The interactive chatbot platform Character.AI allows users to create AI characters and converse with them. Just five years after its founding, the company has now filed for Chapter 11 bankruptcy protection in the United States. Previously, the company faced a series of lawsuits and encountered difficulties scaling its popular platform. According to a court filing, the company stated that its assets and liabilities each fall between $50 million and $100 million.
Colin Adams, CEO of Character.AI, stated in a statement: “Over the past year, despite significant legal, regulatory, and operational challenges, Character.AI has taken meaningful steps to sustain and improve its business. After a comprehensive evaluation of viable alternatives, the board determined that this court-supervised sale process offers the best opportunity to maximize value for all stakeholders.”
The startup also agreed to sell certain assets to Disney for $20 million and grant Disney a non-exclusive, perpetual license to its technology.
The company said Disney will provide transition services through former Character.AI employees who joined the entertainment giant last month alongside former CEO Karandeep Singh Anand.
Adams stated that the company will continue operating during the sale process, which is expected to be completed by late November or early December. However, he also noted that no bids or buyers for the company’s assets have emerged yet.
Character.AI has experienced considerable turbulence over the past five years. The company was founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. Shazeer is one of the co-authors of the landmark Transformer paper. Initially, the company focused on training foundational models and developing an AI chatbot platform that allows users to create custom characters and chat with them.
By September 2022, fueled by strong platform demand, the startup achieved unicorn status following a $150 million funding round. At the time, the company reported that users had exchanged over 2 billion messages with its bots within five months, with active users spending an average of more than two hours per day on the platform.
In May 2023, the Character.AI app attracted over 1.7 million downloads in its first week. But about a year later, in August 2024, Google reached a $2.7 billion deal to license the startup’s models, and Shazeer and De Freitas returned to the search giant. At that time, Dominic Perella, the company’s general counsel, became interim CEO, and the company shifted its focus away from training foundational models toward growth.
However, Character.AI's growth momentum showed no signs of slowing. By October of that year, its platform had reached 20 million monthly active users.
However, the company faced difficulties after a 14-year-old boy in Florida died by suicide; his mother claimed he became obsessed with a chatbot on the platform, leading to lawsuits against the company. Shortly after, Texas launched an investigation to assess whether the platform complied with children’s privacy and safety laws. Since then, the company has settled some of these lawsuits, added additional safety features, and prohibited minors from using its platform.
However, the company ultimately had to file for bankruptcy, indicating that these changes failed to fundamentally improve the startup's sustainability.
This also highlights how challenging it is to scale and commercialize consumer-facing AI products. According to data from the analytics firm Sensor Tower, Character.AI was once one of the apps with the highest user engagement time. However, high engagement can be a double-edged sword: the more users there are, the higher the AI costs become, increasing the pressure to monetize those users.
According to PitchBook data, Character.AI has raised over $193 million across multiple funding rounds, with investors including Lightspeed, SV Angels, Greycroft, and a16z.