(Corrected paragraph 14 to remove references to Google and Amazon’s rejection of comments. This line also appears in earlier versions of this story.)
By Anna Tong and Krystal Hu
San Francisco (Reuters) - Two years after Chatgpt's launch, the return on investment in generating AI is elusive, but one area stands out: software development.
As company boards want to use AI to help, sometimes even replace expensive human software engineers, so-called code generation or "code-traditional" startups are directing high valuations.
Cursor is a San Francisco-based code generation startup that can suggest and complete lines of code and automatically write the entire code, and raised $900 million from the list of technology investors at a $10 billion valuation in May, including Thrive Capital, Andreessen Horowitz and Accel.
Sources familiar with the matter told Reuters that Windsurf is a startup based on mountain landscapes, behind which the price of AI-coded tools coded has attracted the attention of Chatgpt Maker Openai, which is now negotiating a $3 billion acquisition.
Its tools are known for converting plain English commands into code, sometimes called "Vibe encoding", which allows people without a computer language to write software. Openai and Windsurf declined to comment on the acquisition.
“AI has already filled all the repetitive, tedious work with automation,” said Scott Wu, CEO of Code Gen Startip Cognition. "The role of this software engineer has changed dramatically. It's no longer about the esoteric grammar of memory."
Code - Founders of mission startups and their investors believe that they are in a state of land grabbing, with windows constantly shrinking to gain a large number of users and establish their AI coding tools as industry standards.
However, since most people build on AI foundation models developed elsewhere, such as OpenAI, Anthropic or DeepSeek, their per-query cost is also growing and they are not profitable yet.
Two sources familiar with the matter told Reuters they could also be at risk of disruption by Google, Microsoft and Openai, which announced new code-funded products in May, and Anthropic is also working on a product.
Despite participating in the home court at Big Tech, the rapid growth of these startups is still on the rise. Microsoft's Github Copilot was launched in 2021 and is considered a major player in code-gene, with revenues rising by more than $500 million last year, according to sources familiar with the matter.
Microsoft declined to comment on Github Copilot's revenue. The company said the product said on its earnings call in April that it had more than 15 million users.
Learn coding?
As AI revolutionizes the industry, many jobs may be eliminated, especially more basic and involve repetitive entry-level coding positions.
SignalFire, a venture capital firm that tracks technology recruitment, found that new employees with less than one year of experience in 2024 fell 24% in 2024, attributed to tasks assigned to entry-level software engineers that can now be partially implemented through AI.
Google's CEO also said in April that "more than 30% of Google's code" is now established, and Amazon CEO Andy Jassy said last year that the company saved "the equivalent of 4,500 developer years" by using AI.
Microsoft CEO Satya Nadella said at a meeting in May that about 20 to 30% of the code is now AI-generated. That same month, the company announced layoffs of 6,000 workers worldwide, 40% of whom are software developers in Microsoft's hometown of Washington.
"We are focused on creating AI that enables developers to increase productivity, creativity and save time," a Microsoft spokesperson said. "This means that some roles will change with the AI revolution, but human intelligence remains at the center of the software development lifecycle."
Installation loss
Some "atmosphere coding" platforms already have a large amount of annual revenue.
The cursor of only 60 employees increased from zero to $100 million in recurring revenue from January 2025, less than two years since its launch. Founded in 2021, Windsurf launched a code generation product in November 2024 and has already brought in $50 million in annual revenue, according to a source familiar with the company.
However, the two startups have negative gross margins, which means they spend more than they cost.
“The prices people pay for coding assistants will become more expensive,” Quinn Slack, CEO of coding startup SourceGraph, told Reuters.
Cursor and Storm Surfer are both led by MIT graduates in their twenties, and give examples of the gold rush era at the AI startup scene. “I haven’t seen people work hard since the first internet boom,” said Martin Casado, general partner of Andreessen Horowitz.
What is less clear is whether the twelve or so code communication companies can continue to their customers as large technologies develop.
“In many cases, less than who has the best technology, it’s about who will make the most of the technology and who will be able to sell their products better than others,” said Scott Raney, managing director of Redpoint Ventures, whose company invests in SourceGraph and Poolside, a software development startup that built AI AI Foundation Models.
Custom AI model
Currently, most AI-coded startups rely on Anthropic's Claude AI model, which exceeded $3 billion in annual revenue in May, partly due to the fees paid by code-fund companies.
But some startups are trying to build their own models. In May, Windsurf announced its first internal AI model optimized for software engineering to control the user experience. Cursor also hired a team of researchers to pre-train its large boundary-level models, which could allow companies to avoid having to pay so much to the foundation modeling company, according to two sources familiar with the matter.
Startups looking to train their own AI-coded models face a tough battle because it can easily cost millions of dollars to buy or rent the computing power needed to train large language models.
Exchange for an earlier discard plan to train your own model. Poolside has raised over $600 million in coding-specific models, and the company has announced a partnership with Amazon Web Services and is testing with customers, but has not made any products available in general.
Another code, Gen Startup Magic Dev, has raised nearly $500 million since 2023, told investors that the border-level coding model for the summer of 2024 will be launched in 2024, but has not yet launched the product.
Poolside declined to comment. The Magic Developer did not respond to a request for comment.
(Reported by Anna Tong and Krystal Hu in New York. Editors of Kenneth Lee and Michael Lillmont)