The high costs and thin margins threatening AI coding startups

In February, AI -coding starting Windsurf was in talks to raise a big new round at a $ 2.85 billion Rating led by Kleiner PerkinsAt the double estimate it hit six months earlier, sources told Techcrunch at the time. That agreement did not happen, according to a source familiar with the matter. Instead, news broke out in April that the starting was planning to sell itself to Openai for about the same assessment: $ 3 billion.

While that agreement was famously collapsed, there is one bigger question: if the startup increased so fast and attracts VC interest, why would it sell at all?

Businessmen tell Techcrunch that because of all the popularity and hype around AI coding helpers they can actually be massively money-losing companies. VIBE coders in general, and Windsurf can especially have such expensive structures that their rough edges are “very negative”, one family close to Windsurf told Techcrunch. Meaning it costs more to operate the product than the startup could load for it.

This is due to the high costs of using large language models, the person explained. AI code assistants are particularly pressed to always offer the most recent, most advanced and most expensive LLMs as model manufacturers separately set their latest models for enhancements in encoding and related tasks such as debugging.

This is a challenge aggravated by fierce competition in the encoding and code-aid market. Rivals include companies that already have huge customer bases such as Anysphere Cursor and Github Copilot.

The most direct way to improving edges in this business involves the starts to build their own models, thus eliminating costs of paying suppliers such as anthropic and opening.

“It’s a very expensive company to run if you won’t be in the model -game,” said the person.

But that idea comes with its own risks. The co-founder and general manager of Windsurf, Varun Mohan, ultimately decided to build his own model-inadequate business, the person said.

In addition, model manufacturers are already competing directly. Antropical offers Claude Code and Openai offers a codex, for example.

Selling the business was a strategic move to lock a high return before it could be undermined by the same companies that provided its AI, including Openai and Antropic, which also entered the AI coding market.

Numerous people believe that the same pressure on marginal Windsurf -Frown could affect any villain, the manufacturer of a cursor, as well as vibrant codists as beloved, replicated and others.

“Margins about all” code gene products are either neutral or negative. They are absolutely disgusting, “said Nicholas Charriere, founder of MOCHA, startup of vibration and backend host solution serving small and medium -sized businesses (SMBS). He added that he believes that the variable costs for all startups in the sector are very close, probably within 10% to 15% from each other.

Unlike Windsurf, any vacation has grown so fast that it intends to remain an independent company, having already Turned off acquisition offersEven, reports say, from Openai.

And any kind of announced in January that it is trying to build its own model, which could give it more control over its expenses. In July, the startup hired two leaders of the CLAUDE Code of Antropy team, the information reported, but two weeks later, these employees came back work at anthropic.

In addition to building a model, Anysphere might expect the cost of LLMs to decrease over time.

“All this is banking,” said Eric Nordlander, a general partner of Google Ventures. “The inference cost today is the most expensive it will ever be.”

It is not quite clear how true that is. Rather than fall as expected, the Cost of some of the latest AI models roseBecause they use more time and computing resources to treat complicated, multi -step tasks.

When that changes, it remains visible. On Thursday, for example, Openai introduced A new flagship model GPT-5 with fees, which is significantly less than its competitor, Claude Opus 4.1 of anthropic. And any kind of Immediately proposed This model as a choice for cursor users.

Ain’t also recently changed its price structure to get through the increased costs of running the latest Claude model of anthropic, especially to its most active users. The move has seized some of Cursor clients surprisedBecause they did not expect further allegations over its $ 20-month Pro. Any CEO Michael Truell later apologized for unclear communication about the price change in Blog post.

Here is the rock and the hard place. Although cursor is one of the most popular AI applications, having reached $ 500 million in ARR in JuneThe company’s user base may not be so loyal to the product if another company develops a tool superior to a cursor, says investors.

Any sphere did not respond to a request for a comment.

Considering the competitive landscape and the costs, Windsurf’s decision to go out can be understandable. After the Openai Agreement fell, the founders and key employees left to join Google in a deal that led to $ 2.4 billion payments to key shareholders. The remaining business then sold himself to cognitive.

While many, including outstanding VCs, criticized Mohan for leaving about 200 employees without roles at Google, a source familiar with the agreement insisted that the acquisition actually maximized the results for all employees.

Beyond cursor, other AI -coding tools are also among the fastest growing startups of the LLM generation as a replication, lovable, bolt and all depends on model manufacturers.

Additionally, if this extremely popular business sector, already generating hundreds of millions of revenue or more a year, have difficulty building on model manufacturers, what could it mean for other more giving birth industries?