Musk Admits xAI ‘Not Built Right’ as 10 of 12 Founders Exit

Elon Musk acknowledged Thursday that xAI ‘was not built right first time around, so is being rebuilt from the foundations up,’ capping a monthlong exodus that has stripped the AI startup of 10 of its 12 original co-founders. The admission came six weeks after CNBC reported SpaceX acquired xAI in a $1.25 trillion merger, and weeks after Tesla invested $2 billion in the company.

Mass Departures Signal Deeper Dysfunction

Zihang Dai and Guodong Zhang departed this week, following co-founder Jimmy Ba’s February exit. Only two of the 12 people who started the company with Musk in 2023 remain, leaving Manuel Kroiss and Ross Nordeen as the sole surviving members of the founding team. Zhang, head of xAI’s Imagine team, was blamed for issues with the coding product and relieved of his primary duties by Musk, per Financial Times.Musk brought in ‘fixers’ from SpaceX and Tesla to audit xAI, who let go of several employees whose work was deemed inadequate. Former employee Benjamin DeKraker, now at the Naval Welding Institute, described the company as ‘one of the most DEI and corporate-y places I’ve ever worked’ in comments to Inc.. DeKraker wrote that management ‘filled xAI with middle managers and busybodies’, contradicting Musk’s public messaging about flat organizational structure.

Researchers continue to leave because of burnout from Musk’s ‘extremely hardcore’ work demands or after receiving better offers from rivals, according to Financial Times. xAI staff have complained that the upheaval is damaging morale and standing in the way of the company reaching full potential.

Coding Gap Widens Against OpenAI and Anthropic

The organizational crisis coincides with competitive erosion in AI coding, the sector’s most lucrative application. This week, xAI announced two hires from coding startup Cursor—Andrew Milich and Jason Ginsberg—to help the organization catch up to competitors Anthropic and OpenAI in coding, per The Information.Musk said at an all-hands meeting the company held Wednesday that it focused on how to catch up, which he predicted would be possible by the middle of this year, reported by TechCrunch. While an early-year surge of users was powered by xAI’s lax regulation of Grok’s ability to produce sexual and even abusive imagery, coding tools are seen as the key revenue-generating tech for AI labs.

Grok’s U.S. market share rose to 17.8% last month from 14% in December and 1.9% in January 2025, per Reuters. Yet Grok is projected to make close to $300 million for the full year 2025, according to Business of Apps—a rounding error against the $250 billion valuation assigned in the SpaceX merger.

Capital Infusion Follows Structural Confession

The timing raises fiduciary questions. Tesla agreed to invest $2 billion into xAI in a $20 billion funding round, with the investment acquiring preferred stock at a valuation of roughly $230 billion. When SpaceX acquired xAI weeks later, that capital converted into a minority SpaceX stake, per Electrek.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?

Musk posted Friday that he and Baris Akis, responsible for engineering talent at xAI, ‘are going through the company interview history and reaching back out to promising candidates’. The move suggests the company burned through its preferred candidate pool and is now revisiting rejected applicants—a tacit admission that initial hiring filters failed.

Sector-Wide Talent Wars Expose Winner-Take-Most Dynamics

The churn at xAI mirrors a wider pattern of staff turnover across the AI industry, where a fierce war for top talent has driven pay packages into the tens of millions of dollars and, reportedly in one case, past the billion-dollar mark, according to Agence France-Presse. The supply of elite ML researchers and engineers is far smaller than the demand, giving top talent extraordinary leverage to move between organizations. Understanding this broader context makes xAI’s situation less anomalous and more instructive.

Yet even well-capitalized labs are bleeding talent. Multiple senior researchers departed OpenAI between 2023 and 2025, including co-founders and safety team leads, with departures often linked to disagreements about commercialization pace and safety priorities. Anthropic, itself founded by OpenAI defectors, now faces its own retention challenges.

What to Watch

SpaceX’s anticipated IPO—expected to be among the largest in history—will force disclosure of xAI’s financials and governance structure, clarifying whether Musk’s ‘foundations up’ rebuild is rhetorical damage control or genuine restructuring. In merging SpaceX with xAI last month, the reusable rocket company was valued at $1 trillion and the AI component at $250 billion.Whether xAI can close the coding gap by mid-2026, as Musk predicted, will determine if the talent hemorrhage was a necessary purge or a collapse masquerading as strategy. The Cursor hires signal urgency, but two product engineers cannot replace a decimated founding team overnight. Meanwhile, xAI faces government investigations in multiple international jurisdictions after Grok enabled users to easily generate non-consensual sexual images, or deepfake porn, by modifying photos or videos of real adults and children.For AI sector observers, xAI’s crisis offers a clean test: can founder-led charisma and infrastructure spending overcome organizational design failures when competing against labs that retained their technical leadership? The answer will arrive in benchmark scores, enterprise contract wins, and whether the next wave of departures accelerates or stabilizes.