Just five years into its journey, Character.AI, which allows users to create AI characters and have conversations with them, has filed for bankruptcy (Chapter 11), following a series of lawsuits and difficulties scaling its popular platform. In a court document, the company said it had assets and liabilities of between $50 million and $100 million.
“Over the past year, Character.ai has taken significant steps to maintain and improve its business in the face of significant legal, regulatory and operational headwinds. After a thorough review of available alternatives, the Board of Directors has determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders,” Colin Adams, CEO of Character.AI, said in a statement.
The startup also agreed to sell some of its assets to Disney for $20 million, along with a non-exclusive perpetual license for its technology.
The company said Disney would provide transition services through former Character.AI employees who joined the entertainment giant last month alongside its former CEO Karandeep Singh Anand.
Adams said the company will continue operations during the sale process, which is expected to close in late November or early December. He noted, however, that there was not yet an offer for the company’s assets or a buyer.
“We hope that the sales process will result in a concrete proposal that will enable continued operations of the Character.ai platform. However, if such an offer is not available, the platform will be shut down,” Adams wrote.
Character.AI has had a tumultuous five years. Founded by former Google engineers Noam Shazeer, co-author of the landmark Transformer paper, and Daniel De Freitas in late 2021, the startup initially focused on training basic models and developing an AI chatbot platform that lets people create personalized personas with whom they could chat.
In September 2022, the startup reached unicorn valuation with a $150 million fundraising thanks to high demand for its platform, with the company claiming at the time that its users had exchanged more than 2 billion messages with its bots in five months and that active users spent an average of more than two hours per day on the platform.
As of May 2023, Character.AI apps attracted over 1.7 million installs in the first week after launch. But about a year later, in August 2024, Google struck a $2.7 billion deal to license the startup’s models, and Shazeer and De Freitas returned to the search giant. Around that time, the startup’s general counsel, Dominic Perella, became interim CEO, and the company abandoned basic training models to focus on growth.
Character.AI’s rise has not slowed, however, with its platform recording 20 million monthly active users by October of the same year.
But things got tough after the startup was sued following the suicide of a 14-year-old Florida boy whose mother says he became obsessed with a chatbot on its platform. Shortly after, Texas launched an investigation to assess whether the platform complied with child privacy and safety laws. The company later settled some of those lawsuits, added more security features, and banned minors from its platform.
In June last year, the company named Anand, a former Brex and Meta executive, as CEO, and expanded its products to add AI video generation and social feeds. Since then, the company has attempted to introduce new ways to boost user engagement through interactive storytelling formats as well as microdramas.
But the fact that the company had to file for bankruptcy shows that such changes could not change the sustainability of the startup.
This also shows that consumer-facing AI products are very difficult to scale and monetize. Character.AI was one of the top apps in terms of time spent, according to analytics firm Sensor Tower. But high engagement can be a double-edged sword; AI costs rise as more people use the app, which also increases pressure to monetize users.
Character.AI has raised more than $193 million in funding across multiple rounds from investors including Lightspeed, SV Angel, Greycroft and a16z, according to PitchBook.
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