Cursor IDE has emerged as the fastest-growing development environment in recent memory, reaching an unprecedented $100M annual recurring revenue in just 12 months, while Visual Studio Code has announced plans to become a fully open source AI editor. This dramatic shift in the code editor landscape represents one of the most significant developments for software engineers since the introduction of GitHub Copilot, as two major players take different approaches to AI-powered development.

Cursor's Meteoric Rise

In less than three years, Cursor has transformed from an ambitious startup to what many are calling the fastest-growing SaaS product in history. Founded in 2022 by four MIT graduates, Cursor took the bold step of forking Visual Studio Code to create something entirely new: an AI-native development environment that fundamentally reimagines how developers interact with their tools.

A Revolutionary Approach to Code Development

What makes Cursor different isn't just that it has AI capabilities—it's that AI is integrated into its very foundation. Rather than simply adding AI as a feature, Cursor was built from the ground up with artificial intelligence at its core.

The IDE offers advanced capabilities including multi-line code prediction, smart code generation, and intelligent autocompletion that adapts based on the developer's recent changes. Its integration with powerful models like OpenAI's ChatGPT and Claude allows for sophisticated code generation that goes far beyond simple snippets.

"AI should not just assist coding—it should be the foundation of how developers work," was the founding team's realization according to reports on their meteoric growth. This philosophy has clearly resonated with developers, who have flocked to the platform at an unprecedented rate.

Unprecedented Growth Trajectory

The numbers behind Cursor's growth are staggering. The company has achieved what many considered impossible: scaling from $1 million to $100 million in annual recurring revenue in just 12 months. This growth wasn't fueled by enterprise contracts or corporate deals, but rather by individual developers willing to pay $20-40 monthly for the productivity advantages the platform offers.

Cursor now boasts approximately 360,000 paying users, with many more using its freemium tier that offers 2,000 free AI code completions before requiring payment. This product-led growth strategy has allowed the platform to expand rapidly without the massive marketing budgets typically associated with such meteoric rises.

Visual Studio Code's Open Source AI Response

On May 19, 2025, the Visual Studio Code team announced a significant strategic shift in response to the changing landscape: they are committing to making VS Code "an open source AI editor". This represents a major pivot for Microsoft's immensely popular code editor, which has been one of the most successful open source projects on GitHub for the past decade.

Opening the AI Black Box

At the center of VS Code's strategy is the decision to open source the GitHub Copilot Chat extension under the MIT license. This is no small matter, as Copilot has been one of Microsoft's flagship AI products and represents years of investment and development.

"We intend to stay true to our founding development principles: open, collaborative, and community-driven," the VS Code team wrote in their announcement. The plan involves not just releasing the code, but carefully refactoring relevant components into VS Code core, making AI capabilities a central part of the editor rather than just an extension.

Why Now? The Strategic Timing

The VS Code team cited several factors motivating their decision to open source their AI capabilities now:

First, large language models have improved significantly, reducing the need for proprietary "secret sauce" prompting strategies that once provided competitive advantages. Second, effective user experience patterns for AI coding assistants have become increasingly standardized across the industry.

Perhaps most tellingly, the team acknowledges growing concerns around data collection in AI tools: "We've gotten a lot of questions about the data that is collected by AI editors. Open sourcing the Copilot Chat extension enables you to see the data we collect, increasing transparency".

There's also a security dimension—the team notes that "Malicious actors are increasingly targeting AI developer tools," suggesting that the open source security model might be more effective at identifying and addressing vulnerabilities.

The Competitive Landscape

Despite Cursor's impressive growth, it's worth noting that in the broader source code management market, it still holds a relatively small market share. GitHub dominates with 85.11% of the market, followed by GitKraken (6.23%) and SourceTree (6.06%). Cursor, while growing rapidly, is still emerging in this competitive landscape.

VS Code, meanwhile, comes with Microsoft's resources and an existing massive user base. By committing to an open source AI strategy, VS Code is leveraging one of its core strengths—its vibrant community of contributors and extensions.

The competition between these approaches—Cursor's purpose-built AI-native environment versus VS Code's open, community-driven AI integration—represents two fundamentally different philosophies about how AI should be incorporated into development tools.

The Fork Becomes the Competitor

One of the most interesting aspects of this rivalry is that Cursor began as a fork of VS Code. The founders took Microsoft's editor as their starting point but reimagined it as an AI-first tool. Now, VS Code is responding by embedding AI more deeply into its core functionality, creating a fascinating competitive dynamic.

Cursor's approach allowed for rapid innovation without the constraints of maintaining backward compatibility or community consensus. VS Code's approach leverages collective intelligence and transparency. Both have their merits, and the market will ultimately decide which resonates more strongly with developers.

What This Means for Developers

For the average developer, this competition promises to accelerate innovation in development tools. Features that were once considered cutting-edge are likely to become standard across platforms as the competition heats up.

The freemium model that Cursor pioneered—offering limited AI completions for free before requiring payment—may evolve as VS Code brings more AI capabilities into its free, open-source offering. This could put pressure on Cursor's revenue model, which has thus far been extraordinarily successful.

On the other hand, Cursor's singular focus on AI-native development may allow it to continue pushing boundaries in ways that a community-driven project like VS Code cannot. Its product obsession—the founders have stated that "the Cursor of today should feel obsolete in a year"—suggests a pace of innovation that could be difficult for any competitor to match.

Conclusion: The Future of AI-Powered Development

The emerging competition between Cursor and VS Code marks a turning point in software development. AI is no longer just a helpful addition to coding tools—it's becoming the central organizing principle around which development environments are built.

VS Code's announcement reflects the mainstreaming of AI in development: "As AI becomes core to the developer experience in VS Code, we intend to stay true to our founding development principles: open, collaborative, and community-driven". Meanwhile, Cursor's explosive growth demonstrates the market's appetite for tools that fully embrace AI's potential to transform how we write code.

For developers, this competition promises better tools, more innovation, and ultimately more productive coding experiences. Whether the winner is an AI-native upstart like Cursor or an established platform like VS Code embracing AI more fully, the true victors will be the developers who benefit from this accelerated evolution of their most important tools.