Tech investor Sean Parker leads rescue of struggling AI startup

The investment group, which includes former Google Chief Executive Officer Eric Schmidt and early backers of London-based Stability, has struck a deal with suppliers to forgive some $100 million owed by Stability, according to people with knowledge of the arrangement. 

The investors also negotiated for the startup to be released from $300 million in future obligations, largely meant to go to cloud computing providers.

The recapitalization is intended to grant a new lease on life for the company behind Stable Diffusion, an image-generation tool that competes with OpenAI’s DALL-E and startup Midjourney. Stability raised $101 million in late 2022 in a round valuing it at $1 billion, but struggled since then to build a business model around its technology, an open-source tool other companies can use free. 

Stability talked to investors this past year about raising more capital but didn’t land a deal, according to a person with knowledge of the effort.

Despite its problems, Parker said the company’s core technology remained popular, which gave him faith it could become financially successful.

“The business challenges are all things that we know how to solve," he said.

Parker, who will become executive chairman of Stability AI’s board of directors, declined to comment on the company’s valuation following the new investment.

Many generative AI startups are struggling to develop viable business models after raising significant sums of money from investors excited about the technology’s potential. Their struggles have raised questions in Silicon Valley about the possibility of a shakeout in the sector. 

While investors generally believe AI will transform the global economy, they increasingly say many well-funded startups in the space could fail to generate adequate revenue to stay afloat.

Stability co-founder Emad Mostaque resigned as CEO in March following pressure from investors. Under Mostaque, a series of high-profile employees left. The company also failed to pay mounting bills, including for computational resources that are the lifeblood of the AI industry, people with knowledge of the company’s finances said.

Mostaque, who still owns a stake in Stability, said he focused on technology and left business matters to other senior executives.

“I hired highly credentialed individuals and delegated business and other functions to these established leaders," he said. “As a hypergrowth company in a hypergrowth sector, some did well, others did not and could not deliver and left or were let go."

The investor group named a new CEO: Prem Akkaraju, who previously led Weta FX, the visual-effects company behind “Avatar" and “Avengers: Endgame."

The Information previously reported Parker was part of a new investment round and Akkaraju was joining as CEO.

“Stability has an enormous amount of influence and distribution that we think is really difficult to rebuild," said Akkaraju, who also put money into the company. He said a priority will be developing a commercial plan over the next three months.

Parker and Akkaraju said Stability will continue providing open-source models free to researchers and many other developers but they believe they can offer paid versions of those models to large companies that use its technology to build products. Stability could also sell tools that would help developers integrate its technologies.

“Those are obviously places where you can charge for the model," Parker said.

Akkaraju said Stability, which has a video-generation tool, could also start courting Hollywood producers and studios, an area where his prior work in visual effects could prove valuable.

Investors in this round include Greycroft, O’Shaughnessy Ventures and Robert Nelsen, the biotech investor largely known for funding projects that aim to eliminate disease. Prior investors Coatue Management, Lightspeed Venture Partners and Ashton Kutcher’s Sound Ventures have also committed capital.