In December 2022, someone was looking for Emad Mostaque. The founder and CEO of Stability AI, one of the hottest startups in the nascent generative AI field, could not be found.
Even Mostaque’s wife, Zehra Qureshi, was not sure. She texted an employee, worried about Mostaque and noting that he’d left home in his pajamas.
Mostaque would soon reappear, brushing it off. But the bizarre episode hinted at a deeper dynamic destabilizing the AI unicorn. When Mostaque was gone, employees had to scramble to communicate with investors, who’d recently poured more than $100 million into the company and wanted to speak to their star founder. The relationship between Mostaque and Stability AI’s top investors, formed practically overnight, was vital to the company’s early success—even as it began to crack almost immediately. On Saturday, many months after a pressure campaign by investors to oust him had begun and questions about his credibility had been raised, Mostaque resigned from the company he founded.
It’s a stunning fall from grace for a founder who made headlines in 2022 when he nabbed a $1 billion valuation for his startup while raising its “seed” funding—the stage at which the median tech startup is typically valued at a mere $12 million, according to PitchBook.
While not a well-known name within the tech industry, Mostaque had emerged as one of the early players in the generative AI boom thanks to Stability’s role as the driving force behind Stable Diffusion, a powerful open-source AI model that could create images of almost anything a user could think of typing—space unicorns, Lego burgers, or sports cars that look like Van Gogh paintings. Stability’s first product was image editing software called DreamStudio that sat on top of Stable Diffusion and allowed people to more easily use the model.
And Mostaque’s pitch, that Stability AI provided an “open” alternative to privately held models like rival OpenAI, quickly attracted the backing of Coatue and Lightspeed Venture Partners, two of the tech industry’s most prestigious investors. “We believe in Emad Mostaque’s vision and we are thrilled to have led the funding round to support what is possible with AI,” Coatue partner and former Atlassian CTO Sri Viswanath wrote on LinkedIn in October 2022.
The story of how that relationship fell apart—to the point that in just one year, Coatue was demanding that Mostaque be fired—is a spectacular business debacle that may cost tens of millions of dollars, dozens of jobs, and the reputations of many of the principal actors involved. But the whirlwind romance that brought together top-tier investors and a startup in the tech industry’s most promising sector is also a reminder of the hype, FOMO, and dangerous delusions currently fueling Silicon Valley’s love affair with artificial intelligence.
This account is based on interviews with 20 Stability investors, former Stability and Coatue employees, and Coatue-backed founders—as well as hundreds of pages of documents, including lawsuit filings, balance sheets, pitch decks, business plans, and correspondence, reviewed by Fortune.
‘Going hard’
Mostaque’s relationship with Coatue and Lightspeed blossomed alongside Stability’s sudden rise from obscurity. In early August 2022, more than two years after Mostaque founded Stability, the company publicly unveiled its text-to-image generator. Within three days, more than one thousand people had joined Stable Diffusion’s Discord channel. Techies were enchanted.
And investors were taking notice. Approximately 10 days after the initial beta launch, Malachi Price, a member of Coatue’s investment team, sent Mostaque an email introducing himself. Foundational AI models, such as the one powering Stability’s product, had the potential to “democratize” and reinvent the way people work and create content, Price wrote. Many of the companies developing large language models for AI, however, were not truly open-source. “Given the move towards open source in the software space more broadly, this has been somewhat surprising,” Price said.
The pitch was well-received by Mostaque, whose pitch deck for the company at the time described Stability as the “only competitor” to image-generation models like OpenAI’s DALL-E 2. “Thank you for your thoughtful email,” Mostaque wrote back. “I am very impressed relative to some of the discussions I have had recently and echo some of your thoughts.”
In the summer of 2022, interest rates were still low and venture capital investments in tech were booming. Coatue, a hedge fund based in New York, had been on a binge in 2021, inking more than 150 VC deals that year, according to PitchBook data. The firm was easing up its deal pace in 2022, but generative AI technology had the kind of buzz that meant exceptions could be made.
