Stability AI Explores Sale Amid Investor Pressure; Coatue Management Calls for CEO’s Resignation

London-based artificial intelligence startup Stability AI, known for its Stable Diffusion image generator, is reportedly exploring a potential sale as investor pressure mounts over its financial position. The company has engaged in preliminary talks with multiple potential acquirers, though a deal is not imminent, and Stability may opt to end the process without selling, according to sources familiar with the matter.

Investor Tensions and CEO Resignation Demand

Stability AI, once a venture capital favorite, is currently facing heightened tensions with some of its largest investors, including Coatue Management. Coatue, which led a funding round valuing Stability at $500 million initially, has called for the resignation of Stability’s CEO, Emad Mostaque, in a letter to management. This demand follows a funding round that ultimately pushed the startup’s valuation to $1 billion. Coatue expressed concerns about leadership and management under Mostaque, citing departures of senior managers and the startup’s precarious financial position.

In response to these claims, a spokesperson for Stability AI defended Mostaque’s leadership, stating, “Our CEO’s leadership and management has been instrumental to Stability’s success,” and emphasized that recent investments reflect investor confidence in the company’s potential in the rapidly growing AI market.

Exploration of Potential Buyers

Stability AI has reportedly presented itself as an acquisition target in recent weeks, initiating early-stage discussions with various companies. However, a conclusive deal is not currently in sight, and the startup may opt to conclude the sale exploration process without finalizing a transaction.

Among the companies approached for potential acquisition was Cohere, a Canadian startup focused on developing technology for other businesses to create their own AI products. Cohere reportedly declined to engage in talks. Stability also approached Jasper, an AI startup specializing in software for creating marketing materials.

Financial Landscape and Recent Investments

Stability AI raised $101 million in 2022, reaching unicorn status with its software capable of generating striking images based on prompts. In October, the company secured an investment of nearly $50 million from Intel Corp in the form of a convertible note. The startup has been actively spending on business expansion, reportedly allocating around $8 million per month on bills and payroll, while its revenue in August stood at $1.2 million, with an anticipated increase to $3 million in the current month.

The company’s controversial image generation tools, such as Stable Diffusion, have been utilized to create realistic yet manipulated images, raising concerns about the proliferation of deepfakes.

Investor Inquiries and Intel Partnership

Coatue’s letter to Stability’s management, sent in late October after the Intel investment, reportedly included inquiries about executive pay details. Stability AI has faced challenges with senior hires departing due to organizational issues under Mostaque’s leadership.

Intel, describing Stability AI as its “anchor customer” for a new AI supercomputer in September, made a subsequent investment contingent on the startup using Intel processors. Stability AI’s spokesperson denied any specific hardware or cloud service contingencies related to the capital received.

As the situation evolves, Stability AI’s exploration of a potential sale reflects the complex dynamics between the startup and its investors, emphasizing the challenging landscape faced by companies navigating growth, financial stability, and leadership concerns in the competitive AI sector.

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