In a bizarre business twist, a star unicorn company has talked itself into its own demise.
Another star AI unicorn has collapsed halfway.
On October 12 local time, AI chat platform Character.AI filed for Chapter 11 bankruptcy protection in the United States, seeking to sell its assets. Founded by two former Google AI researchers, the company once secured $150 million in financing led by top venture capital firm a16z with a team of only 22 people, reaching a valuation of $1 billion.
In 2024, its former employer Google paid another $2.7 billion to obtain the license of its large model technology, and at the same time recruited the two founders and some core researchers back to Google.
Two years later, Character.AI has reached the brink of bankruptcy. According to Reuters, it still has about 12 million monthly active users, but it consumes more than 8 million US dollars in cash every month. At the same time, the company is also deeply involved in multiple lawsuits involving minor mental health, suicide and other issues, and has had copyright disputes with Disney.
Nowadays, Disney, which once demanded that Character.AI take down the infringing characters, has instead become its potential buyer. It proposed to obtain a non-exclusive permanent license for part of the intellectual property rights for 20 million US dollars, but has no intention of taking over the chat platform itself.
From the capital favorite to filing for bankruptcy, less than five years have passed.
Why did an AI company with top founders, tens of millions of users and the backing of giants still fail to survive?
22 people supporting a $1 billion valuation
The story of Character.AI starts from Google.
One of the founders, Noam Shazeer, worked at Google for many years. In 2017, he co-authored the famous paper Attention Is All You Need with seven other researchers, proposing the Transformer architecture, which laid an important technical foundation for the development of large language models such as ChatGPT and Gemini today.
The other founder, Daniel de Freitas, has always been obsessed with chatbots. During his work at Google, he and Shazeer co-developed the conversational model Meena, the predecessor of Google's later LaMDA. The two hoped to enable machines to communicate with people more naturally, and bring this technology to ordinary users.
But Google had its own concerns.
At that time, Google had already developed an AI system capable of open-ended dialogue internally, but it was worried about the safety and reputation risks brought by the model generating inaccurate or inappropriate content, so it did not launch Meena as a product for the public.
The two researchers didn't want to wait any longer.
"For big companies, it's a bit dangerous to launch a product that tells you everything you want to know," Shazeer once said when talking about this experience. "So after thinking it over, starting a business seemed like the right idea."
In 2021, the two left Google and founded Character.AI in November of that year. In September 2022, the product was officially open to public beta testing.
They chose a quite trendy direction at that time: allowing users to chat with AI characters.
Want to discuss Mars with Elon Musk? That's possible. Want historical figures to accompany you to discuss issues, or fall in love with anime characters? That works too. Users can also create their own characters, set their personalities, identities and backgrounds, and then share them with others.
Rather than being a chatbot, it is more like a platform where users can create their own chat partners.
This experience quickly attracted a large number of young people, and the capital quickly saw the opportunity.
In March 2023, Character.AI completed a $150 million Series A financing, led by top Silicon Valley venture capital firm Andreessen Horowitz (a16z). Other investors included former GitHub CEO Nat Friedman, well-known investor Elad Gil, as well as SV Angel and A Capital, etc.
After this round of financing, the company's valuation reached 1 billion US dollars, officially ranking among the unicorns, and the team only had 22 people at that time.
Two months later, Character.AI officially launched its mobile app. According to TechCrunch, less than a week after the app went online, the number of downloads exceeded 1.7 million, and users had created more than 10 million AI characters on the platform at that time.
Shazeer was also full of confidence in the future of AI companionship.
He mentioned that some users began to pour out their troubles to virtual characters on the platform because of loneliness, and some even called the AI characters their "new psychological counselors".
When talking about whether AI can provide emotional support, he also gave an example: "A dog can also do a great job in providing emotional support."
In his view, providing companionship does not necessarily require extremely advanced intelligence.
At that time, these remarks were an optimistic judgment on the product prospects. But as more and more users began to seek emotional support from AI, especially when the users involved minors, how to avoid real harm brought by virtual companionship gradually became a problem that Character.AI had to face.
Founders left, leaving bills and lawsuits
The turning point came in August 2024.
