Musk’s xAI wants $12 billion more for AI infrastructure
In the AI arms race with OpenAI, Google, and Microsoft, Elon Musk’s xAI wants $12 billion more to lease Nvidia chips for Colossus 2, a second AI data center. Elon Musk is leveraging all available funding avenues to maintain competitiveness in the highly competitive artificial intelligence sector. Just weeks after his AI company secured $10 billion through a combination of equity sales and debt financing, the firm is now targeting an additional capital raise of up to $12 billion. Recent reports indicate that the new funding is being organized with the assistance of a long-time ally.
Valor Equity Partners, an investment firm established by Antonio Gracias, recognized for his strong ties to Musk, is reportedly engaged in discussions with lenders to secure new capital. The funds are anticipated to be allocated towards the acquisition of a substantial inventory of Nvidia’s cutting-edge chips. The chips would subsequently be leased to xAI for the establishment of a large-scale data centre, facilitating the training of its AI chatbot, Grok. In order to effectively compete with dominant players in the technology sector, Musk is endeavoring to amass substantial financial resources. Grok has not achieved the same level of popularity as OpenAI’s ChatGPT and has recently encountered criticism for disseminating offensive and racist content on X. The firm subsequently issued an apology for the “horrific behaviour”.
Negotiations are currently in progress, with a final agreement anticipated in the near future. However, sources familiar with the situation indicate that there remains a possibility of the deal not materializing. The magnitude of the loan and the schedule for repayment represent critical points of contention. Certain lenders are advocating for a repayment period of three years and are seeking to cap the total amount borrowed in order to mitigate their risk exposure. The depreciation of AI chips can occur rapidly with the introduction of advanced models, alongside additional risks such as declining demand or potential challenges faced by xAI.
Given the constraints on xAI’s financial resources, Musk has been employing innovative strategies to secure funding. SpaceX, a company under his ownership, has recently allocated $2 billion to xAI, effectively reallocating capital from one of Musk’s ventures to another. Additionally, when xAI borrowed $5 billion in June, it utilized Grok’s intellectual property as part of the collateral, according to individuals familiar with the transaction. Given that the development and training of large AI models necessitate substantial financial resources, xAI may need to secure additional funding in the foreseeable future. In contrast to rivals like OpenAI and Anthropic, which collaborate with cloud service providers to mitigate expenses, xAI has opted to develop and operate its own infrastructure.
Cash is exiting xAI at a pace nearly equivalent to its inflow. Financial documents disseminated to prospective lenders earlier this year indicated that the firm was poised to allocate approximately $13 billion in 2025. The startup is presently operating at a loss and produces negligible revenue. xAI is now considering a more intricate funding strategy, which entails leasing chips instead of purchasing them outright. While this may alleviate certain short-term financial pressures, it simultaneously establishes enduring commitments. Notwithstanding the obstacles, Musk’s historical performance continues to instill a sense of assurance among a significant number of investors. His achievements in the realms of rockets and electric vehicles provide a glimmer of optimism that xAI’s unorthodox approach could yield favorable outcomes. Numerous supporters are of the opinion that Musk would intervene to bolster xAI by leveraging resources from other segments of his business empire, if required.
The firm established its inaugural large-scale data center in Memphis, Tennessee, known as Colossus, in a mere 122 days. It initially housed 100,000 Nvidia GPUs, positioning it as one of the most substantial AI chip clusters in the world. In a mere 92 days, the facility expanded its capacity to accommodate 200,000 GPUs. “That is like superhuman, and as far as I know there’s only one person in the world who could do that,” remarked Nvidia CEO Jensen Huang during a podcast last year. “Elon possesses a unique comprehension of engineering, construction, and large systems, as well as the ability to effectively marshal resources.”
Plans are underway for the establishment of a second large-scale data centre. xAI intends to deploy one million chips for Grok. To fund its second, even larger data centre – Colossus 2 – it is once again seeking support from Valor. The firm has previously allocated capital to Musk’s ventures, including SpaceX, Tesla, The Boring Company, SolarCity, and Neuralink. Valor and other private equity investors are anticipated to inject their own capital into a financing framework that would subsequently leverage billions more from private credit sources. The repayment of the loan will be facilitated through the fees that xAI incurs for the utilization of the chips. In the event that the firm defaults on its obligations, lenders would possess the authority to reclaim the chips.
The $5 billion corporate debt issued by xAI recently comprised bonds and loans secured by assets such as data centres, Nvidia chips, and the Grok codebase. The bonds offer a substantial yield of 12.5 percent. In the event of xAI defaulting, lenders would possess the opportunity to lease Colossus to alternative AI enterprises and could additionally assert rights to Grok, which is incorporated into various other Musk initiatives. Given the stipulations of this financing arrangement, xAI is permitted to incur an additional $5 billion in corporate debt, not accounting for any chip lease agreements.
