Only 5 years later, the interactive chatbot platform Character.AI has created files for bankruptcy

The startup will sell part of its assets to Disney for $20 million.

The last day to showcase your progress to over 10,000 tech leaders at Disrupt is on October 2nd. Book fair table now.

Disrupt the doors opening on October 13th. Get your card and bring someone with you with a 50% discount. Register now.

Just five years into its journey, which lets users create and interact with artificial intelligence characters, it has filed for Chapter 11 bankruptcy after a flurry of lawsuits and efforts to expand its popular platform. In a court filing, the company said it has assets and liabilities of between $50 million and $100 million.

"Over the past year, the company has taken significant steps to preserve and improve its business in the face of significant legal, regulatory and operational challenges. After a comprehensive review of available options, the board determined that this court-supervised sale process provides the company with the best opportunity to deliver maximum value to all shareholders," CEO Colin said in a statement.

The startup has also agreed to sell some of its assets to Disney for $20 million, as well as a perpetual non-exclusive license to its technology.

Disney will provide transition services through former employees who joined the entertainment giant last month along with former CEO Karandeep Singh Anand, the company said.

Adams said the company will continue to operate during the sale process, which is expected to close in late November or early December. However, he noted that there is not yet an offer for the assets of the company or the buyer.

"We hope that the sale process will produce a workable offer that will allow for continued operation of the Platform. However, if such an offer is not available, the Platform will be liquidated," Adams wrote.

It has been five years full of ups and downs. Founded in late 2021 by ex-Google engineers Noam Shazier, co-author of the landmark Transformer paper, and Daniel de Freitas, the startup initially focused on training basic models and developing an AI chatbot platform that allows people to create custom characters to chat with.

By September 2022, the startup reached a unicorn valuation of $150 million due to high demand for its platform, with the company announcing at the time that its users had exchanged more than 2 billion messages with its bots in 5 months, and active users spent an average of more than 2 hours a day on the platform.

In May 2023, the apps attracted more than 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 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 teaching foundational models to focus on growth.

However, traction did not slow, as its platform registered 20 million monthly active users in October of that year.

But things took a turn for the worse after the startup was sued following the suicide of a 14-year-old Florida boy whose mother said he was infatuated with a chatbot on its platform. Shortly after Texas launched an investigation to assess whether the platform complied with child safety and privacy laws. The company subsequently settled some of those lawsuits, added more safety features, and banned minors from its platform.

In June last year, the company appointed Anand, a former Berks and Meta executive, as CEO and expanded its products to include AI-powered video production and social feeds. Since then, the company has tried to introduce new ways to stimulate user engagement through interactive storytelling formats as well as micro-dramas.

But the fact that the company had to file for bankruptcy shows that such changes cannot move the startup's sustainability needle.

It also shows that scaling and monetizing consumer AI products is really hard. It was one of the top programs in terms of time spent, according to analytics firm Sensor Tower. But high engagement can be a double-edged sword, AI costs increase the more people use the app, which in turn increases the pressure to monetize users.

It has raised more than $193 million in multiple rounds from investors including Lightspeed, SV angels, Greycroft and a16z, according to PitchBook.

When you make a purchase through links in our articles, we may earn a small commission. This does not affect our editorial independence

Evan covers global developments in consumer technology at TechCrunch. He is based out of India and has previously worked for publications including The Huffington Post and The Next Web.

You can contact or confirm Ivan by sending an email to [email protected] or by sending an encrypted message to ivan.42 on Signal.

Get 50% off a second pass The Disrupt experience is meant to be shared. Grab your pass and bring a colleague, partner or peer for 50% off. Cover more ground by building connections, building momentum, and discovering what's next in the startup ecosystem.

Elon Musk attacks Ambani over Jagmeet Singh's India Starlink launch delay

Batteries are already cheaper than the natural gas turbines used in many of Tim de Chant's data centers.

Remember Orkut? Its founder wants to bring back Jagmeet Singh

The United States barred Microsoft, Adobe and major IT companies from the green card program for skilled foreign workers Ayesha Malik.

Elon Musk questions Ambani influence as Starlink India launches on Jagmeet Singh stands

The 19-year-old founder of Cal AI just raised $10 million for his new AI startup Julie Burt.