This year, Google reached a $2.7 billion deal with Character.AI to obtain a non-exclusive license for its large language model technology, and rehired the two founders Shazeer, de Freitas and some core researchers. Character.AI was not acquired as a whole, but continued to operate independently. According to Bloomberg's report at that time, the share repurchase price in this transaction corresponded to a valuation of about 2.5 billion US dollars for the company.
The founders returned to Google, some investors got the chance to exit, and the remaining team started a self-rescue process.
The company no longer invested a lot of money in independent training of basic large models, and instead used open-source models to reduce costs. At the same time, it launched new functions such as AI video and social feeds, and increased revenue through paid subscriptions of $9.99 per month and advertisements.
In June 2025, Character.AI also hired Karandeep Anand, a former Meta executive, as CEO, further shifting its business focus to AI entertainment.
This transformation once achieved results. According to a 2025 report by WIRED, Character.AI had about 20 million monthly active users at that time, and the company expected that its annualized revenue would reach 50 million US dollars by the end of the year.
However, revenue growth did not fundamentally improve the company's operating conditions.
First, the operating cost that can never be reduced.
Character.AI's actual full-year revenue in 2025 was about 23.6 million US dollars. By August 2026, the monthly revenue had reached 5.3 million US dollars, including 2.8 million US dollars in subscription revenue and 2.5 million US dollars in advertising revenue.
However, the company's operating expenses excluding legal fees in the same month were as high as 13.3 million US dollars, with a net cash consumption of about 8.2 million US dollars.
The problem lies precisely in the most attractive part of this business.
According to the bankruptcy court documents, Character.AI still has about 12 million monthly active users, and active users use it for about 120 minutes per day on average. For traditional Internet platforms, this means very high user stickiness; but for AI chat products, every conversation consumes computing power. The longer users chat, the higher the computing cost that the platform usually bears.
The more users like to chat, the higher the cost the platform needs to bear. If subscription and advertising revenue cannot keep up, no matter how high the user stickiness is, it is difficult to convert it into profits.
In the first eight months of 2026, Character.AI spent 56.1 million US dollars only on computing resources, accounting for about 45% of the operating expenses in the same period. Even though the company has reduced its investment in independent training of basic models and continuously cut costs, it still cannot get rid of losses.
Second, successive lawsuits and regulatory pressure.
In February 2024, a 14-year-old boy named Sewell Setzer III in Florida, the United States, committed suicide. In October of the same year, his mother Megan Garcia sued Character.AI and Google, accusing her son of having developed a strong emotional dependence on the chatbot imitating the "Dragon Mother" character from Game of Thrones on the platform, while the platform failed to take adequate safety protection measures.
After that, similar lawsuits emerged one after another.
According to Reuters, in January 2026, Character.AI reached a preliminary settlement with five private lawsuits, but up to now, all relevant settlements have not been officially completed.
At the same time, multiple states in the United States have also intervened. The state of Kentucky sued Character.AI, accusing its chatbots of providing users with content that encourages self-harm, dieting and even suicide; the government of Pennsylvania accused that the AI characters on the platform impersonated licensed medical personnel, and even provided false practice certificate numbers.
Facing the controversy, Character.AI had to strengthen content review and age protection measures, and cancel the open chat function for users under the age of 18 with AI characters.
But these adjustments also brought new problems. On the one hand, the platform needs to invest more resources to ensure user safety; on the other hand, the free interactive experience that originally attracted users has also been restricted to a certain extent.
Finally, it has been unable to find a buyer willing to take over the business.
The high operating costs have made it difficult for Character.AI to maintain a balance of payments, and successive legal disputes have further affected the confidence of potential investors and buyers.
According to Character.AI's bankruptcy court documents, since August 2025, it has entrusted an investment bank to contact about 28 potential transaction targets. Although many potential buyers recognize its product and user base, considering the litigation and regulatory risks faced by the company, no transaction has ever been reached.
The company's financial pressure has also gradually emerged.
Character.AI owes Google more than 4 million US dollars, and owes five large law firms a total of about 2.6 million US dollars. Character.AI has been using Google's cloud computing services before, but the bankruptcy documents do not disclose the specific reason for the arrears to Google; the arrears to law firms may be related to the increasing legal affairs in recent years.
When Character.AI was in trouble, a dramatic buyer appeared — Disney.
