A star company with a valuation of 29 billion yuan has broken its capital chain

Is the first fallen generative AI unicorn to appear?

Recently, Stability AI was revealed to be facing a broken capital chain and may be about to go out of business. Stability AI is one of the star companies in the AIGC tuyere, and the Stable Diffusion model developed by it is now one of the most popular Wensheng graph models.

However, Stability AI has been operating beyond its means since its inception. According to reports, Stability AI had less than $5 million in revenue in the first quarter of this year, but lost more than $30 million, and currently owes $100 million in bills to providers such as cloud services.

On May 17, a spokesperson for Stability AI said it was in talks with a number of investors to raise funds and that an exclusivity agreement had been signed. However, given the dramatic personnel turmoil at Stability AI in recent months, the funding outlook is less promising. At present, only individual investors such as Sean Parker, the former president of Facebook, are rumored to be involved in the negotiations, and there are no "deep pocket" institutional investors and industry parties who have expressed interest. The latest news is that Stability AI is actively looking to sell.

Without immediate access to financing and blood transfusions, Stability AI will soon be forced to shut down, making it the first major setback of this AI wave.

The star company fell suddenly

Founded four years ago, became popular two years ago, and now facing the crisis of bankruptcy, Stability AI's life is full of ups and downs.

Mostaque, the founder of Stability AI, has a unique background among AI startups. He holds a BA in Mathematics and Computer Science from the University of Oxford, but has no experience working in any tech company. Prior to founding Stability AI, he worked primarily in the UK hedge fund industry. In 2020, at the age of 37, Mostaque founded Stability AI in London using his savings as a hedge fund manager as start-up capital.

Having never worked as a programmer, Mostaque is an avid open source activist who believes that AI technology is too important to "allow a centralized entity to control the world's most powerful technology." However, Mostaque felt that the open-source AI community was "lacking in organization," so he felt the need to do something about it.

Mostaque founded Stability AI with the original intention of providing computing resources to support the development of open source AI technology. To that end, Stability AI operates a computing cluster of more than 4,000 NVIDIA A100 GPUs on the Amazon Cloud.

At that time, the wave of AIGC led by the diffusion model was on the eve of an outbreak. In August 2022, five researchers from the Ludwig Maximilians University of Munich and the University of Heidelberg published the first Stable Diffusion model, which was developed with computing power provided by Stability AI. Since then, 4 of the 5 developers of Stable Diffusion have joined Stability AI to continue the development of subsequent versions of Stable Diffusion.

Overnight, Stability AI rose to prominence. In October 2022, Stability AI announced the completion of a $101 million seed round of financing, reaching a valuation of $1 billion, crossing the threshold of unicorns in one fell swoop. Institutions participating in this round of financing of Stability AI include well-known VCs and hedge funds such as Coatue, Lightspeed Ventures, and O'Shaughnessy Ventures.

Since its release, Stable Diffusion has been one of the hottest Wensheng diagram AI models in the world, and it has been a standout with its main rival, Midjourney. After the completion of the financing, Stability AI has developed a number of new models to enrich its ecosystem. In September 2023, Stability AI released Stable Audio, a music and audio generation model. In November 2023, Stability AI released Stable Video Diffusion, a video generation model.

However, Stability AI's cash burn rate is also quite fast, and the $100 million seed round is completely insufficient.

Stability AI has not disclosed financial figures, but media reports in November 2023 said that Stability AI burns about $8 million a month. According to Information, Stability AI lost more than $30 million in the first quarter of this year, which is basically in line with the $8 million burned per month. This means that the $100 million seed round is only enough for Stability AI to spend a year.

In the second half of 2023, Stability AI was rumored to be planning a new round of financing, valuing it at about $4 billion (about 29 billion yuan at the current exchange rate). But there was no follow-up to this round of funding.

Entering 2024, Stability AI suddenly became turbulent, and a number of senior executives such as vice presidents and vice presidents of the audio business line left one after another. In March 2024, three members of the original development team of the Stable Diffusion model left Stability AI en masse, followed by the departure of Tyler Saltsman, head of strategic partnerships. A few days later, the company's founder, Mostaque, also announced his resignation. Stability AI was in turmoil for a while.

Commercialization is blocked, and investors are forced to the palace

So far, most startups in this round of AI competition have not been able to find an effective path to commercialization. The crisis of Stability AI has made the debate on AI commercialization even more intense.

Over the past two years, Stability AI has tried (or envisioned) a variety of commercialization models.

In a 2022 interview, Mostaque said that Stability AI plans to make money by customizing, training "private" models for customers, and acting as a common infrastructure layer. Mostaque added: "We have already signed a number of cooperation orders at the moment, and our profitability is unquestionable compared to most large companies that lose money. ”

Stability AI is also trying to add some targeted feature enhancements to Stable Diffusion to attract industry users. For example, in November 2023, Stability AI launched a tool called "Sky Replacer", which allows users to replace the sky background of an image. Mostaque claims that this is a tool with practical applications, especially in the real estate industry, because "sunsets or clear skies instead of cloudy days can enhance the visual appeal of a property to potential buyers".

