In February, AI coding startup Windsurf was in talks to boost an enormous new spherical at a $2.85 billion valuation led by Kleiner Perkins, at double the valuation it hit six months earlier, sources advised TechCrunch on the time. That deal didn’t occur, in keeping with a supply aware of the matter. As a substitute, information broke in April that the startup deliberate to promote itself to OpenAI for roughly the identical valuation: $3 billion.
Whereas that deal famously fell aside, one larger query stays: If the startup was rising that quick and attracting VC curiosity, why wouldn’t it promote in any respect?
Insiders inform TechCrunch that for all the recognition and hype round AI coding assistants, they will really be massively money-losing companies. Vibe coders typically, and Windsurf particularly, can have such costly buildings that their gross margins are “very unfavourable,” one particular person near Windsurf advised TechCrunch. That means it price extra to run the product than the startup may cost for it.
That is as a result of excessive prices of utilizing massive language fashions (LLMs), the particular person defined. AI coding assistants are significantly pressured to at all times provide the latest, most superior, and most costly LLMs as a result of mannequin makers are significantly fine-tuning their newest fashions for enhancements in coding and associated duties like debugging.
It is a problem compounded by fierce competitors within the vibe-coding and code-assist market. Rivals embrace firms that have already got large buyer bases like Anysphere’s Cursor and GitHub Copilot.
Probably the most easy path to bettering margins on this enterprise entails the startups constructing their very own fashions, thereby eliminating prices of paying suppliers like Anthropic and OpenAI.
“It’s a really costly enterprise to run for those who’re not going to be within the mannequin sport,” stated the particular person.
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However that concept comes with its personal dangers. Windsurf’s co-founder and CEO, Varun Mohan, in the end determined in opposition to the corporate constructing its personal mannequin — an costly endeavor, the particular person stated.
As well as, mannequin makers are already competing immediately. Anthropic gives Claude Code and OpenAI gives Codex, as an illustration.
Promoting the enterprise was a strategic transfer to lock in a excessive return earlier than it may very well be undermined by the very firms that provided its AI, together with OpenAI and Anthropic, which have been additionally getting into the AI coding market.
A number of folks consider that the identical stress on margins Windsurf confronted may very well be impacting Anysphere, the maker of Cursor, in addition to vibe coders like Lovable, Replit, and others.
“Margins on the entire ‘code gen’ merchandise are both impartial or unfavourable. They’re completely abysmal,” stated Nicholas Charriere, founding father of Mocha, a vibe-coding startup and back-end internet hosting resolution serving small and medium companies (SMBs). He added that he believes the variable prices for all of the startups within the sector are very shut, possible inside 10% to fifteen% of each other.
In contrast to Windsurf, Anysphere has been rising so quick that it intends to stay an impartial firm, having already turned down acquisition gives, together with, reviews say, from OpenAI.
And Anysphere introduced in January that it’s making an attempt to construct its personal mannequin, which may give it extra management over its bills. In July, the startup employed two leaders from Anthropic’s Claude Code crew, the Data reported, however two weeks later, these staff returned to work at Anthropic.
Along with constructing a mannequin, Anysphere may count on the price of LLMs to lower over time.
“That’s what everybody’s banking on,” stated Erik Nordlander, a normal associate at Google Ventures. “The inference price at the moment, that’s the most costly it’s ever going to be.”
It’s not totally clear how true that’s. Quite than falling as anticipated, the price of among the newest AI fashions has risen, as they use extra time and computational assets to deal with sophisticated, multistep duties.
When that may change stays to be seen. On Thursday, as an illustration, OpenAI launched a brand new flagship mannequin, GPT-5, with charges which can be considerably lower than its competitor, Anthropic’s Claude Opus 4.1. And Anysphere instantly provided this mannequin as a selection for Cursor customers.
Anysphere has additionally lately modified its pricing construction to go alongside the elevated prices of operating Anthropic’s newest Claude mannequin, significantly to its most energetic customers. The transfer caught a few of Cursor clients unexpectedly, since they didn’t count on extra costs on prime of its $20-per-month Professional plan. Anysphere CEO Michael Truell later apologized for unclear communication concerning the pricing change in a weblog put up.
That is the rock and the exhausting place. Though Cursor is without doubt one of the hottest AI purposes, having reached $500 million in ARR in June, the corporate’s consumer base is probably not so loyal to the product if one other firm develops a instrument that’s superior to Cursor, traders say.
Anysphere didn’t reply to a request for remark.
Given the aggressive panorama and the prices, Windsurf’s choice to get out might show to be comprehensible. After the OpenAI deal fell by means of, the founders and key staff left to affix Google in a deal that led to a $2.4 billion payout to key shareholders. The remaining enterprise then bought itself to Cognition.
Whereas many, together with outstanding VCs, criticized Mohan for leaving roughly 200 staff with out roles at Google, a supply aware of the deal insisted the acquisition really maximized the outcomes for all staff.
Past Cursor, different AI coding instruments are additionally among the many quickest rising startups of the LLM era, like Replit, Lovable, and Bolt, and all of them depend on mannequin makers as properly.
Moreover, if this extraordinarily standard enterprise sector, already producing tons of of thousands and thousands in income or extra a yr, has problem constructing on prime of mannequin makers, what may it imply for different, extra nascent industries?