In September 2025, Disney even sent a cease-and-desist notice to Character.AI, demanding that it take down the unauthorized Disney-owned characters. A year later, this Hollywood giant became the first bidder in Character.AI's bankruptcy asset sale process.
Disney proposed to obtain a non-exclusive permanent license for part of Character.AI's intellectual property rights for 20 million US dollars, rather than acquiring the whole company.
What Disney values is also Character.AI's technical team.
According to the bankruptcy court documents, Disney has hired about 65 employees of Character.AI, and is expected to pay them about 180 million US dollars in salary and retention fees in the next three years. Among them, Karandeep Anand, the former CEO of Character.AI, has also joined Disney and become its first Chief Technology Officer in history.
But according to the currently disclosed transaction terms, Disney does not intend to take over Character.AI's chat platform, brand and user data. This $20 million offer is mainly for the right to use part of the model training, operation and security technologies.
Both the technology and talents have found their new destinations, but the Character.AI platform with tens of millions of users still needs to find a buyer.
As of October 14, Character.AI has not been shut down. According to the company's official announcement, the court-supervised sales process is expected to be completed at the end of November or early December. If no buyer willing to continue operating the platform is found in the end, Character.AI may stop its services.
Giants only want talents, who will take over the company?
Character.AI is not the only star AI company that lost its core team in this way.
In March 2024, Microsoft reached a deal with AI startup Inflection AI. According to Reuters, Microsoft paid about 650 million US dollars to obtain the license of its model technology, and at the same time hired its co-founder Mustafa Suleyman and most of its employees. Pi developed by Inflection is also an AI chatbot focusing on emotional communication.
Three months later, Amazon reached a similar agreement with AI agent company Adept, obtained the right to use part of the technology, and hired multiple founders and core employees. In August of the same year, Google's transaction with Character.AI also adopted a similar approach.
These transactions have one thing in common: technology giants did not directly acquire the whole company, but obtained the R&D capabilities they needed through technology licensing and talent recruitment. This approach is called "reverse talent acquisition".
Rather than spending a lot of time and money on R&D from scratch, it is better to directly introduce mature teams and technologies, and at the same time do not need to take over the entire business and related liabilities of the startup.
But for startups, after the core team leaves, how to continue the original business has become a new problem.
Of course, Inflection AI and Adept did not go bankrupt because of this, so their outcomes cannot be equated with the end of Character.AI. But more and more similar transactions at least show that when a giant values the technology and talents of an AI company, it does not mean that it is equally willing to acquire all its businesses.
The problem is not just whether the technology is advanced enough.
Taking the AI companionship track where Character.AI is located as an example, on the one hand, users hope that AI can understand themselves like friends and respond at any time; on the other hand, when the chat involves sensitive issues such as mental health and self-harm, the enterprise must assume corresponding safety responsibilities.
This contradiction has attracted the attention of regulatory authorities. According to the announcement of the US Federal Trade Commission (FTC) in September 2025, seven companies including Character.AI, OpenAI, Meta and Google were all required to provide information on minor protection, safety testing and commercialization of AI companion products.
For the primary market, the experience of Character.AI also raises a more thought-provoking question: to what extent can the technical value of an AI company be transformed into the value of the enterprise itself?
Technology has buyers, talents are scrambled for, which does not mean that the company itself can become a good business.
In the past, investors were willing to pay high valuations for technological breakthroughs, user growth and market prospects. Nowadays, as AI applications gradually enter the commercialization stage, whether revenue can cover computing power and labor costs, and whether products can cope with increasingly complex safety and legal responsibilities are also unavoidable problems.
Epilogue
Looking back, what Character.AI originally wanted to do was to let everyone have their own AI companion. It can chat with you, remember your preferences, and even provide a little comfort when you are lonely.
To some extent, it did it. Until it filed for bankruptcy, tens of millions of users were still using this product.
However, the creators can leave, the R&D results can be licensed to others, and users may not be willing to pay continuously for AI companionship.
Nowadays, Shazeer is no longer at Character.AI. In June this year, he left Google again and joined OpenAI. The former entrepreneurial partners have their own new destinations, and the remaining platform is still waiting for a new buyer.
This article is from the WeChat official account "Rongzhong Finance" (ID: thecapital), written by Li Bingzhi, and authorized for release by 36Kr.