Many of the biggest names in venture capital, including Andreessen Horowitz and Sequoia Capital, were interested in Stability, and Mostaque was taking meetings with all of them, according to someone with direct knowledge of the matter. As the meetings continued, Mostaque said in an email that he was flying to New York for a week to woo funds and family offices, and he bragged to people in his circle about the interest he was seeing from Sequoia’s Pat Grady and Shaun Maguire—and even Microsoft CEO Satya Nadella, according to messages seen by Fortune. But Coatue, in particular, was “going hard,” Mostaque confided to someone close to him. One of the first Coatue partners to meet with Mostaque following Price’s outreach was David Cahn. Mostaque, a former hedge fund manager, and Cahn hit it off. “I quite liked their macro approach and really liked David,” Mostaque said in an email to Fortune.
Within 10 days of the introductory email, Mostaque relayed to someone close to him that he already had a term sheet from Coatue. And in September, Coatue had agreed to invest $50 million at a $500 million valuation, according to messages from Mostaque and someone familiar with the matter. Lightspeed later joined as co-lead investor, and when the deal closed on Sept. 19, Mostaque had managed to scoop up $101 million in total funding at a $1 billion valuation. The unicorn valuation for such a young company, and the speed at which the deal was struck, was eye-popping, even by the standards of 2022’s red-hot VC market, although investors still had more than a month overall to perform due diligence on the investment. Investors reviewed a Notion document with data and information, reviewed Stability’s revenue figures, talked to customers, reviewed Stability’s compute contract with Amazon, did a background check on Emad, and had their own data science teams replicate numbers, according to two people familiar with the matter.
For Stability, the investment was a game-changer. Just weeks earlier, the company had been valued at $100 million from smaller investors and was racking up AWS compute bills as it hired employees remotely or from its London office (which sits atop a fried chicken shop). “It was very hand-to-mouth,” one former employee recalled, describing Mostaque’s efforts to raise money from family, friends, and “anybody who would listen to him.” Stability had a payments backlog with AWS, and it wasn’t until Coatue and Lightspeed stepped in that “everything was in order” and it was fully paid off, the person said.
‘We came out of nowhere’
An AI-generated image of a grinning Mostaque riding a unicorn in space was projected on a giant on-stage screen as the crowd whooped and hollered.
The real Mostaque was also on stage, wearing a baseball cap and T-shirt, mic in hand, at San Francisco’s Exploratorium for Stability AI’s launch party on Oct. 17, 2022. News of Stability’s $101 million seed round, at a whopping $1 billion valuation, had been announced that same day. A who’s who of Silicon Valley’s royalty, including Google founder Sergey Brin, angel investor Ron Conway, and AngelList cofounder Naval Ravikant, were all there to celebrate.
“Is Stability hype or real?” Mostaque asked the crowd. “A lot of you in this room are thinking that because, look, we came out of nowhere. We did a few things, and I think we flipped the world of artificial intelligence. And I think it might be more than that soon.”
It was a triumphant moment for Stability—there was an afterparty at the Tequila Mockingbird bar that involved dancing, one employee told Fortune. But the party was also a triumph for Coatue, and the event marked Stability’s darling status within Coatue’s portfolio. Coatue had footed the bill for a portion of the lavish party, two former employees say, and packed the event with “a large guest list.”
Coatue cofounder Thomas Laffont was among the revelers. His brother, Coatue cofounder Philippe Laffont, used Mostaque’s presentations as examples of excellence at least once, recalls one founder of another Coatue-backed AI company.
Sri Viswanath, a Coatue partner who was involved in the deal, joined Stability’s board after the funding round and took a hands-on role in hiring the company’s vice president of engineering and chief people officer, among others.
But it didn’t take long for tensions to intrude into the honeymoon. The collaborative relationship between the investors and the promising startup gradually morphed into something more akin to that of a parent and an unruly child as the extent of internal turmoil and lack of clear direction at Stability became apparent, and even increased as Stability used its funding to expand its ranks.
“There was literally no structure in place in the business at all,” says one former employee. In the London office, “one day [employees would] be working on a marketing strategy. Before that, they weren’t quite sure. And another day, they’d be working on something completely different.” That a sizable portion of Stability’s workforce was remote didn’t help.
Another employee said there was no clear sense of business strategy: “For a long time, they were just giving these models away for free and looking at ways to catch their revenue elsewhere,” they said. The company experimented with freemium or paid consumer products and paid APIs.
