The High Costs And Thin Margins Threatening Ai Coding Startups

In February, AI coding startup Windsurf was successful talks to raise a large caller information astatine a $2.85 cardinal valuation led by Kleiner Perkins, astatine double nan valuation it deed six months earlier, sources told TechCrunch astatine nan time. That woody didn’t happen, according to a root acquainted pinch nan matter. Instead,  news collapsed successful April that nan startup planned to waste itself to OpenAI for astir nan aforesaid valuation: $3 billion. 

While that woody famously fell apart, 1 bigger mobility remains: if nan startup was increasing that accelerated and attracting VC interest, why would it waste astatine all? 

Insiders show TechCrunch that for each nan fame and hype astir AI coding assistants they tin really beryllium massively money-losing businesses. Vibe coders generally, and Windsurf successful particular, tin person specified costly structures that their gross margins are “very negative,” 1 personification acquainted adjacent to Windsurf told TechCrunch. Meaning it costs much to tally nan merchandise than nan startup could complaint for it.

This is owed to nan precocious costs of utilizing ample connection models, nan personification explained. AI coding assistants are peculiarly pressured to ever connection nan astir recent, astir advanced, and astir costly LLMs because exemplary makers are peculiarly fine-tuning their latest models for improvements successful coding and related tasks for illustration debugging. 

This is simply a situation compounded by fierce title successful nan vibe coding and code-assist market. Rivals see companies that already person immense customer bases for illustration Anysphere Cursor and GitHub CoPilot.

The astir straightforward way to improving margins successful this business involves nan startups building their ain models, thereby eliminating costs of paying suppliers for illustration Anthropic and OpenAI. 

“It’s a very costly business to tally if you’re not going to beryllium successful nan exemplary game,” said nan person.

But that thought comes pinch its ain risks. Windsurf’s co-founder and CEO, Varun Mohan yet decided against building its ain exemplary — an costly undertaking, nan personification said. 

In addition, exemplary makers are already competing directly. Anthropic offers Claude Code and OpenAI offers Codex, for instance.

Selling nan business was a strategical move to fastener successful a precocious return earlier it could beryllium undermined by nan very companies that supplied its AI, including OpenAI and Anthropic, which were besides entering nan AI coding market.

Multiple group judge that nan aforesaid unit connected margins Windsurf faced could beryllium impacting Anysphere, nan shaper of Cursor, arsenic good arsenic vibe coders for illustration Lovable, Replit and others. 

“Margins connected each of nan ‘code gen’ products are either neutral aliases negative. They’re perfectly abysmal,” said Nicholas Charriere, laminitis of Mocha, a vibe coding startup and backend hosting solution serving mini and mean businesses (SMBs). He added that he believes nan adaptable costs for each nan startups successful nan assemblage are very close, apt wrong 10% to 15% of 1 another.

Unlike Windsurf, Anysphere has been increasing truthful accelerated that it intends to stay an independent company, having already turned down acquisition offers, including, reports say, from OpenAI.

And Anysphere announced successful January that it is attempting to build its ain model, which could springiness it much power complete its expenses. In July, nan startup hired 2 leaders from Anthropic’s Claude Code team, nan Information reported, but 2 weeks later, these employees returned to activity astatine Anthropic.

In summation to building a model, Anysphere could expect nan costs of LLMs to alteration complete time.  

“That’s what everyone’s banking on,” said Eric Nordlander, a wide partner astatine Google Ventures. “The conclusion costs today, that’s nan astir costly it’s ever going to be.”

It’s not wholly clear really existent that is. Rather than falling arsenic expected, the costs of immoderate of nan latest AI models has risen, arsenic they usage much clip and computational resources to grip complicated, multi-step tasks. 

When that will alteration remains to beryllium seen. On Thursday, for instance, OpenAI introduced a caller flagship exemplary GPT-5 pinch fees that are importantly little than its competitor, Anthropic’s Claude Opus 4.1. And Anysphere immediately offered this exemplary arsenic a prime for Cursor users.

Anysphere has besides precocious changed its pricing building to walk on nan accrued costs of moving Anthropic’s latest Claude model, peculiarly to its astir progressive users. The move caught immoderate of Cursor customers by surprise, since they didn’t expect further charges connected apical of its $20-per-month Pro plan. Anysphere CEO Michael Truell later apologized for unclear connection astir nan pricing alteration successful a blog post.

This is nan stone and nan difficult place. Although Cursor is 1 of nan astir celebrated AI applications, having reached $500 cardinal successful ARR successful June, nan company’s personification guidelines whitethorn not beryllium truthful loyal to nan merchandise if different institution develops a instrumentality that is superior to Cursor, investors say.

Anysphere didn’t respond to a petition for comment.

Given nan competitory scenery and nan costs, Windsurf’s determination to get retired whitethorn beryllium to beryllium understandable. After nan OpenAI woody fell through, nan founders and cardinal labor near to subordinate Google successful a woody that led to a $2.4 cardinal payout to cardinal shareholders. The remaining business past sold itself to Cognition. 

While many, including salient VCs, criticized Mohan for leaving astir 200 labor without roles astatine Google, a root acquainted pinch nan woody insisted nan acquisition really maximized nan outcomes for each employees. 

Beyond Cursor, different AI coding devices are besides among nan fastest increasing startups of nan LLM procreation for illustration Replit, Lovable, Bolt and each of them trust connected exemplary makers, arsenic well.

Additionally, if this highly celebrated business sector, already generating hundreds of millions successful gross aliases much a year, has trouble building connected apical of exemplary makers, what mightiness it mean for other, much nascent industries?