“AI startups revolutionize coding industry, leading to sky-high valuations”, June 3, 2025

Two years after the launch of ChatGPT, return on investment in generative AI has been elusive, but one area stands out: software development. So-called code generation or “code-gen” startups are commanding sky-high valuations as corporate boardrooms look to use AI to aid, and sometimes to replace, expensive human software engineers... Cursor raised $900 million at a $10 billion valuation in May from investors including Thrive Capital, Andreessen Horowitz and Accel.

These startups are growing fast, but most are not profitable and operate with negative gross margins... They’re also at risk of being disrupted by Google, Microsoft and OpenAI, which all announced new code-gen products in May. Microsoft’s GitHub Copilot, launched in 2021, grew to over $500 million in revenue last year, according to a source familiar with the matter.

Some companies are trying to train their own models to reduce reliance on external AI providers... Windsurf announced its first in-house AI models in May, and Cursor has hired researchers to pre-train its own large frontier-level models. But the costs are steep, and others like Replit have dropped similar plans. What’s less clear is whether these startups can retain users as Big Tech scales up.