In February, AI coding startup Windsurf was in talks to raise a big new round at a $2.85 billion valuation led by Kleiner Perkins, at double the valuation it hit six months earlier, sources told TechCrunch at the time. That deal didn’t happen, according to a source familiar with the matter. Instead, news broke in April that the startup planned to sell itself to OpenAI for roughly the same valuation: $3 billion.
While that deal famously fell apart, one bigger question remains: If the startup was growing that fast and attracting VC interest, why would it sell at all?
Insiders tell TechCrunch that for all the popularity and hype around AI coding assistants, they can actually be massively money-losing businesses. Vibe coders generally, and Windsurf in particular, can have such expensive structures that their gross margins are “very negative,” one person close to Windsurf told TechCrunch. Meaning it cost more to run the product than the startup could charge for it.
This is due to the high costs of using large language models (LLMs), the person explained. AI coding assistants are particularly pressured to always offer the most recent, most advanced, and most expensive LLMs because model makers are particularly fine-tuning their latest models for improvements in coding and related tasks like debugging.
This is a challenge compounded by fierce competition in the vibe-coding and code-assist market. Rivals include companies that already have huge customer bases like Anysphere’s Cursor and GitHub Copilot.
The most straightforward path to improving margins in this business involves the startups building their own models, thereby eliminating costs of paying suppliers like Anthropic and OpenAI.
“It’s a very expensive business to run if you’re not going to be in the model game,” said the person.
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But that idea comes with its own risks. Windsurf’s co-founder and CEO, Varun Mohan, ultimately decided against the company building its own model — an expensive undertaking, the person said.
In addition, model makers are already competing directly. Anthropic offers Claude Code and OpenAI offers Codex, for instance.
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