AI startups revolutionize coding industry, leading to sky-high valuations

(Corrects paragraph 14 to remove reference to Google and Amazon declining to comment. This line also appeared in an earlier version of this story.)

By Anna Tong and Krystal Hu

SAN FRANCISCO (Reuters) -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, a code generation startup based in San Francisco that can suggest and complete lines of code and write whole sections of code autonomously, raised $900 million at a $10 billion valuation in May from a who’s who list of tech investors, including Thrive Capital, Andreessen Horowitz and Accel.

Windsurf, a Mountain View-based startup behind the popular AI coding tool Codeium, attracted the attention of ChatGPT maker OpenAI, which is now in talks to acquire the company for $3 billion, sources familiar with the matter told Reuters.

Its tool is known for translating plain English commands into code, sometimes called “vibe coding,” which allows people with no knowledge of computer languages to write software. OpenAI and Windsurf declined to comment on the acquisition.

“AI has automated all the repetitive, tedious work,” said Scott Wu, CEO of code gen startup Cognition. “The software engineer’s role has already changed dramatically. It’s not about memorizing esoteric syntax anymore.”

Founders of code-gen startups and their investors believe they are in a land grab situation, with a shrinking window to gain a critical mass of users and establish their AI coding tool as the industry standard.

But because most are built on AI foundation models developed elsewhere, such as OpenAI, Anthropic, or DeepSeek, their costs per query are also growing, and none are yet profitable.

They’re also at risk of being disrupted by Google, Microsoft and OpenAI, which all announced new code-gen products in May, and Anthropic is also working on one as well, two sources familiar with the matter told Reuters.

The rapid growth of these startups is coming despite competing on big tech's home turf. Microsoft’s GitHub Copilot, launched in 2021 and considered code-gen’s dominant player, grew to over $500 million in revenue last year, according to a source familiar with the matter.

Microsoft declined to comment on GitHub Copilot’s revenue. On Microsoft’s earnings call in April, the company said the product has over 15 million users.