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Stability AI Gets Intel Backing in New Financing

(Bloomberg) -- Stability AI has raised new financing led by chipmaker Intel Corp., according to people familiar with the matter — a cash infusion that arrives at a critical time for the company.

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Stability, the artificial intelligence startup best known for the popular Stable Diffusion image-generating software, raised just under $50 million in the form of a convertible note in the deal, which closed in October, said the people, who asked not to be identified discussing private information.

A Stability spokesperson said in a statement that it had “received repeated interest over the last few months in fundraising from both major venture capital and strategic investors.” In a post Tuesday on X, formerly known as Twitter, Stability Chief Executive Officer Emad Mostaque said, “We closed strategic funding ourselves last month (announcements soon).”

Intel declined to comment on the financing. The deal was completed after the chipmaker announced in September that it was building an AI supercomputer using its Xeon processors and 4,000 Gaudi2 AI processors, and described Stability as the “anchor customer.”

The news follows a challenging period for Stability, which has recently shed more than a half dozen senior employees, including the head of human resources, Bloomberg earlier reported. Stability said in a statement that turnover is normal at a startup.

The company has also had disagreements with some of its board representatives. Coatue Management, a major backer, had issues with Mostaque’s leadership, according to people familiar with the situation who asked not to be identified because the talks were private. Coatue at one point had sought to add a co-CEO or president, according to a person familiar with the discussions.

Read More: Stability AI Is Losing Executives, Engineers and Its Edge

A representative for Coatue declined to comment on its relationship with the startup. In a statement, a Stability representative said, “We value our board members and respect their counsel and experience,” saying that the board “continues to help us with our product roadmap and future direction.”

Earlier this year, Coatue general partner Sri Viswanath, who sat on Stability AI’s board, didn’t attend a board meeting, people said, and a Coatue lawyer attended the meeting in his place. A representative for Coatue declined to comment on the meeting and Viswanath did not respond to requests for comment.

In October, Coatue left Stability AI’s board, said a person with knowledge of the matter, who asked not to be identified because the exit wasn’t publicly announced. The departure was because of Intel’s investment in Stability, one person said. Coatue holds a large stake in Advanced Micro Devices Inc., an Intel competitor. Coatue, which still holds a $50 million stake in Stability according to multiple people, reported its stake in AMD as recently as August in a filing with the US Securities and Exchange Commission.

Another investor, Lightspeed Venture Partners’ Gaurav Gupta, recently left his role as a board observer at Stability AI amid differences of opinion with management over the direction of the company, according to people with knowledge of the matter. A Lightspeed representative declined to comment on behalf of Gupta and the firm.

A Stability spokesperson said, “We do not disclose information about confidential board business or engage in harmful speculation.”

Last October, Stability AI announced a $101 million seed round, valuing it at $1 billion and making it a unicorn in startup parlance. Since then, the company’s growth has hit snags. It sought to raise cash at a much higher valuation, but a new round didn’t come to fruition. In the spring it raised a relatively small convertible note from investors, compared with its earlier funding round, Bloomberg reported in June.

The London-based startup is spending millions of dollars per month, according to two people with knowledge of the matter, who asked not to be identified discussing private information. It’s paying roughly $8 million per month for expenses such as computing costs and worker salaries, they said. At the same time, it’s bringing in a fraction as much in revenue, these people said.

In a July statement to Bloomberg News, Mostaque said that Stability’s projected annual revenue was more than $10 million as of October 2022, but that this number has fallen as the company has focused increasingly on research and development. On Wednesday, the company said its revenue has risen “tenfold over the last year” and that it’s on target to increase revenue further by the end of the year as it puts out more products.

Mostaque has at times been a controversial leader. People who have worked with Stability said the CEO has made statements that defy belief. And Mostaque has presented blue-sky conversations about partnerships and products as sure things long before reaching actual agreements. The company was also sued by a co-founder, Cyrus Hodes, who alleged he was tricked into selling his shares for cheap shortly before Stability cinched its billion-dollar valuation. The startup has said the suit is without merit.

On X, Mostaque recently celebrated a Stability milestone. “Just started Year 3 of Stability AI as a generative AI company. What a two years it has been,” he posted, adding a melting-face emoji. “Lots of announcements in the coming weeks…”

Earlier this week, he struck a hopeful tone in posts about financing, writing, “I hope we can all stay sane & build great stuff that helps everyone.”

--With assistance from Ian King, Mark Bergen, Hannah Miller, Edward Ludlow, Jamie Tarabay and Katie Roof.

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©2023 Bloomberg L.P.

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