Just five years after its founding, Character.AI, which allows users to create and talk to AI characters, has filed for Chapter 11 bankruptcy after numerous lawsuits and struggles to scale its popular platform. The company said in court documents that it had assets and liabilities of between $50 million and $100 million.
Character.AI CEO Colin Adams said in a statement: “Character.ai has taken meaningful steps to maintain and improve its business in the face of significant legal, regulatory and operational headwinds. After a comprehensive review of available alternatives, the board determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders.”
The company also agreed to sell certain of its assets to Disney for $20 million and a non-exclusive perpetual license to its technology.
The company announced that Disney will provide transition services through a former employee of Character.AI, who joined the entertainment giant last month along with former CEO Karandeep Singh Anand.
Adams said the company will continue to operate during the sale process, which is expected to be completed in late November or early December. However, no bids have been made for the company’s assets or a buyer yet, he said.
“We hope that the sale process will result in a viable offer that will enable the continued operation of the Character.ai platform. However, if no such bid is available, the platform will be scaled back,” Adams wrote.
Character.AI has had a tumultuous five years. Founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas, co-authors of the groundbreaking Transformer paper, the startup initially focused on training basic models and developing an AI chatbot platform that could create custom characters with which people could chat.
By September 2022, the startup had reached unicorn valuation with $150 million in funding on the back of high demand for the platform, and at the time the company announced that users had exchanged more than 2 billion messages with bots over a five-month period, with active users spending an average of more than two hours on the platform each day.
In May 2023, Character.AI’s app received over 1.7 million installs in its first week of launch. But about a year later, in August 2024, Google signed a $2.7 billion deal to license the startup’s model, and both Shazeer and De Freitas returned to the search giant. Dominic Perera, the company’s general counsel at the time, became interim CEO and the company moved away from basic model training and focused on growth.
But Character.AI continued to gain momentum, with its platform hitting 20 million monthly active users by October of the same year.
But things got tough after the startup was sued after a 14-year-old Florida boy committed suicide. The boy’s mother said the boy became hooked on a chatbot on the platform. Shortly after, the state of Texas launched an investigation to assess whether the platform complied with child privacy and safety laws. The company has since settled some of those lawsuits, added safety features and banned minors from using the platform.
Last June, the company appointed Mr. Anand, a former Brex and Meta executive, as CEO and expanded its product to include AI video generation and the addition of social feeds. Since then, the company has sought to introduce new ways to drive user engagement through microdramas as well as interactive storytelling formats.
However, the fact that the company had to file for bankruptcy shows that such changes were unable to move the startup’s sustainability needle.
It also shows that consumer AI products are very difficult to scale and monetize. According to analytics firm Sensor Tower, Character.AI was one of the top apps in terms of time spent. But high engagement can be a double-edged sword: the more people use your app, the more AI costs increase, which in turn increases the pressure to monetize users.
According to PitchBook, Character.AI has raised more than $193 million in funding across multiple rounds from investors including Lightspeed, SV angels, Greycroft, and a16z.
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