AI startups revolutionize coding industry, leading to sky-high valuations

Cursor, with just 60 employees, went from zero to $100 million in recurring revenue by January 2025, less than two years since its launch. Windsurf, founded in 2021, launched its code generation product in November 2024 and is already bringing in $50 million in annualized revenue, according to a source familiar with the company.

But both startups operate with negative gross margins, meaning they spend more than they make, according to four investor sources familiar with their operations.

“The prices people are paying for coding assistants are going to get more expensive,” Quinn Slack, CEO at coding startup Sourcegraph, told Reuters.

Both Cursor and Windsurf are led by recent MIT graduates in their twenties, and exemplify the gold rush era of the AI startup scene. “I haven’t seen people working this hard since the first Internet boom,” said Martin Casado, a general partner at Andreessen Horowitz, an investor in Anysphere, the company behind Cursor.

What’s less clear is whether the dozen or so code-gen companies will be able to hang on to their customers as big tech moves in.

“In many cases, it's less about who's got the best technology -- it’s about who is going to make the best use of that technology, and who's going to be able to sell their products better than others,” said Scott Raney, managing director at Redpoint Ventures, whose firm invested in Sourcegraph and Poolside, a software development startup that’s building its own AI foundation model.

Most of the AI coding startups currently rely on the Claude AI model from Anthropic, which crossed $3 billion in annualized revenue in May in part due to fees paid by code-gen companies.

But some startups are attempting to build their own models. In May, Windsurf announced its first in-house AI models that are optimized for software engineering in a bid to control the user experience. Cursor has also hired a team of researchers to pre-train its own large frontier-level models, which could enable the company to not have to pay foundation model companies so much money, according to two sources familiar with the matter.

Startups looking to train their own AI coding models face an uphill battle as it could easily cost millions to buy or rent the computing capacity needed to train a large language model.

Replit earlier dropped plans to train its own model. Poolside, which has raised more than $600 million to make a coding-specific model, has announced a partnership with Amazon Web Services and is testing with customers, but hasn’t made any product generally available yet.

Another code gen startup Magic Dev, which raised nearly $500 million since 2023, told investors a frontier-level coding model was coming in summer 2024 but hasn’t yet launched a product.

Poolside declined to comment. Magic Dev did not respond to a request for comment.