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Elon Musk’s xAI Gets $18 Billion Valuation

When OpenAI released ChatGPT in 2022, it kicked off a generative AI race, with every company out there investing billions of dollars to stay in the race and keep up with the latest generative AI technologies, and the AI race is far from over. News broke recently that Tesla’s (NASDAQ: TSLA) Elon Musk is reportedly raising an impressive $3 billion in funding for his AI startup, xAI, from trusted investors close to him, valuing the young company at a whopping $18 billion already.

According to people familiar with the matter, the venture-capital firm Gigafund, and Steve Jurvetson, one of Musk’s most prominent backers and co-founder of another venture firm, are among the backers considering investing in the round.

xAI’s Plans

Last year, Bloomberg Intelligence reported that generative AI would become a $1.3 trillion market by 2032, from a market size of just $40 billion in 2022. Therefore, it’s really no surprise that companies, whether they’re tech companies or not, are placing their bets on this technology. One of these companies is Musk’s AI startup, xAI, which was founded just one year ago. xAI has its own chatbot, Grok, which is seen by many as a ChatGPT competitor.

Now, Musk is reportedly seeking to raise $3 billion for xAI, and this fresh injection of cash will give xAI the resources it needs to expand its AI engineering teams and boost its computing power, which will undoubtedly give Grok a massive opportunity to dominate the generative AI space. Before the Wall Street Journal reported the news, user @charity_trades on X, who often talks about Tesla’s future outlook, tweeted that he received an invitation to invest in xAI at a $20 billion valuation. The invitation said that the current funding round is already oversubscribed by top-tier funds and institutional investors.

User @charity_trades’ tweet and more details on the invitation.

It also talked about the existing synergies between X, Tesla, and xAI, saying that xAI has access to X’s 550 million monthly active users for both training data and distribution, and that xAI is already leveraging resources and expertise from Tesla.

Musk’s track record and synergies between xAI, Tesla, and X.

It was revealed recently that Tesla machine-learning scientist, Ethan Knight, left the car company to join xAI, and he wasn’t the first, as other Tesla engineers left to join the AI startup instead. This was seen as a clear conflict of interest when it happened, but maybe that was all part of Musk’s plan to integrate the two companies together. According to people familiar with the matter, terms of the xAI fundraising haven’t been finalized and the plans could change.

How will xAI Compete?

While competitors like OpenAI and Google (NASDAQ: GOOG) entered the market first with their own AI bots, Musk is confident that xAI’s technology and unique approach gives Grok the potential to surpass current market leaders. This is because Grok has what all these other companies don’t: access to probably the most important dataset for training any large language model for human use. X is one of the world’s richest sources of data for training an AI model, as it contains millions of human interactions, as well as important sources of info that are being constantly updated by its millions of users.

Many might say that Grok still has a long way to catch up with ChatGPT, but Grok has already made a lot of progress since its preview release just five months ago, and it’s constantly being updated. Musk is also no stranger to defying expectations and toppling incumbents. For instance, when Tesla first entered the auto market, critics scoffed and said it could never compete with traditional auto manufacturers, and yet, Musk proved them all wrong by out-innovating the competition and capturing huge market share.

Musk is confident that history will repeat itself with xAI, and it all starts with Grok’s technology. xAI recently unveiled Grok 1.5, which demonstrates massive improvements over the first version. In particular, Grok 1.5 will excel at math, logic and coding. In addition to that, Grok 1.5 will be near GPT-4’s performance, which powers ChatGPT.

In important benchmarks, Grok came very close to achieving GPT-4’s scores, and it even surpassed ChatGPT on the benchmark for mathematical problems, scoring 90% while ChatGPT scored 67%. This means that Grok will likely be better than ChatGPT when it comes to solving mathematical problems. Considering ChatGPT’s capabilities on just a GPT-3 foundation, this is an extremely promising sign that Grok can overtake ChatGPT once running on a model similar to a GPT-4 model itself. Beyond benchmarks, Grok 1.5 handles documents with 16 times more contextual information than before. This allows more nuanced conversations and understanding of complex relationships.

xAI also open-sourced Grok, inviting collaboration to accelerate development. This aligns with Musk’s motivation since co-founding OpenAI then founding xAI – to develop AI safely for humanity’s benefit. Overall, the stage is set for Grok to achieve superior performance to ChatGPT. xAI has access to data and engineering talent, all it needs is the necessary funding to develop Grok even more, and that’s why the company might be raising money now.

What this Means for Tesla

Many analysts and investors are saying that Musk should focus on only Tesla and have other people worry about xAI and X, but the success of xAI can actually really help Tesla and boost the company’s stock. Since xAI is supposedly raising funds, Tesla definitely needs to get in and invest a substantial amount of money in the company to acquire an equity stake in it.

This will stop the “conflict of interest” narrative with all the Tesla engineers moving to xAI, and will also open the door for collaborations between the two companies. For instance, new Tesla cars could come with Grok installed for drivers to use it, maybe even by speech rather than text. A collaboration between the two companies could also result in adding a new feature to Tesla’s FSD system, like a conversational system that can talk to drivers about the best routes to take to avoid bad traffic. Think of it as AI-powered GPS.

Tesla acquiring a stake in xAI will also help Musk develop AI confidently in Tesla, as he has said that he wasn’t comfortable making Tesla the next big AI thing if he didn’t have 25% of the company, but Tesla’s board agreeing to invest in xAI is also a really great incentive. Tesla could even pay Musk for a stake in xAI in the form of more Tesla shares, getting him to a higher ownership percentage, and this would honestly be a win-win situation for the two companies.

Any, or all, of these scenarios would definitely give a boost to Tesla stock. But, it won’t be just Tesla that xAI would be helping, but also X. Last fall, Musk tweeted that X investors own 25% of xAI, so extra funding for the AI startup that values it at nearly $20 million could add nearly $5 billion to X’s valuation.

Musk saying that X investors will own 25% of xAI.

All of this sounds extremely exciting, but investors should wait for Musk to confirm whether xAI is actually raising capital or not. It’s important to note that he has denied that the company was raising money in the past, so it could still be the same case here. Elon himself is open to the idea of Tesla investing in xAI, as shown in a tweet he made when he was asked about a potential deal between Tesla and xAI that would give Tesla a stake in the AI startup, as well as access to Grok AI going forward, he said that he’ll discuss this with Tesla’s board.

Musk’s response to a potential partnership between xAI and Tesla.

But, that doesn’t mean Tesla’s board would like the idea, so if Musk really wants this to happen, he’d need to convince them somehow. If xAI succeeds, it will be a boon for tech pioneers like Musk who kept their ambitions for AI positive and grounded in wisdom. The world needs this technology controlled by leaders who will guide it toward uplifting humanity.


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