Let’s talk about why Elon Musk needs $6 billion for xAI

Either way, xAI isn’t Musk’s first AI rodeo. A cofounder of OpenAI, Musk left the company in 2018. Though there are conflicting accounts as to why Musk left OpenAI, with explanations ranging from Tesla conflicts to personal power struggles, one thing is certain—when Musk unveiled xAI, he had characteristically grand ambitions. The company’s objective is nothing less than to “understand the true nature of the universe” and, as he tweeted in July, to “understand reality.”

If you take these lofty goals at face value, perhaps $6 billion isn’t too much to ask for such breakthroughs. In the context of what it takes to develop even the most advanced of today’s most AI models however, $6 billion is an astounding amount of money.

For Greg Osuri, the founder and CEO of computing resources marketplace Akash Network, the giant sum is a clue that Musk could be planning to go “full stack”—that is, to control all the elements of an AI system, from the LLM software to the computing power hardware necessary.

Instead of relying on Alphabet, Amazon, or Microsoft datacenters (as OpenAI and Anthropic do), Musk could build, own, and operate his own datacenter with $6 billion, at least for a few years, said Osuri. Could Musk be thinking even bigger, and want to produce his own chips for the datacenters? Probably not, Osuri reckons. That’s what makes the $6 billion figure so “interesting.”

“It’s too small a price for [chip] production, too big for a [LLM] training run,” he said. “You can do a lot of training with $6 billion, but it’s not enough to have your own [chip] foundry.” 

So if Musk is raising capital, who exactly would he be raising $6 billion from? Per the FT, the answer lies in massive investors (likely sovereign wealth funds) in the Middle East and Asia. Per Musk, the answer is no one—“I have had no conversations with anyone in this regard,” his X statement reads. 

Musk’s options among U.S. VCs are limited—and for reasons that have nothing to do with the messy Twitter saga. Many VCs have already staked their claim elsewhere. OpenAI has raised $11.3 billion, according to Crunchbase, and it’s a star-studded cap table. Khosla Ventures was a seed investor, while Sequoia Capital, Andreessen Horowitz, Thrive Capital, and K2 Global have all reportedly bought shares in OpenAI. 

And xAI is expressly built to be an OpenAI competitor, which makes it tricky for Musk to pursue deals with old allies (like, say, Marc Andreessen, who helped back his Twitter takeover). 

“It gets tough because within a portfolio, the idea is that you’re trying to do your best by founders and LPs, and that’s done by avoiding conflicts of interest, especially when large sums of capital are involved,” Madeline Darcy, founder and managing partner at Kaya Ventures, says. “If you invest in too many competing companies, Partner A is going to one board meeting, Partner B is going to another, and then they’re going to inevitably get together on Monday to talk about the portfolio.”

Still, Musk has been recruiting a team to stake his AI claim—his xAI inner circle includes executives from Google’s DeepMind, Microsoft, and Tesla. Morgan Stanley appears to be in too; the bank helped fund Musk’s Twitter acquisition and is reportedly now involved in the xAI fundraising process. (Reached by Fortune, Morgan Stanley declined comment.) 

I find myself thinking about the Wild West, probably because I’m watching HBO’s Deadwood—a profane but Shakespearean show about the constantly shifting power dynamics in a frontier town. The third and final season asks the question: Who is best positioned to win in a gold rush? Is it the person who stakes their claim first, and has a jump-start surveying the land? Or is it the well-connected businessman who shows up to the marketplace later, with money, resources, and influence?

I’m only halfway through Season 3, so I don’t know how it ends.

One more thing…Term Sheet is partnering with Semaphore again for its 16th annual confidence survey of private equity, venture capital, hedge fund, and other professionals. For the curious, a preliminary result: So far, the U.S. House has a 1% confidence rating, while the U.S. Senate has 9% confidence. We’d love for you to weigh in; it’s anonymous and should take you 3–4 minutes. You can take the survey here. Have a look at last year’s results here, here, and here.

See you tomorrow,

Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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Joe Abrams curated the deals section of today’s newsletter.

VENTURE DEALS

- Transmutex SA, a Geneva, Switzerland-based nuclear engineering company, raised $23 million in a Series A extension. Union Square Ventures and Steel Atlas led the round and were joined by At One Ventures, HCVC, AlleyCorp, and others.

PRIVATE EQUITY

- Vista Equity Partners took EngageSmart, a Braintree, Mass.-based provider of customer engagement software and integrated payments solutions, private for $4 billion. 

- SmartBear, backed by Vista Equity Partners and Francisco Partners, acquired Reflect, a Philadelphia, Pa.-based AI-powered no-code testing platform for web applications. Financial terms were not disclosed.

- Summit Hydraulics, a portfolio company of North Branch Capital, acquired Tubing & Metric Hydraulics, an Alvin, Texas-based supplier of hydraulic and industrial hoses. Financial terms were not disclosed.

EXITS

- Ansys agreed to acquire a minority stake in Humanetics, a Farmington Hills, Mich.-based producer of crash dummies and other safety solutions for automobile manufacturing, space missions, and other applications, from Bridgepoint Group. Financial terms were not disclosed.

OTHER

- Autodesk (NAS: ADSK) agreed to acquire Payapps, a Melbourne, Australia-based provider of construction payment and compliance management solutions. Financial terms were not disclosed.

IPOS

- BrightSpring Health, a Louisville, Ky.-based healthcare services provider, plans to raise up to $960 million in an offering of 53.3 million shares priced between $15 and $18. The company posted $8.4 billion in revenue for the year ending September 30, 2023. KKR and Walgreens back the company.

- ArriVent BioPharma, a Newtown Square, Pa.-based biotech company developing cancer medicines, raised $175 million in an offering of 9.7 million shares priced at $18. Lilly Asia Ventures, Octagon Capital Advisors, OrbiMed, Shanghai Allist Pharmaceuticals, Sofinnova Venture Partners, Hillhouse Investment Management, and Sirona Capital Partners back the company.