The basic idea of Stability AI is that the open-source version of the model is free, and then the commercial version of the model is used to generate revenue. However, judging by the results, the commercialization efforts of Stability AI have had limited effect.

Many reports have pointed the finger at Mostaque himself. As the majority shareholder and CEO of Stability AI, Mostaque is somewhat ambiguous about commercialization. Mostaque has said he doesn't understand why generative AI startups talk about commercialization. Mostaque used the example of autonomous driving as an argument, saying that the autonomous sector has burned more than $10 billion and generated almost no revenue. In contrast, generative AI will create more economic value than autonomous driving, with "return expectations clearer than anything we've ever seen." After his resignation, an insider was quoted as commenting in the media: "Mostaque doesn't care about commercialization at all." ”

But as cash flow problems have grown, Mostaque's attitude has shifted. Heading into 2024, Mostaque said his focus this year will be on increasing revenue as the company's users have shifted from early adopters to mass enterprises. A month before his resignation, Mostaque also wrote on social media: "Our goal is to achieve positive cash flow this year, and I think we can achieve that sooner rather than later." ”

It's not hard to imagine that the pressure on Mostaque has increased over time. From the second half of 2023, Mostaque and investors have erupted into fierce conflicts. Cougue reportedly tried to remove Mostaque from work, but was unsuccessful. Since Mostaque is the controlling shareholder of Stability AI, it is basically impossible to stage a "coup" like OpenAI. Not only Coatue, but Lightspeed Ventures, another major investor, also wrote a letter to Stability AI's board in October 2023, claiming that Mostaque's mismanagement had "severely undermined" Lightspeed's confidence in the company, urging Stability AI to find a buyer to take over.

In this situation, it is not surprising that Stability AI's next round of funding has been delayed. On the other hand, Mostaque's resignation and departure from the company was also a turning point. An investor in Stability AI commented to the media on condition of anonymity that Stability AI actually has a very special and differentiated product, but it is operating poorly under Mostaque's helm. They are optimistic that the new CEO can clean up the mess.

The survival dilemma of open source model companies

Stability AI still has a glimmer of life, and it is not ruled out that there will be a "white knight" to come to the rescue. After all, Stable Diffusion is a good model.

However, whether or not Stability AI survives, the open-source AI model will probably suffer a major blow. Stability AI has always been the standard-bearer of the "open source" of AI. Stability AI's Stable Diffusion is completely open-source from code, data, and models, and users can download and use it for free. This is a far cry from the closed-source route of its main rival, Midjourney.

After the launch of Stable Diffusion, it was called the "mother of all models", which has indeed given birth to a rather prosperous open source ecosystem, which has led the development of AIGC to a certain extent. At present, the vast majority of Wensheng picture products on the market use Stable Diffusion or its derivative model. In terms of audience size, Stable Diffusion far surpasses closed-source models such as Midjourney and OpenAI's DALL-E.

However, Midjourney is far more successful than Stability AI when it comes to commercialization. With a monthly subscription fee of $10 to $120, Midjourney was able to generate $200 million in annual revenue, having already turned a profit last year. Stability AI has not found a good open-source business model. Investors' interest in the commercialization of Stability AI is also inseparable from the success of Midjourney.

In his resignation statement, Mostaque stressed that he left "voluntarily", but his "grievances" can still be seen between the lines. You can't beat a centralized product with a more centralized product, he said.

In the face of an existential crisis, it is not impossible for Stability AI to adjust its direction like OpenAI back then. In February 2024, Stability AI released Stable Diffusion 3. Many people have noticed that Stability AI only promises that Stable Diffusion 3 will be free for ordinary users this time, but does not mention open source again, which also raises some doubts.

Some time ago, Robin Li's remarks that "open source models will get more and more backward" sparked a big debate in AI circles. Many people disagreed with Robin Li's remarks, and Fu Sheng, chairman of Cheetah Mobile, immediately posted a video to refute: "The open source community will eventually defeat closed source." "This debate is bound to continue, and it is difficult to draw conclusions in the short term.

Theoretically, even if Stability AI fails, it doesn't mean that open source AI fails. Some of the enhanced models based on Stable Diffusion in the open source community are more powerful than Stable Diffusion 3 developed by Stability AI itself, and the vitality of the open source community is very strong.

It's just that for Stability AI, it is indeed embarrassing that it has fallen to this point in only two years after a blockbuster. Of course, as a pioneer of generative AI, Stablity AI has undoubtedly written a significant mark in the history of AI.