Dan Jeffries, an early advisor and briefly an executive at the company, helped shape Stability’s early strategy, according to someone close to Mostaque (as well as Mostaque’s initial email exchange with Coatue). But Jeffries contends that his suggested strategy was never ultimately used.
“The only strategy ever executed there was Emad’s. As he said many times, ‘The buck stops with me,’” Jeffries told Fortune.
Several people within Stability’s then 100-person company chafed at interactions with Mostaque’s wife, who was also an executive at Stability, according to former employees. Zehra Qureshi had played an instrumental role in the early development of the company, shaping marketing and HR, those people said. According to some employees, she was outspoken and could be extraordinarily particular—there was even a bathroom in Stability’s London office marked off with a paper sign reading “Zehra’s toilet,” according to a photo viewed by Fortune.
“She’s very strong-minded,” one employee says of Qureshi. “At times, there were people that found that very uncomfortable… But the truth is that, without her, Stability would never have gotten off the ground.”
Qureshi was reached by Fortune, but ultimately didn’t respond to requests for comment in time for publication. Mostaque told Fortune in an email that since Stability was an “applied deep tech company,” it would have been “weird” to have defined business strategy during that early period. He also cited a “clash of cultures” and “some poor choices in leaders on my part who were fired.”
Stability AI did not provide comment on specific claims in this article, but a Stability AI spokesperson told Fortune via email:
“Stability AI has developed best in class generative AI models, which are the most liked on Hugging Face and have been downloaded over 150 million times. The company remains focused on commercialising its world leading models and providing partners across the creative industries with the freedom to create across image, video, audio, 3D, language and code through its membership programme, API platform, applications and model customisation.”
‘A complicated person’
In late 2022, not long after the party, Coatue’s Cahn stepped in to help the company with day-to-day operations, according to three sources familiar with the matter. Cahn, who seemed to have a good working relationship with Mostaque, helped work on Stability’s business strategy and get documentation and other details sorted for what was expected to be additional fundraising, two of those sources told Fortune. But at the end of January 2023, Cahn left Coatue to take a job at VC firm Sequoia. Viswanath, the Coatue partner who was already on Stability’s board, became the main point person.
Despite having publicly praised Mostaque’s vision less than four months earlier, Viswanath now seemed less than enthused about the state of affairs at the buzzy AI startup he had helped tie his firm to. Around this time, Coatue asked the company for a document that would lay out Stability’s product plan and a timeline—a “road map,” according to a former employee who helped work on the document that was ultimately given to Coatue. That document “was never referenced again” after it was sent to Viswanath, the person said.
By the end of January, Viswanath’s doubts in Mostaque were serious enough that he told the company he thought it should hire a new CEO, according to a person familiar with the matter. Viswanath didn’t respond to Fortune’s request for comment.
The exact cause of Viswanath’s initial misgivings regarding Mostaque could not be confirmed, but whatever the resulting strain to the relationship, it did not lead to a complete rift between Coatue and Stability’s CEO.
Investors asked Mostaque to fundraise, several sources said. There were a series of rolling attempts to gather together another giant round, this time at a valuation that Bloomberg reported to be about $4 billion. (Mostaque disputes that there were formal valuation discussions.) Stability met with Altimeter, Redpoint, and Maverick Ventures, according to two sources with direct knowledge of the matter. Dell was also at one point interested in investing, a source familiar with the matter said. “Everyone was seeing them,” one person said. Ultimately, however, the market wouldn’t bite.
In addition to Stability’s rich valuation, part of the problem in the fundraising process may have been that Mostaque was avoidant—when asked about the special “data room” for prospective investors to peruse confidential business documents, Mostaque said “it’ll be ready in two weeks,” recalled a former employee with direct knowledge of the matter. Two weeks came and went, the former employee noted, but the data room was nowhere to be seen. (Mostaque told Fortune that existing investors and strategic investors who asked for data room access received it, but since no formal process was begun, other potential investors who signed nondisclosure agreements did not receive access to a data room.)
