Tesla shareholders are suing Musk (again) over new AI company

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Hey SaaS Sentinel readers. Musk is getting sued (again), limited partners are flocking to secondaries funds, and government regulators are clamping down on large AI investments. Here’s what’s happening in SaaS this week.

• Tesla shareholders sued Elon Musk for allegedly breaching his duty by starting AI firm xAI and diverting Tesla resources to it.

• StepStone raised a record $3.3B venture secondaries fund showing investors still have appetite for mature startups amid the VC pullback.

• Microsoft and Nvidia have been the most active tech giants investing in AI startups, but government probes could dampen the breakneck pace.

Musk Sued (Again) for Diverting Tesla Resources to AI Startup

Elon Musk is facing legal heat from Tesla shareholders over the launch of his new AI company xAI. In a lawsuit filed this week, shareholders allege Musk breached his fiduciary duty by starting a competing firm and shifting talent and resources from Tesla to fund his side project.

The suit claims Musk violated Tesla's ethics code by founding and leading xAI, which raised $6 billion last year and aims to develop advanced AI capabilities. Shareholders point to at least 11 employees who have left Tesla for xAI, along with AI-related data and Nvidia processors supposedly redirected from Tesla operations to Musk's new venture.

Musk has long pitched Tesla as an AI leader—not just an electric vehicle maker. But shareholders argue he is now building AI value outside of Tesla at the expense of the company and its investors.

The complaint seeks to force Musk to turn over his ownership stake in xAI to Tesla. It also calls out the Tesla board for enabling Musk's actions against the company's best interests.

This latest lawsuit adds to Musk's growing legal troubles as CEO. Earlier this week, separate shareholders sued Musk for selling over $8 billion of his Tesla shares last year using alleged insider knowledge.

The outspoken billionaire is clearly ruffling some feathers with his unpredictable management style. But whether his controversial moves at Tesla and beyond rise to the level of legal liability remains to be seen. For now, Musk's legal bills are piling up.

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LPs Flock to Secondaries Amid Venture Funding Pullback

Venture capital fundraising sank 61% in 2022 as rising interest rates and public market turmoil led to a dramatic cooldown in startup investing. But even as the skies darken over traditional VC, limited partners are finding the light in the venture secondaries market.

Secondaries funds like StepStone purchase existing startup shares and VC fund stakes from LPs and other shareholders—this allows investors to access mature, late-stage private companies at often steeply discounted valuations compared to the lofty round sizes of today. Speaking of which, StepStone recently closed a mammoth $3.3 billion secondaries fund, the largest ever of its kind.

So what’s the appeal of these secondaries, exactly?

Secondaries like StepStone provide a lifeline for LPs seeking to stay invested in venture capital's high-growth potential, while sidestepping the elongated 10-year fund cycles that lock up their capital. Additionally, by purchasing shares at discounts rather than through fresh VC rounds, these secondaries present an opportunity for LPs to recalibrate entry valuations after the stratospheric, often inflated pricing of 2020-2021.

But the real signal that StepStone's staggering $3.3 billion fundraise sends is that LPs have grown disenchanted with the late-stage venture market in particular. And the secondaries lifeline is welcome news for VCs, who need liquidity partners to create exit opportunities in a quiet IPO and M&A market. 

With LPs sustaining their appetite for startup returns, just in a more cautious form, StepStone's massive new fund could be just the beginning. We may see LPs continue to deploy more dry powder into secondaries as they navigate the VC slowdown while remaining committed to the asset class.

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Microsoft and Nvidia Sprint Ahead in AI Startup Funding Race

Microsoft and Nvidia have clearly emerged as the most active and aggressive tech giants making massive bets on AI startups in 2023. Both companies are leading a furious wave of multimillion (and multibillion) dollar investments aimed at securing leadership in the red-hot generative AI space.

Just last week, Microsoft participated in a $450 million round for Toronto-based AI firm Cohere, while also launching its own $1 billion AI investment fund via Cisco. And earlier this year, Microsoft also put a whopping $1.5 billion into United Arab Emirates-based AI startup G42 and led a $1 billion funding round for self-driving car startup Wayve. Microsoft's prolific venture arm M12 has also been busy, participating in 7 deals this year including an $80 million round for AI cloud startup Foundry.

That’s a lot of venture activity… but wait, there’s more!

Nvidia has invested in over 10 AI startups in 2023 alone, including joining multiple mega-rounds above $100 million—these include Scale AI's massive $1 billion round, Figure's reported $675 million raise, and Mistral AI's $640 million equity and debt financing. Nvidia's NVentures arm also got in on the action, leading an $85 million Series C for agricultural robotics firm Carbon Robotics.

Other tech heavyweights like Google, Salesforce, and Cisco are chasing AI startup deals but have not quite kept pace with Microsoft and Nvidia. Google has limited itself to smaller seed investments, though its GV arm did lead a $27.5 million round for AI safety firm WitnessAI. And newly public company Databricks has an aggressive new venture fund that's already joining sizeable rounds for AI leaders like Glean.ai.

But just as Big Tech's appetite for AI startups appears endless, potential government roadblocks loom that could slow the breakneck pace of these investments.

Specifically, the Federal Trade Commission (FTC) has reportedly launched a broad probe into how Microsoft's multibillion dollar partnership with leading AI firm OpenAI could impact its competition. The FTC aims to determine whether the partnership harms innovation in the generative AI space by concentrating too much power and technology with Microsoft. Similarly, the Department of Justice (DOJ) has initiated a separate investigation examining if chipmaker Nvidia's actions around AI technology and acquisitions illegally stifle competition.

While neither probe directly targets startup investments, the heightened scrutiny from regulators on Big Tech's rapid AI moves could give pause to companies considering major deals and funding rounds in the space.

That's worrying for AI startups, who received a staggering 40% of all venture funding in May 2023. Microsoft and Nvidia may need to look over their shoulders as they vie for AI supremacy. And the entire sector will hope regulators don't scare away the Big Tech cash flow that is the lifeblood for today's AI investing environment.

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Parting Thoughts

Well, that’s the tech news for this week. Hit reply and let us know — did you learn something from today’s newsletter?

Until next time!