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Cursor's crazy revenue & 10B valuation - is it sustainable? Lets talk TAM, revenue quality, and other sources of value Cursor might be sitting on (frontier coding model??).
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What is Minimum Viable Banter?
From the trenches, Technology conversation and insight, now with more... molecules.
Hey, if you're listening to this, thanks for joining me. My name is Rod Edwards, and welcome to the minimum viable banter podcast inaugural episode. Today, what I'd really love to talk about for a few minutes is Cursor, the 10,000,000,000 semi automated coding phenomenon that just finished raising a $900,000,000 round. The basic question is, is this rational? We're gonna talk about that today on Minimum Viable Banter.
Rod Edwards:So, Cursor, the current poster child of the AI hype train. And to be clear, I say that with, you know, a bit of sarcasm baked into it or skepticism perhaps. But for the record, I'm fully on board of the AI hype train. I got my ticket a long time ago and I'm certainly enjoying the ride. But Cursor is one of those standout transactions in the venture capital realm that raises a lot of eyebrows and not in the least because it's such an exciting story.
Rod Edwards:Cursor, the product, which is run by a bigger umbrella organization, but Cursor, the product, is three years old and in that time has grown to be a $10,000,000,000 company. A lot of people think of it as the fastest growing startup in history, just based on its revenue trajectory, which, you know, is pretty wild. You know, this year, for instance, Cursor has scaled their revenue from $100,000,000 of ARR to over $500,000,000 and, you know, that's not nothing. Does that command a $10,000,000,000 valuation? So to qualify that, to begin with, the valuation is actually $9,900,000,000 post money, pre money it's $9,000,000,000 I'm just rounding up to $10,000,000,000 because it's way easier to talk about.
Rod Edwards:It also makes the math easier to do. With $500,000,000 of ARR, dollars 10,000,000,000 valuation represents a 20X multiple on ARR. That is a good multiple in the current SaaS valuation environment. Know, honestly, 20x doesn't seem crazy for something that has 5x'd their revenue in the last six months. You know, that 20x, I think, bakes in a fair amount of skepticism perhaps.
Rod Edwards:It's funny to look at, you know, a three year old company with a $10,000,000,000 valuation that just raised $900,000,000 and say that that's a skeptical valuation, but it sort of feels like it is. The big question that I'll come back to from the beginning is, is this rational? Let me ask three questions or three streams of consciousness about the Cursor story. The question is growth. They've grown from $100,000,000 to $500,000,000 incredible trajectory.
Rod Edwards:But how much is left? You know, if you do some Googling or OpenAI conversating, you'll get various estimates as to the number of software developers in the market. But that's really your total addressable market for a product like Cursor is software developers. I've seen anywhere from 20,000,000 to closer to 50,000,000. For the sake of argument, I'm going to land on what sort of stuck out as the median estimate for me at 30,000,000 developers and if every one of those 30,000,000 developers signed up for Cursor for $20 a month, plus $20 a month, $2.40 a year, that represents a total addressable market of $7,200,000,000.
Rod Edwards:Cursors obviously got a big chunk of that already at their $500,000,000 of ARR but 7.2 means there's still a fair amount out there to grab. But you know, the real talk here is that Cursor is not going to get 100% of that market. You know, let's say that they get 25%. One out of every four software developers on earth ends up using Cursor on a fully annualized $20 a month subscription. That would be a of $7,200,000,000, which is 1,800,000,000.0, which still represents more than a X of their current revenue.
Rod Edwards:So, you know, that's a pretty good return. Does that feel real? Is it likely that one out of every four software developers is going to end up on Cursor? I don't know. There's a ton of competition.
Rod Edwards:You've got everything from Replit and Windsurf, the sort of peer players in the assisted coding space, to open source alternatives like RU Code that hook a language model into whatever your IDE of choice is. And then there's enterprise players that are only going to strike deeper into this space like Microsoft obviously has a very vested interest in getting in on this. So, to pull it back, how much growth is left? Total addressable market of $7,200,000,000. Could Cursor 3x their current revenue or 4x their current revenue and grab 1.5 to $2,000,000,000 of annual revenue?