Mostaque, who was born in Jordan but raised in Bangladesh and the U.K., is a “complicated person,” one former Stability AI employee says. He could be charismatic, warm, and kind, but also forgetful and disorganized, that person says. In media interviews, he has said candidly that he has Asperger’s, and he told Fortune in an email that he will “take a few days off the grid a quarter” to reset because of it, including the time in December 2022 when people were looking for him.
Devoted to public speaking events, Mostaque could be passionate, fast-talking, and brimming with confidence. In private, however, he often seemed fatigued, stressed, and ambivalent. Mostaque would sometimes tell investors that he would step down, or that he wanted to hire a president for Stability, one former employee said.
Nathan Lile, former chief of staff at Stability who frequently traveled with Mostaque, recalled the Stability founder having Wi-Fi issues on his phone during a flight layover. Mostaque went off into the terminal in search of better Wi-Fi and a new SIM card. He returned a half-hour later, holding a pair of new AirPods.
It was a gift for Lile, who Mostaque said had been working very hard and would enjoy the noise cancellation. Lile was touched by the gesture, recalling how Mostaque’s eyes lit up when asking if Lile had ever tried spatial audio (he hadn’t).
“I was in complete shock, because he’d just gone out and bought it,” Lile said. “And then he said something like ‘If things were a little more organized around here, I’d have gotten your initials engraved on it.’”
As Lile fiddled with the gift, he realized something else: It seemed like Mostaque had forgotten to get the SIM card, he remembers.
‘That level of souring is pretty uncommon’
In June 2023, Mostaque’s public image took a major hit when Forbes published a bombshell story raising questions about his credibility. The article contained numerous allegations that Mostaque had exaggerated his own credentials, Stability’s partnerships, and what the company could do. (Mostaque vehemently denied the article’s allegations in a blog post at the time.)
The interactions between Mostaque and Stability’s investors changed almost immediately, people say. One person with knowledge of the matter said that Coatue was looking to help Stability hire and tout the company until just a few days before the Forbes story came out. An investor says Mostaque distanced himself from them shortly after the story came out: “After that, we sort of started to speak less,” they said.
Shortly before the Forbes story ran, there was a shakeup on the Stability board. Mostaque’s wife, Qureshi, who had served as head of communications, left her seat, and early employee Scott Trowbridge joined in her stead. (A former employee said the board “absolutely” played a role in her resignation. Mostaque disputes that the board had anything to do with it.)
Adding to the woes, Stability’s cash position was starting to dwindle again, as the company’s compute expenses climbed. Stability didn’t have the multibillion-dollar investments with Big Tech cloud computing providers that some of its generative AI competitors enjoyed. OpenAI, for instance, had teamed up with Microsoft. Anthropic, another fast-growing AI startup, had linked up with both Amazon and later Google.
But there was another problem. This time, it was Lightspeed that brought it up. The Silicon Valley VC firm, famous for investing early in Snapchat and for backing richly-valued startups like Stripe, had questions about Stability’s financials, Fortune has learned. Lightspeed specifically told Stability leadership that the firm was surprised about Stability’s cash position—and that some recent figures shared with Lightspeed were inconsistent with previous discussions, according to documents reviewed by Fortune.
As 2023 came to a close, the relationship between Mostaque and his investors officially turned antagonistic. Both Coatue and Lightspeed were off the board in the fall. Gaurav Gupta, the investor at Lightspeed, gave up his board observer role, due to what Bloomberg reported was differences of opinion over the company’s direction. Coatue gave up its board seat on Oct. 5, 2023, according to someone familiar with the matter, who specified it was because of a conflict arising from a new investment into Stability by chipmaker Intel.
And on Oct. 24, Coatue went nuclear. In a letter to Stability’s leadership, Coatue called for Mostaque to step down and to undergo sale negotiations. The letter, which was first reported by Bloomberg and independently confirmed by Fortune, specifically demanded information about compensation paid to Mostaque, Peter O’Donoghue, Scott Trowbridge, and Zehra Qureshi and asked that future bonuses and payments be approved by non-executive board members. (In response to this, Mostaque said that “all related party transactions, payments, and bonuses have always been board-approved.”)
The situation was stunning, even to some of the people close to it. “This—where you’ve got folks resigning from the board right after a $100 million round… That level of souring is pretty uncommon—at least that early anyway,” one of Stability’s investors says.
