Why most AI startups won't survive?

Every week there’s a new AI startup on X, Linkedin or Product Hunt. Another wrapper around an LLM. Another shiny demo that calls someone else’s API. Founders raise a seed round, go viral for a day, and then make quick revenue and will vanish.
The truth is uncomfortable, if your company is just an API call to OpenAI or Anthropic, you don’t own anything. You don’t own the moat, the data, the infrastructure, or the economics. You are just a middleman, and middlemen don’t survive long.

The platform always eats the layer above it

History repeats.
  • If you built a business on top of Facebook pages, Facebook killed your reach.
  • If you built on top of Twitter bots, Twitter closed the API.
  • If you built on top of Shopify plugins, Shopify cloned you.
Why would AI be any different? Right now, startups are building clever UIs around APIs. But the model creators are not your partners, they are your landlords. At some point they raise rent, change rules, or release the same feature natively.

Who actually wins?

Four kinds of companies survive this wave:
  • The model builders. The people training foundation models with compute, data, and talent. This is capital intensive and brutally hard, but it’s where the real moat lives.
  • The infrastructure players. Cloud, GPUs, fine-tuning platforms, data labeling, orchestration layers. These companies sell the picks and shovels for the AI gold rush.
  • The distribution moguls. Startups who have cracked the global distribution game through virality, network or capital will make it big.
  • The real problem solvers. There is no replacement for true customer focused problem solving. If you built a solution that customers need and use AI to make the solution better. You will survive any hype cycle.
Everyone else? They’re features waiting to be absorbed.

But isn’t there room for applications?

Yes, but the bar is much higher than a wrapper. If you’re building an “AI startup,” you need one of:
  • Proprietary data that no one else has.
  • Distribution that no one else can match.
  • A workflow so deeply embedded that replacing you feels impossible.
If you don’t have these, you’re not a company. You’re a thin UI on someone else’s infra.

The hype cycle is brutal

Investors are learning fast. They funded clones, wrappers, gimmicks. Now they want defensibility. They want to know why the platform won’t kill you in 12 months. Most AI startups can’t answer that. 

Model builders will always say wrappers are ok, because thats how they make the money. 

The uncomfortable advice

If you’re building in AI today, ask yourself honestly:

  • What do I control that the API provider can’t take away?
  • What can I defend if the model costs drop to zero or features become free?
  • Am I building something with a moat, or just a feature?

Because here’s the reality, when the dust settles, the only survivors will be the ones who either own the model or own the infrastructure everyone depends on. Everyone else will be a footnote in the history of another hype cycle.