Cloud Startup Vercel Fields Offers for $9 Billion Valuation
The Takeaway
• Startup’s annualized revenue has doubled in last year
• Gross margins from main web hosting and cloud service are 76%
• Investors have been making unsolicited offers to startups during AI gold rush
Vercel, a nine-year-old cloud startup that companies use to host and develop websites and artificial intelligence apps, has been approached by investors offering to invest hundreds of millions of dollars at a valuation between $8 billion to $9 billion, according to a person with direct knowledge of the discussions.
The new funding could nearly triple Vercel’s private valuation from a financing in May last year and follows a recent growth spurt at the San Francisco startup, which competes with cloud providers such as Cloudflare and Amazon Web Services and also sells an AI-powered coding assistant. The discussions are early and it is unclear if a deal will be reached.
Annual recurring revenue topped $200 million in May this year, up from $100 million in ARR in early 2024 and about $67 million in 2023, according to a person with knowledge of its financials. The company has a large staff that contributes to cash burn, however.
Vercel’s growing revenue shows how the rise of AI is helping older companies expand their products and rapidly increase their revenue. Eager to invest in these startups, venture firms are making pre-emptive, or unsolicited, offers to invest before the companies start a formal fundraising.
Vercel has about 650 employees and has raised $563 million from investors including Accel, GV, CRV and Bedrock Capital. It was valued at $3 billion, before the investment, from a financing about 15 months ago.
OpenAI, UnderArmour and PayPal pay for Vercel services to develop and run websites and applications. Vercel says its technology improves the speed and performance of its customers’ websites. Customers commit to pay a certain amount for these services per month or year.
Its gross margins–or share of revenue after a product’s direct costs to deliver it–for this main product were roughly 76% earlier this year, according to the person with knowledge of the fundraising discussions and another person with knowledge of its financials.
Margins at that level compare it to top software-as-a-service startups. Cloudflare, which runs and protects websites and applications, had margins of about 75% as of the June quarter.
It’s not clear what Vercel’s margins are for all of its products.
Like other enterprise software startups that emerged before the ChatGPT era, Vercel has been rapidly trying to reposition its business for AI. In 2023, it launched V0, which writes code based on text prompts and now also helps customers build websites and offer guidance on how to accomplish technical tasks.
“It’s very, very clear that you give an assistant to a developer and they’ll save lots and lots and lots of time,” said Vercel CEO Guillermo Rauch at The Information’s AI Summit in September. V0 “saves us time, it saves our customers time, it also helps migrations between technology.”
Revenue at startups that primarily sell coding assistants to technical and non-technical users has also taken off this year.
Anysphere, maker of Cursor, more than doubled its annualized revenue rate in just three months, to $500 million as of June. Last month, Replit was generating $144 million in annualized revenue, while Lovable was generating over $100 million in annualized revenue.
The gross margins of coding assistants like Replit, Lovable and StackBlitz range between 20% and 40%—lower than Vercel’s main product. That’s likely due to the high costs of running these AI assistants, which rely on paying OpenAI, Anthropic and Google for access to the underlying AI models.
Vercel burned roughly $11 million at the end of its first quarter, according to the person with knowledge of its financials. This implies that the company could burn around $44 million for the year.
Coding copilot Replit, which has about 80 employees, burned roughly $20 million last year, according to a different person with knowledge of its finances.
Vercel has not disclosed a timeline for going public, but Jeanne DeWitt Grosser, Vercel’s chief operating officer, said in an interview in May that the company has been adding people to its board and improving internal processes so that “one day we are ready to be a public company.”