Margin reality hits AI coding startups after funding rush

HIGH MODEL COSTS WEIGH ON PROFITABILITY OF ‘VIBE CODING’ FIRMS

- POULOMI CHATTERJEE

THE RAPID RISE of AI coding toolshastriggeredasurge ofstartups offering so-called ‘vibe coding’ platforms in the US and India.

But after an early funding rush and lofty valuations, many ofthese companiesare grappling with a more difficult challenge: sustaining margins.

The platforms rely heavily on large language models (LLMs) from providers such as OpenAl, Anthropic and Google. Access to theseadvanced models typically comes through paid application programming interface (APIs), making model usage one of the largest cost components for AI coding startups.

“Gross margins across the category are under severe pressure,” Deepak Dhanak, cofounderand chief operating officer of Rocket.new, told FE.“Most platforms are operating below 50% gross margins, with many inthe 20-30% range,”he added.