Musk’s xAI is Paying Off for Twitter Investors

Investors who faced significant losses after backing Elon Musk’s acquisition of Twitter, now known as X, are set to make a huge windfall due to an increase in the valuation of Musk’s artificial intelligence startup, xAI.

Musk has given 25% of the shares in xAI, which he founded last year, to investors who supported his $44 billion acquisition of the social media platform X, formerly known as Twitter, in 2022. Those who backed Musk’s takeover of Twitter have faced billions of dollars’ worth of unrealised losses, with advertisers and users departing over concerns about lax content regulation. But xAI’s gains could help them recover their previous losses.

About Twitter

Twitter, founded in March 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams, officially launched in July of the same year. The platform grew quickly, reaching over 100 million users who generated 340 million tweets per day by 2012. Twitter, Inc., was located in San Francisco, California, and had more than 25 offices globally. A signature feature of the service was the requirement for posts to be brief. The platform initially limited posts to 140 characters, later increasing this to 280 characters in 2017. In 2023, character limits were removed for subscribed accounts. The majority of tweets are produced by a small fraction of users. In 2020, it was estimated that around 48 million accounts, or 15% of all accounts, were operated by internet bots instead of real users.

Elon Musk’s acquisition and rebranding to X

The platform is currently owned by X Corp., the American company formed in March 2023 to succeed Twitter, Inc., after Elon Musk’s $44 billion acquisition of Twitter in October 2022. Musk stated that his primary goal for the acquisition was to promote free speech on the platform. However, since Musk’s takeover, Twitter has faced criticism for contributing to the spread of disinformation and hate speech. On June 5, 2023, Linda Yaccarino replaced Musk as CEO, while he remained as the chairman and chief technology officer. In July 2023, Musk announced the rebranding of Twitter to “X”, including the removal of its bird logo. The process was completed by May 2024.

Since Musk’s takeover, app-tracking data has indicated that global usage of the platform has dropped by about 15%, compared to a 5-10% decline on other social media platforms. However, the platform has disputed these findings, with Musk saying in a May 2024 tweet that membership had increased to 600 million users. By October 2024, the platform was estimated to have lost around 80% of its value since Musk’s acquisition.

XAI’s soaring valuation and recovery for investors

xAI recently completed a $5 billion fundraising round, with its valuation doubling to $50 billion in just six months. This increase in value has enabled some of Musk’s backers, to recover their losses entirely through their shares in the AI startup.

Major investors reaping the rewards of Musk’s ventures include Fidelity, Oracle co-founder Larry Ellison, Saudi Arabia’s Prince Alwaleed bin Talal, Twitter founder Jack Dorsey and Silicon Valley venture firms Sequoia Capital and Andreessen Horowitz.

The connections between Musk’s businesses highlight the overlapping incentives for those who back his ventures, which also include electric-car maker Tesla and rocket builder SpaceX.

Many of Musk’s financial backers have justified their support of the takeover of Twitter as a bet on the billionaire himself and a way to remain closely aligned with his ventures. That strategy has been considered especially prescient, given Musk’s growing influence and close relationship with president-elect Donald Trump.

“There are few adages in tech that really hold up,” said one investor in Musk’s companies. “Never bet against Elon is one.”

xAI’s funding journey

xAI has raised about $11 billion in capital from investors this year, needed for the huge spending required to build AI models and one of the world’s largest clusters of supercomputers.

The rapid growth of xAI has provided a significant boost for Twitter equity investors, from whom Musk raised $7.1bn to finance the takeover. The remaining funds came from bank loans and Musk’s personal wealth, including from selling Tesla shares. Banks such as Morgan Stanley and Barclays are holding around $13bn of Twitter debt.

Since the acquisition, the value of the social media platform has sharply declined as advertisers have abandoned the site over content moderation concerns.

Fidelity, which publicly discloses the value of its stake in X, has written down its investment by nearly 80 per cent, bringing its current value to $9.4bn.

xAI fundraising boosts valuation

In May, xAI carried out a $6 billion fundraising, its first major cash injection from external investors, which valued the startup at $24 billion. Many of Musk’s X backers, including Andreessen Horowitz, Sequoia Capital, Prince Alwaleed and Fidelity chose to invest even more cash into the start-up deal.

In a follow-up fundraising round in November, Musk allowed only previous xAI backers to make new investments. It reportedly raised $5 billion in a round that more than doubled its previous valuation to $50 billion.

As a result, X investors now hold 25% of xAI’s equity across both fundraising rounds, with their stakes protected from dilution by new shares issued in the latest fundraising round.

While these investments have been profitable, they also present complex challenges for investors involved in Musk’s various companies.

“It’s hard to manage conflicts of interest on this sort of stuff,” said an investor in one of the companies. “You have to be a fiduciary and you’re on both sides.” Musk did not respond to a request for comment.

In summary

The rapid growth of xAI has helped many of Musk’s investors recover losses from his Twitter acquisition. However, this success also brings challenges, as investors must manage potential conflicts of interest from their stakes in multiple Musk companies. While the financial rewards have been significant, the complex relationships and interests make these investments far from straightforward.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.