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Stability AI CEO exits startup ‘hollowed out’ by departures, mismanagement

Stability AI Chief Executive Officer Emad Mostaque announced his resignation to staff late Friday night with a strikingly optimistic note. He was stepping down as CEO but two deputies, his interim replacements, would find a new leader to take the British unicorn startup “from 10 to 100,” Mostaque wrote.

And “you all, as owners of the company, will have a massive part to play,” he continued in an internal Slack message, which Bloomberg News viewed.

But there are a dwindling number of people left to read that note. Mostaque’s exit followed a wave of departures from the startup — already accustomed to rapid turnover — that included the exit of key scientists behind the company’s flagship product, Stable Diffusion.

Now, without its charismatic and controversial CEO, Stability’s future is murkier than ever. Last fall, a major investor called on Mostaque to step down over what it called Stability’s shrinking cash reserves, Bloomberg reported in November. The startup’s prospects haven’t improved dramatically since. The company’s last reported fundraising round was in October and, in addition to computing costs, it’s fighting a copyright lawsuit from Getty Images Holdings Inc.

The company, according to several former employees who remain in touch with current staff, is now a shell of itself; one person described it as being “totally hollowed out” in terms of research talent and in a “death spiral,” even before Mostaque’s resignation because of high ongoing costs, legal troubles and dwindling resources. These people asked not to be identified for fear of retaliation.

A representative for Stability said that the company is focused on “commercializing our world leading technology and providing our partners across the creative industries with AI operating systems and tools that give them the freedom to create across image, video, audio, 3D, language and code.’’ The company said that it has “multiple revenue streams’’ via its membership program, API platform, applications and model customization business.

Stability is the latest high-flying generative artificial intelligence startup to struggle to find a viable business. Every startup in the field is now contending with the advances of the largest technology firms, and are increasingly fighting for scarce resources and cash. Last week, the co-founders of Inflection AI — a chatbot developer that had raised $1.5 billion and was competing with OpenAI and other behemoths — departed for Microsoft Corp.

“They’re spooked,” Jack Stilgoe, a professor of science and technology studies at University College London, said of AI startups. “They’re concerned with how anyone is going to compete with an emerging generative AI oligopoly.”

Yet Stability’s difficulties may be less about competition and more about mismanagement, according to insiders who Bloomberg interviewed over the last year.

Mostaque, a former crypto entrepreneur, ran his AI startup much like a crypto venture — a style including frequent war cries against big institutions and lots of hype. He raised $101 million in late 2022 on the viral popularity of Stable Diffusion, an AI image generator the startup managed, and the promise of running an open-source alternative to Silicon Valley’s giants. Mostaque often talked about this as a high-stakes undertaking. “This technology can maximize humanity’s potential or it can be corporatized and used as a method of centralization and control,” he said in an interview with YouTuber Yannic Kilcher in 2022. “Which side do you want to be on?”

Inside the startup, however, Mostaque operated with considerable control. Former leaders at Stability describe the CEO’s leadership at times as chaotic, even as the startup’s open-source tools faced rising competition from major companies like Meta Platforms Inc. Often, they said, Stability pulled resources from one project to rush into another. Last summer, for instance, the company removed staff from handling customer support complaints despite a backlog of them, according to one person.

As CEO, Mostaque also made some outlandish claims and empty promises, as Bloomberg reported in August. At a Bloomberg event in July, Mostaque was asked about the persistent problems that image generators like Stable Diffusion have with gender and racial bias. He replied that the company was working with “multiple governments” to create models tailored to the norms and sensitivities of each nation. But three people who worked at the company said they saw no evidence of signed deals with any government during their tenure.

In another sign of trouble, the company has lost many of its key hires, including several of the researchers who created Stable Diffusion, according to people with direct knowledge of the departures who asked not to be named discussing private information. Among the most recent departures: Robin Rombach, who was one of the company’s research leaders, as well as Dominik Lorenz and Andreas Blattmann. Stability and the researchers did not comment on the departures, some of which Forbes previously reported.

“Robin’s team was one of the highest-density research groups in the world,” said Nathan Lile, CEO and co-founder of Synth Labs, who previously worked at Stability AI as Mostaque’s chief of staff.

Mostaque’s defenders say the company has been unfairly maligned. “Emad’s a great visionary and we struggle in some ways, like many startups do,” said Tyler Xuan Saltsman, who led super-compute at Stability, including the building of its supercomputer with Intel Corp. “I would say the frustrating thing is folks want Stability to struggle. They want us to fail. And it’s sad.” In early March, Saltsman left to form a new company, Stable Edge, devoted to commercializing Stability’s large language models for use directly on devices such as laptops and smartphones. He said he left with Mostaque’s “blessing.”

Starting late last year, Stability took several dramatic steps to solidify its business. These included having talks about selling itself to another company — one possibility was Jasper AI, which Stability approached about a potential purchase, Bloomberg reported. Stability denied it was trying to get acquired. The company also launched new products, including Stable Video, an AI model that can generate short videos from typed prompts, and shifted its focus to a membership model, which would require payment for corporate use. It also sold its only known acquisition, a startup called Init ML, to Jasper.

But while rival AI startups raised round after larger round, Stability failed to match the sums from its 2022 financing. In the fall, Coatue Management, one of Stability’s largest backers, sent a private letter demanding Mostaque resign or find buyers. The company received an investment in October of just under $50 million in the form of a convertible note from Intel, Bloomberg reported. But the company has also been spending significant amounts of money to grow its business: At the time of its deal with Intel, Stability was spending roughly $8 million a month on bills and payroll and earning a fraction of that in revenue.

Now, with Mostaque’s exit, the company’s new leadership will be interim co-CEOs Shan Shan Wong, the chief operating officer, and Christian Laforte, Stability’s recently appointed chief technology officer. In a blog post, the company said they will usher in a new phase of growth. “Together, we are committed to preserving the exceptional team, cutting-edge technology and vibrant community that’s been cultivated over the years, ensuring Stability AI remains a leader in open multi-modal generative AI,” the startup said.

Even though Mostaque is leaving the company and its board, he’ll still play a role in Stability’s fate. As of the most recent corporate filings in the UK, more than 75% of the startup’s equity belongs to Mostaque.

Over the weekend, he texted in a private crypto-focused group chat about his resignation. He wrote that he was keeping board control and a majority of shares at Stability — echoing details he also posted to X after his departure. Bloomberg

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