TechCrunch Startup News The high costs and thin margins threatening AI coding startups
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Aug 11, 2025 AI coding startups are struggling with profitability amidst high costs and fierce competition. The financial health of these ventures, exemplified by Windsurf, raises questions about their future sustainability. The discussion delves into the impact of large language models and strategic choices that could define the industry's trajectory. Listeners gain insight into the pressing challenges these innovative companies face in a rapidly evolving landscape.
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Negative Margins From LLM Costs
- Windsurf and similar AI coding startups had gross margins that were very negative due to LLM costs.
- It often cost more to run the product than startups could charge users.
Windsurf's Failed Sale And Exit
- Windsurf pursued a sale to OpenAI that collapsed and its founders then joined Google for a large payout.
- The remainder later sold to Cognition amid concerns over staff outcomes.
Pressure To Use Newest Models
- AI coding assistants must offer the newest and most expensive LLMs to improve coding and debugging.
- That obligation pushes operating costs up as model makers prioritize code performance.