue payoff.”

However, on the day of action, none of his assurances worked in his favor, and he had to step down. One report suggested that the stepping down was a result of ‘investor mutiny' and ‘staff exodus.' 

While Stability was trying to rectify things, the NVIDIA deal did not work out as effectively as planned. However, Mostaque never accepted the charge that any such meeting between NVIDIA and Stability AI had happened. 

The Alleged NVIDIA Meet and Other Investments That Did Not Happen

Forbes reported that Emaad Mostaque had met Nvidia CEO Jensen Huang and that the meeting had ended disastrously. While Mostaque denied that such a meeting had happened, NVIDIA also did not confirm this. 

Another big-time deal that did not go well was the Intel fundraiser that reportedly came with ‘hefty hardware purchase commitments.' Initially, reports suggested that Stability AI had received an investment from Intel to the scale of US$50 million. 

However, in actuality, the investment included Stability AI committing to using a majority of the round to gain access to Intel's hardware resources. While Stability was in desperate need of cash, the terms of the Intel deal involved the hardware giant offering access to its resources through a new, AI-optimized supercomputer that the two companies had announced to have co-developed. 

Apart from this deal, the other funding raised by Stability was not adequate, especially when compared to its competitors. Between October 2022 and February 2024, the company had secured US$101 million. Although Stability employed more than 190 people, its smaller competitor, the France-based 51-employee-strong Mistral, raised US$537 million between June 2023 and February 2024. Similarly, a German firm, Aleph Alpha, which only employed 84 people, has raised US$641 million. 

By the end of 2023, Mostaque had hoped to raise US$95 million. However, Intel funding could only provide US$50 million. As discussed, even that US$50 million could not be disbursed in cash. Apart from NVIDIA, an apparent investment from Google also did not materialize. 

Click here to learn what makes AI a jack of all trades.

Is Stability AI Filing for Bankruptcy?

Although there is no concrete proof yet of Stability AI's inclination to file bankruptcy, several pieces of information and analyses floating in the market require careful inspection. 

The VC fund Lightspeed was the first to raise alarms about the financial status of Stability, especially its weak cash flow. It urged Stability to sell off its business. However, that could not happen due to the non-availability of a qualified buyer. 

In December 2023, Stability AI decided to start charging its commercial customers. According to reports, the company decided to step away from its open-source model and brought its most efficient AI models behind a paywall. Enterprise customers could access it via monthly subscriptions. 

Beginning this year, Stability undertook a series of measures to fortify its position. The company released Stable Code 3B to address the needs of AI-powered code generation. In collaboration with Immerso A, it introduced supercomputing capacity to Immerso AI Park. Additionally, Stability introduced a smaller and more efficient language model of 1.6B and launched SVD 1.1, a diffusion model for more consistent AI videos. Following the success of Stable Diffusion, its new model, Stable Cascade, showed promises of becoming Gen Ai's next flagship product for text-to-image generation. Moreover, Stability upgraded and launched its synthetic media engine to Stable Diffusion 3. 

Amidst all these achievements, Stability also kept facing hurdles. Midjourney banned Stability AI employees from accessing its models over data scraping allegations. Amongst staff exodus, its CEO stepped down, and as we saw in the very beginning, it could hardly pay for its rented infrastructure. Yet, no decision could be reached at the time of writing this article on the provider's willingness to declare bankruptcy. 

After Emaad's exit, the company said it was “actively searching for a permanent CEO to build upon Stability AI's foundation and lead the company into its next phase of growth.” It also stressed the leadership change as an “opportunity for Stability AI, the management team, Board of Directors, and investors in a shared commitment to realize the full vision for the company's next stage of growth.”

Overall, only time will tell whether Stability AI and its present leadership will live up to their promises.

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Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.