For those in Mostaque’s camp, Coatue’s gambit was viewed as an egregious betrayal and a power grab. “Emad is a visionary and the boss,” Joseph Jacks, one of Stability’s investors, wrote Fortune in an email. “He had shitty investors who tried to kick him out of his own company,” he said, noting that he was specifically referring to Coatue and Lightspeed.
Despite its significant investment, however, Coatue couldn’t unseat Mostaque. Mostaque told Fortune this was because he retained board control, with a majority of the voting power, and that there was no mechanism for him to be removed. While Viswanath and Lightspeed’s Gupta were out of Stability’s boardroom, Mostaque remained on the board alongside Stability executives O’Donoghue and Trowbridge, and early investor Jim O’Shaughnessy, according to a source directly involved.
But while Mostaque managed to hang on, the leaked vote of no confidence in his leadership made it difficult for the company to progress, especially as competition in the text-to-image-generation sector was heating up. Its competitor Midjourney was releasing updated versions of its rival text-to-image generator at a prodigious rate. Adobe had released a similar image-generation product. Facebook parent company Meta announced in September it had an image generator in the works, too, while Google said it planned to have a text-to-image model in the market soon, and OpenAI released DALL-E 3 in September.
Stability did get investments from strategic investors—from both Intel, and later Supermicro, around the end of 2023, according to someone with knowledge of the matter. Still, a succession of Stability executives and employees were heading for the door. There were seemingly a number of reasons for the turnover. For example, Ed Newton-Rex, head of Stability’s audio model, left last year after objecting to the startup’s approach to copyright. He told Fortune that Stability’s official position on the kind of training data that models should use doesn’t line up with his own. He declined to go into specifics.
But the startup that approximately 18 months ago was at the forefront of the generative AI revolution now looked like it was being left behind.
‘Nobody tells you how hard it is’
After the year of tension between Mostaque and his investors, the Stability AI Saturday announcement that Mostaque was stepping down came abruptly.
Reached by email, Mostaque would not discuss the rupture of his relationship with Coatue and Lightspeed, or the investors’ campaign to unseat him, apart from specifying he had majority control of Stability shares. He cited the personal toll of running a startup while suggesting that he was preparing to jump into the fray with a new project.
“Nobody tells you how hard it is to be a CEO and there are better CEOs than me to scale a business,” Mostaque said. “I am not sure anyone else would have been able to build and grow the research team to build the best and most widely used models out there and I’m very proud of the team there. I look forward to moving onto the next problem to handle and hopefully move the needle.”
Mostaque said he had been thinking about leaving over the last month and will be working on a “new initiative in decentralized AI” that will focus on “national and science/sectoral models and the protocols and infrastructure to pull them together.”
As part of Mostaque’s resignation, Stability COO Shan Shan Wong and CTO Christian Laforte will serve as interim co-CEOs of the company as it looks to bring on a new chief executive. But Mostaque is leaving behind a shell of what Stability AI once was, whose value and future prospects are uncertain.
Clément Delangue, the CEO and cofounder of Hugging Face, an AI company that’s also backed by Coatue, tweeted on Friday: “Should we acquire Stability and open-source SD3?”
According to a person with direct knowledge of the matter, there were behind-closed-doors founder-to-founder acquisition talks with Coatue-backed Hugging Face, but the deal apparently went nowhere. There have been other rumors and reports of possible acquirers, including Cohere, but sources say a sale of the company now would be tricky.
One of Stability’s investors laments that even with Mostaque out of the picture, the wave of employee departures and the breakup with key investors mean that new backers are unlikely to sign on.
The irony is that a golden-boy startup CEO with a compelling vision is not so easy to replace. The investors who initially rushed to hook up with Mostaque, and who bet that he would lead them to the AI promised land—even when Mostaque briefly went missing back in 2022—are now searching for something else: where the company’s future really lies, in a crowded AI field where Stability has surrendered its early-mover advantage.
Though Stability AI’s models can still generate images of space unicorns and Lego burgers, music, and videos, the company’s chances of long-term success are nothing like they once appeared.
“It’s definitely not gonna make me rich,” the investor says.
