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High cost and thin margins threaten AI coding startups

TechBrunchBy TechBrunchAugust 7, 20255 Mins Read
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In February, AI coding startup Windsurf was in talks to raise a major new round at a $2.855 billion valuation led by Kleiner Perkins. Sources familiar with the issue said the transaction did not occur. Instead, the news broke in April, and the startup had planned to sell itself to Openai with roughly the same rating: $3 billion.

The deal has become famous, but one big question remains. If startups are growing so rapidly and are attracting VC interest, why would they sell at all?

Insider told TechCrunch that it could actually become a money-taking business because of all the popularity and hype about AI coding assistants. In general, atmosphere coders, windsurf in particular, can have a structure that is expensive enough to make gross profits “very negative,” one person close to windsurf told TechCrunch. This means it costs more to run the product than a startup can bill.

This is because of the high cost of using large-scale language models (LLM), the person explained. AI coding assistants are especially pressured to always provide the latest, most sophisticated, most expensive LLM, as model makers are fine-tuning the latest models specifically for improving coding and related tasks such as debugging.

This is a challenge exacerbated by the atmosphere and fierce competition in the code assist market. Rivals include companies that already have a huge customer base, such as Anysphere's cursor and Github Copilot.

This easiest path to improving the margins of your business involves startups building their own models, eliminating the costs paid to suppliers such as humanity and Openai.

“If you don't participate in a model game, it's a very expensive business to run,” the person said.

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But the idea has its own risks. Varun Mohan, co-founder and CEO of Windsurf, ultimately decided to oppose the company that built its own model.

Furthermore, model makers are already directly competing. Humanity provides Claude Codes, Openai provides Codex, for example.

Selling businesses was a strategic move that was locked at high returns before being damaged by AI and companies that supply AI, including humanity.

Several people believe that the same pressure on the margins faced by Windsurf could affect Anysphere, the maker of the cursor, and could affect coders with atmospheres such as Lovable, Replit, and more.

“The margins for all 'Code Generation' products are neutral or negative. They are absolutely awful,” said Nicholas Charriere, founder of Mocha, a vibe coding startup and backend hosting solutions (SMBs) that serves small and medium-sized businesses (SMBs). He added that he believes the variable costs for all startups in the sector are very close, perhaps within 10% to 15%.

Unlike Windsurf, Anysphere is growing so rapidly that it intends to remain an independent company and has already rejected acquisition offers, including reports from Openai.

And then, Anysphere announced in January that it was about to build its own model. In July, the startup hired two leaders of the Claude Code team of humanity, information reported, but two weeks later, these employees returned to work with humanity.

In addition to building models, Anysphere can expect LLM costs to decrease over time.

“We're committed to providing a range of services to our customers,” said Erik Nordlander, general partner at Google Ventures. “Today's inference costs are the most expensive ever.”

It is not entirely clear how true it is. Rather than falling as expected, the costs of some of the latest AI models are increasing. This is because it uses more time and computational resources to handle complex, multi-stage tasks.

I can't see it yet when that changes. On Thursday, Openai introduced the new flagship model GPT-5 for a significantly lower price than its competitor, the Claude Opus 4.1. And Anysphere quickly offered this model as an option for cursor users.

Anysphere recently changed its price structure to take over the latest Claude models of humanity, particularly the increasing costs to the most active users. This move was a surprising surprise as we didn't expect any additional fees on top of the $20/month Pro Plan. Anysphere CEO Michael Truell later apologized for unclear communications regarding changes to the pricing of his blog post.

This is a rock and a difficult place. Cursor is one of the most popular AI applications, which reached $500 million in ARR in June, but if another company is developing a tool that is better than cursor, its user base may not be that loyal to its products.

Anysphere did not respond to requests for comment.

Given the competitive landscape and costs, the decision to break out of windsurf may prove understandable. After the Openai contract collapsed, the founders and key employees left to join Google in a transaction that led to a $2.4 billion payment to key shareholders. The rest of the business was then sold to recognition.

Many people, including the well-known VC, criticized Mohan for leaving around 200 employees at Google, but sources familiar with the deal claimed that the acquisition actually maximized the outcomes for all employees.

Beyond the cursor, other AI coding tools are also one of the fastest growing startups of the LLM generation, such as Replit, Lovable, and Bolt, all of which also rely on model makers.

What's more, if this extremely popular business sector has already generated revenue for more than a year, if it is difficult to build on top of model makers, what does it mean for other, more emerging industries?



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