Rod Edwards:Yeah, sure. Possibly. To me, that 25% feels like a big bet. Know, just so much coming into this space that it feels like a big bet. So that's the question, is how much growth is left?
Rod Edwards:question, that $500,000,000 of revenue, what is the quality of that revenue? Cursor calls it annual recurring revenue, but their subscriptions are monthly. You can sign up for an annual, but I'm assuming that that $500,000,000 is literally taking their monthly recurring revenue, whatever that is, and multiplying it by 12. I could do the math and it's, you know, $40,000,000 or something like that. But does that ring true?
Rod Edwards:You know, how what percentage of Cursor's $500,000,000 of revenue or, you know, their their monthly revenue, what percentage is coming from drive bys? How many of those people are going to stay on? Essentially what we're asking is what's the churn like at Cursor? And I don't think we know, I don't know that I've seen a statistic, know, they've published something about that. But I think that's an important question because the quality of that revenue matters.
Rod Edwards:I think that goes without saying. And it strikes me that there isn't a ton of barrier to entry to switching. You're on Cursor today, tomorrow you pick up shop and point Windsurf at your GitHub repository and you use Windsurf or whatever the next flavor du jour is. What is the sticking power of Cursor? I don't think anyone knows that yet.
Rod Edwards:So that's a question as well. So how much growth is left? What's the quality of the current revenue? The last sort of flag or question that I would ask is what are the other pieces of the puzzle? You know, what other sources of value does an organization or, you know, product like Cursor create?
Rod Edwards:So what do we know? We know that Cursor is built on Versus Code, an open source IDE. So, you know, it's built on open source. There's value to be found there, but obviously not the same type of value lock in that you can get from rolling your own platform. The other thing is Cursor isn't a frontier or a foundational model provider.
Rod Edwards:Provider so they're back ended by other companies' models. The documentation seems to indicate that it's part Claude or Clode depending on how you want to pronounce it and part OpenAI. You know, But the model on the back end isn't a source of unique value for Cursor either. So they don't own the software on the endpoint. They don't own the model on the back end.
Rod Edwards:What do they own? Arguably, the most important piece, which is the user experience. So adapting UX code, sorry, Versus code to be on AI enabled platform and making it feel totally frictionless and natural for both a developer and the ecosystem surrounding the developers, presumably QAs, enterprise software managers, you know, all the other players in the ecosystem that would be impacted by the presence of something like Cursor. I think what we've seen so far is that Cursor is executing really well. They're doing the best job of anyone in market in terms of making the experience of becoming an AI equipped super coder really frictionless and seamless.
Rod Edwards:So that's very powerful. You know, another proposition out there is that, you know, maybe things like Cursor and Windsurf are actually a foundational model play or a frontier model play. So what these do is, in theory, let Winsorf, Recursor, whoever, see a ton of code and see a ton of human created code so you can sort of tap dance around the risk of training models on output from models and avoiding model collapse. So in theory, these tools are an incredible resource for gathering all that and in theory someone like Cursor could be planning to create their own frontier coding model or, you know, tuning, you know, something like Clode from Anthropic to be a superior coding model. But the truth of it is obviously a large amount, if not all of the code that goes into something like Cursor is going to be bound by intellectual property and privacy laws and so I think unwinding all of that and having user agreements that are permissive enough to let you take proprietary human created code and bake it into your own frontier model, that feels like a stretch to me as well.
Rod Edwards:It feels like what Cursor's got is an incredible user experience, which carries a lot of value that they've leveraged into incredible adoption in market, which shows up in their revenue story. There we go. The bottom line is that growth is phenomenal, but there's a ceiling set by the total addressable market. That is to say the number of developers, the number of developers that Cursor can get vis a vis the competition, the amount that they're willing to pay because there will be downward pressure on price over time. There's a ceiling set on the tool addressable market and the revenue quality that Cursor is getting is to be determined as well.
Rod Edwards:So when you take all that into account with the fact that beyond their user experience and distribution, Cursor doesn't necessarily have a unique source of value that they're creating, it feels like the participants in this recent raise are going to be pushing hard for another series or an exit in the next twelve to twenty four months to watch that revenue 3x and then get their value out. So that's the bottom line on Cursor. Thank you for listening to minimum viable banter today and I will catch you next time. Cheers.