Musk admits xAI ‘not built right’ — weeks after Tesla invested $2 billion

Elon Musk admitted today that xAI, his artificial intelligence venture, “was not built right first time around” and “is being rebuilt from the foundations up.” The admission comes just six weeks after he had Tesla pour $2 billion of shareholder money into the company.

The timing is remarkable. Tesla disclosed the $2 billion xAI investment in its Q4 2025 earnings report on January 28. Days later, SpaceX acquired xAI in a deal valuing the combined entity at $1.25 trillion. Now Musk is telling the world the thing he just sold to his own public and private investors was broken.

10 of 12 xAI co-founders are gone

The “not built right” admission didn’t come out of nowhere. xAI has been hemorrhaging talent at an alarming rate. Of the 12 people who co-founded the company with Musk in 2023, only two — Manuel Kroiss and Ross Nordeen — remain.

The departures accelerated dramatically in February 2026. Jimmy Ba, a University of Toronto professor whose research was critical to Grok’s development, resigned amid reported tensions over demands to improve model performance. Tony Wu left the same week. Igor Babuschkin, Kyle Kosic, Christian Szegedy, Greg Yang, Zihang Dai, Guodong Zhang, and Toby Pohlen have all departed in rapid succession.

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At an all-hands meeting in February, Musk suggested the exits were deliberate, claiming that some people are “better suited for the early stages of a company and less suited for the later stages.” But losing 10 of 12 co-founders isn’t a natural evolution, it’s a collapse of the founding team.

Several of the departing engineers are reportedly starting a new venture together, which tells you everything about the internal dynamics at xAI.

The $2 billion problem for Tesla shareholders

Here’s what makes this especially concerning: every person who owns an S&P 500 index fund is now exposed to this mess.

Tesla invested $2 billion in xAI’s Series E round on January 16, acquiring preferred stock at a valuation of roughly $230 billion. When SpaceX acquired xAI weeks later, that $2 billion converted into a minority SpaceX stake.

Tesla shareholders are already suing Musk for breach of fiduciary duty over xAI’s founding, arguing he diverted AI talent and resources away from Tesla to benefit his private company. Musk admitting that xAI was fundamentally broken, weeks after extracting billions from Tesla and SpaceX to prop it up, adds a new layer to those legal challenges.

Did SpaceX investors get full disclosure that xAI needed to be “rebuilt from the foundations up” before the $1.25 trillion mega-merger closed? Did Tesla’s board understand what they were buying into? These are questions that regulators and shareholders will be asking.

Electrek’s Take

Musk has lost his entrepreneurial magic.

For years, the bull case on anything Musk touched rested on a simple narrative: the man has a golden track record. PayPal, Tesla, SpaceX, a string of world-changing successes that justified premium valuations and extraordinary trust from investors.

That narrative is crumbling.

Twitter, now X, had lost roughly 70% of its value after Musk’s $44 billion acquisition and before he proped it back up to $44 billion through his own self-dealing with the xAI merger.

Tesla’s Robotaxi rollout has been a disaster, with a single vehicle providing limited unsupervised drives in Austin almost a year into the program. “Full Self-Driving” remains a misnomer nearly a decade after Musk promised coast-to-coast autonomous driving “within a year.” And now xAI, presented to investors as a frontier AI lab worth $250 billion, needs to be rebuilt from scratch.

According to Arc AGI, xAI is significantly lagging behind Google, OpenAI and Anthropic in both performance and cost:

Musk is not batting 1,000 anymore. He’s running multiple companies simultaneously while serving on-and-off as a senior advisor in the Trump administration, and the quality of execution across his empire is suffering for it. You can’t run Tesla, SpaceX, xAI, X, Neuralink, The Boring Company, and DOGE while maintaining the obsessive focus that made SpaceX and early Tesla successful.

We’ve been covering the xAI-Tesla entanglement for months, and every new development makes the situation worse for Tesla shareholders.

The sequence of events here is damning. Musk founded xAI despite Tesla’s own AI efforts after selling part of his stake in the succesful automaker to finance his Twitter acquisition.

He then convinced Tesla’s board, which he effectively controls, to invest $2 billion of shareholder money into xAI. He had SpaceX acquire xAI at a $250 billion valuation, creating the largest merger in history. He announced a joint “Digital Optimus” project to justify the investment. And now, six weeks later, he admits the whole thing was built wrong and needs to start over.

This isn’t the Elon Musk who nearly went bankrupt to save both Tesla and SpaceX in 2008. That Musk was laser-focused on two companies and willing to stake everything on making them work. Today’s Musk is spread across half a dozen ventures, distracted by political power, and using his publicly traded company as a piggy bank for his private ventures. The 10 co-founders who left xAI, many of them world-class AI researchers, clearly saw the problem before the rest of us did, and likely took a deal through the SpaceX merger.

This self-dealing is completely unacceptable, especially when it involves siphoning billions from a publicly traded company that millions of people are indirectly invested in through index funds.