Only five years into its journey, Character.AI, which lets users create AI characters and have conversations with them, has filed for Chapter 11 bankruptcy, following a slew of lawsuits and struggles to scale its popular platform. In a court document, the company said it had assets and liabilities between $50 million and $100 million. After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders,” Character.AI CEO Colin Adams said in a statement.
The startup has also agreed to sell some of its assets to Disney for $20 million, as well as a non-exclusive perpetual license for its technology. The company said Disney will provide transition services via former Character.AI employees who joined the entertainment giant last month alongside its former CEO Karandeep Singh Anand. Adams said that company would continue operating during the sale process, which is expected to close in late November or early December.
However, he did note that there isn’t yet a bid for the company’s assets or a buyer. If such a bid is unavailable, however, the platform will be wound down,” Adams wrote. Character.AI has had a tumultuous five years.
Founded by former Google engineers Noam Shazeer, a co-author of the landmark Transformer paper, and Daniel De Freitas in late 2021, the startup initially focused on training foundation models and developing an AI chatbot platform that lets people create custom characters they could chat with. By September 2022, the startup reached unicorn valuation with a $150 million fundraise on the back of high demand for its platform, with the company saying at the time that its users had exchanged more than 2 billion messages with its bots in 5 months, and active users were averaging more than 2 hours on the platform daily. In May 2023, the Character.AI’s apps attracted more than 1.7 million installs in their 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 both Shazeer and De Freitas returned to the search giant. At that time, the startup’s general counsel, Dominic Perella, stepped in as interim CEO, and the company moved away from training foundation models to focus on growth. Character.AI’s traction didn’t slow, however, with its platform recording 20 million monthly active users by October of that year.
But things got difficult 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. Soon after Texas launched an investigation to assess if the platform conformed to child privacy and safety laws. The company subsequently settled some of these lawsuits, added more safety features, and banned minors from its platform.
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