AI Startups Turn Applications Into Big Business
Artificial intelligence startups that build practical apps using large language models (LLMs) are seeing a rapid rise in sales. This growth is sparking a fierce race to turn cutting-edge AI into profitable products.
From Experiments to Explosive Growth
Investors are betting big on companies like Cursor, Perplexity, Synthesia, and ElevenLabs. These startups build tools powered by AI models developed by OpenAI, Google, and Anthropic. Their goal: bring generative AI to both everyday users and businesses.
These companies are now generating tens of millions of dollars in revenue. Their success is helped by increased competition among LLM providers, which has driven down the cost of running AI queries.
“Many of these startups are reaching up to $200 million in annual recurring revenue in just a couple of years,” said Lorenzo Chiavarini, head of research at Dealroom.co. “That kind of growth is attracting serious investor interest.”
A Surge in AI Funding
In 2024 alone, startups building AI-powered apps raised $8.2 billion in funding. That’s a 110% increase compared to the previous year, according to Dealroom.co and Flashpoint.
Silicon Valley-based Perplexity, an AI search engine, raised $500 million in December—its fourth funding round of the year. The round tripled its valuation to $9 billion. It is now seeking even more capital at a higher valuation.
Legal AI startup Harvey also raised $300 million in February, while coding-related startups like Reflection AI, Poolside, Magic, and Codeium each attracted hundreds of millions.
Coding Tools Draw Investor Attention
Anysphere, the company behind the AI coding tool Cursor, raised $105 million in January at a $2.5 billion valuation. Insiders say investors are now valuing it at over $10 billion. The startup is just three years old but already making about $200 million annually.
“People find natural language interesting, but code is where the real value lies,” said Oskar Schulz, Anysphere’s president.
Productivity Tools With Lasting Impact
Investors are drawn to AI apps that boost productivity. These tools promise to make knowledge work faster and cheaper—without the high costs of building LLMs from scratch.
“Most of these apps help professionals work better together using AI,” said Mike Volpi, an AI-focused investor. Volpi backs Hebbia, which uses AI to search through unstructured data.
There’s growing agreement that the real long-term value lies in AI applications, not the foundational models.
“Applications are where the most value will be created,” said Victor Riparbelli, CEO of AI avatar company Synthesia, valued at $2.1 billion earlier this year.
Faster Revenue Than Past Software Waves
Recent data shows AI startups are making money faster than earlier tech companies. According to Stripe, leading AI startups are hitting millions in revenue within a year—much faster than typical software companies.
Bret Taylor, chair of OpenAI and co-founder of AI support startup Sierra, highlighted the speed of change. Sierra launched in February 2024 and hit a $4.5 billion valuation by October.
“We’ve already changed the models we use five or six times,” Taylor said. “Using a model from two years ago now would feel like driving a car from the 1950s.”
Uncertainty Remains
Despite the hype, some investors remain cautious. Many of today’s leading AI apps are built on top of existing models. That makes them vulnerable to being replaced if larger tech firms create similar tools.
Because these startups are so new, it’s unclear how loyal their customers will be. “They haven’t been through an annual renewal cycle yet,” said Hannah Seal, a partner at Index Ventures. “We don’t yet know what their churn rates will look like.”
A New Era for Software?
Still, industry leaders believe AI marks the beginning of a major platform shift—similar to the rise of the internet or mobile phones.
“There’s probably more uncertainty in software now than at any point in my career,” said Sierra’s Taylor. “But it’s also a time of massive opportunity.”
