Elon Musk’s artificial intelligence company, xAI, is gearing up to participate in a funding round that could value the firm at approximately $40 billion according to involved in the negotiations.

The sources spoke in condition of anonymity to the Wall Street Journal and provided key details about the discussions between xAI and its top financial backers. Earlier this year, the firm raised $6 billion at a valuation of $24 billion to work on its generative AI model Grok.

The report highlighted that negotiations are still at an early stage, which means that the terms and conditions of the deal could change at any given point.

xAI Needs Money to Compete with the Sector’s Current Incumbents

By enlarging its war chest, xAI could be getting much-needed ammunition to compete with titans of the industry like OpenAI and Anthropic, both of which have been financed by top names in the tech space like Alphabet (GOOG), Amazon (AMZN), and Microsoft (MSFT).

OpenAI, the Microsoft-backed company behind the popular generative AI model ChatGPT, recently raised $6.6 billion earlier this month at a jaw-dropping $157 billion valuation, making it one of the largest private funding rounds ever.

Meanwhile, another AI startup called Perplexity is seeking to raise $500 million at an $8 billion valuation.

Musk, who co-founded OpenAI in 2015 before leaving a few years later, has positioned xAI as an alternative to OpenAI and other prominent companies in this nascent space.

He has been critical of OpenAI’s approach to the development of this technology and even sued the company in federal court over as it allegedly prioritized the commercialization of its models instead of helping the industry advance via open-source software as the firm’s original mission intended.

Musk’s AI Company Built a Large Super Computer in Tennesse to Handle its Workloads

Since Musk announced the launch of xAI in July 2023, the startup has made significant strides the development of AI capabilities and infrastructure.

One of xAI’s key accomplishments was the construction of a massive data center in Memphis, Tennessee. The facility houses 100,000 advanced Nvidia graphics processing units (GPU), making it one of the world’s largest supercomputers dedicated to AI training.

Nvidia CEO Jensen Huang praised the speed with which xAI built the Memphis data center, describing it as “easily the fastest supercomputer on the planet.” Musk said the data center will soon double in size to 200,000 GPUs.

“If you’re training a frontier model, you need a massive amount of compute,” Musk said recently while speaking at a conference in Saudi Arabia.

The startup has also made progress in the development of its flagship AI model – Grok. In August, xAI expanded Grok’s capabilities to include image generation. However, this feature was criticized for allowing users to generate images of real people like Donald Trump and Kamala Harris.

The only known revenue source for xAI at the moment is the X Premium subscription, which includes access to the Grok chatbot. However, last week, the company released a tool that allows developers to build applications by using Grok. This could potentially open up new commercial and growth opportunities to the startup.

Still, xAI is far behind industry leaders like OpenAI and Google when it comes to the sophistication and adoption of its AI models. OpenAI’s ChatGPT, for instance, has captured the attention of millions and is being used by both individuals and institutions already to enhance and automate processes, produce content, come up with recipe recommendations, and many other purposes.

Musk has acknowledged that xAI has been in catch-up mode relative to its competitors but he emphasized that the company’s goal is to build the “most truth-seeking” AI system.

Musk has reportedly used the resources of other companies he owns to finance his vision for xAI. This has raised concerns among investors about potential conflicts of interest.

Moreover, the company has been hiring engineers and other professionals from Tesla (TSLA) and SpaceX and Musk has opted to divert thousands of Nvidia chips to the AI company instead of supplying them to Tesla.

Considering how scarce these chips are, this is a move that could endanger the financial performance of the electric vehicle maker.

Sources also report that xAI has been negotiating a deal with Tesla (TSLA) to receive revenue in exchange for providing access to its advanced AI model to enhance the technological features of the firm’s EVs.

These arrangements could result in legal issues for Musk as shareholder’s interest may not be aligned with his personal ambitions.

Musk has argued that xAI’s work has been “helpful to Tesla AI quite a few times in terms of things like scaling up.”

AI Startups Raise $19 Billion in Q3 2024

If xAI successfully raises money at this higher $40 billion valuation, it would send an important signal to its competitors that things are getting serious. The fresh funding would give the company more than enough resources to fine-tune its software and infrastructure.

According to data from Crunchbase, AI companies raised nearly $19 billion in funding during the third quarter of 2024. This figure accounted for 28% of all venture capital funding deployed during that period.

ai startups keep raising billions this year

In total, six AI companies raised more than $1 billion during this period, including OpenAI’s massive round.

Musk and his team will need to show investors that they have made significant progress in areas like model performance, scalability, and real-world application to justify this higher price tag.

The company also has to deal with increased regulatory scrutiny and the public’s concerns about the societal impacts of advanced AI systems.

That said, Musk’s track record of building transformative technologies and the world’s seemingly insatiable demand for cutting-edge AI, xAI seems poised to become a major player in this rapidly evolving space.

The amount raised by the company and the corresponding valuation would provide evidence of how advanced xAI is in its vision to deliver on its promise of developing a safe, efficient, and trustworthy AI model that would benefit mankind.