On Tuesday local time, according to the Wall Street Journal, Musk approached private equity firms seeking up to $12 billion in financing for xAI.
Insiders revealed that following the $10 billion raised through stocks and debts by xAI, a startup under Musk’s ownership, it is collaborating with a credible financial partner to seek another round of financing of up to $12 billion to propel its ambitious expansion plans. Antonio Gracias, founder of investment firm Valor Equity Partners, who has close ties with Musk, is negotiating financing with lenders.
The funds will be used to purchase a large number of advanced Nvidia chips and lease them to xAI, which aims to establish a super-large data center to train and operate its AI chatbot Grok.
Facing financially robust competitors like Google, Microsoft, and Meta, Musk needs as much funding as possible to maintain his competitive edge. Compared to ChatGPT from OpenAI, Grok’s influence is far less significant, and its image was damaged earlier this month after posting racist and controversial comments on social media platform X. xAI has since issued an apology for these actions.
Given xAI’s tight financial situation, Musk has had to seek innovative ways to raise funds. For example, SpaceX recently invested $2 billion in xAI, effectively transferring funds from one Musk-owned company to another. Additionally, to secure $5 billion in debts raised in June this year, xAI mortgaged its most valuable asset—the intellectual property behind Grok—as collateral.
Considering the substantial expenses required to train large AI models, xAI may still need to continue raising funds in the coming months.
Unlike startups like OpenAI and Anthopic, xAI did not collaborate with large cloud computing companies but instead built and operated its own AI infrastructure.
Almost as soon as xAI’s cash was received, it was spent. Insiders revealed that xAI had indicated to potential creditors that the company expected to burn approximately $13 billion in cash by 2025. xAI has yet to achieve profitability, with revenue being extremely limited.
By leasing chips through a complex debt structure, xAI could potentially reduce billions of dollars in expenses, but this would also entail ongoing financial obligations.
Musk’s success has brought substantial returns to many shareholders and creditors. Some investors believe that if needed, Musk could utilize other parts of his business empire to assist xAI.
xAI constructed its first massive data center “Colossus” in Memphis, Tennessee, within 122 days, initially equipped with 100,000 NVIDIA GPUs, becoming one of the largest AI chip clusters globally. Just 92 days later, it expanded to 200,000 GPUs.
Nvidia CEO Jensen Huang stated: “This is almost like something out of a superhero’s book. In my opinion, only one person can do this—Elon (Musk). He understands engineering, construction, large systems, and resource allocation better than anyone else.”
xAI plans to eventually deploy up to 1 million chips for Grok. To build a larger second data center “Colossus 2,” xAI once again seeks support from Valor. Valor’s funds have invested in several companies under Musk, including SpaceX, Tesla, SolarCity, The Boring Company, and Neuralink.
Valor will partner with other private equity investors to establish financing vehicles and borrow billions of dollars from private credit funds for chip purchases. The interest and principal on the debt will be repaid by xAI through chip rental payments, and in the event of default, the lender can recover the assets.
Valor is negotiating with a group of funds, hoping to reach an agreement within the coming weeks, but the transaction could still fail. The key aspect of the negotiations currently lies in the loan amount and repayment terms. Some lenders are seeking to settle the debt within three years and have set a borrowing cap to manage risks. Due to the rapid depreciation of AI chips, which is driven by rapid technological updates, potential reductions in data center demand, or challenges faced by xAI, there is concern about the viability of these investments.
xAI’s recent issuance of $5 billion in corporate debt includes bonds and loans secured by data centers, Nvidia chips, and Grok code, with yields as high as 12.5%.
Should xAI default, lenders would have the right to lease Colossus data centers to other AI companies and could claim rights over cutting-edge AI models integrated into Musk’s other enterprises.
Furthermore, after this round of debt financing, xAI’s future borrowing capacity is limited to an additional $500 million, excluding debt related to chip rentals.