Character.AI, a service that lets users chat with AI characters they create, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code, a reorganization process. Court filings put both its assets and liabilities in the range of $50 million to $100 million. The company will continue operating during the sale process and has agreed to sell some assets to Disney for $20 million. However, no buyer has yet been found for the platform as a whole.
What exactly is Character.AI?
Character.AI is a service that lets users create AI characters to their liking and chat with them. If a typical conversational AI is a useful tool that answers questions, Character.AI was more like a place to create a companion and have fun. Users could give characters personalities like those of anime characters or chat with them casually as they would with a friend; the possibilities depended on their imagination.
The company was founded in late 2021 by former Google engineers Noam Shazeer and Daniel De Freitas. Shazeer co-authored the paper “Transformer,” which is known for underpinning modern AI. Initially, the company worked both on training foundation models—the large models that serve as the brains of conversational AI—and on building a chat platform where users could talk with characters.
Rapid growth in numbers
The momentum was reflected in the numbers. In September 2022, the company raised $150 million, reaching a valuation of more than $1 billion and unicorn status. At the time, it said users and bots had exchanged more than 2 billion messages in five months, and active users spent an average of more than two hours per day on the service.
The company launched its app in May 2023, which was installed more than 1.7 million times in its first week. Monthly active users reached 20 million in October 2024. According to PitchBook, the company has raised more than $193 million in total, with investors including Lightspeed, SV Angel, Greycroft and a16z.
There is no doubt that the company built a service people wanted to talk to for two hours a day in just a few years. So why was it unable to avoid bankruptcy?
How a deal with Google changed the company
The turning point came in August 2024. Google signed a $2.7 billion licensing deal to use the company’s models, and Shazeer and De Freitas returned to Google. Dominic Perella, then the company’s general counsel, became interim CEO, and the company shifted away from training foundation models to focus on growing its service.
Giving up the work of building the brains and focusing on expanding the service made the company leaner. But it also meant that the entire burden of turning its user base into revenue fell on the operator.
Lawsuits and regulation over the safety of minors
Headwinds came from safety concerns. The company was sued after a 14-year-old boy in Florida died by suicide. His mother alleged that her son had become deeply involved with a chatbot on the platform. Texas later launched an investigation into whether the company complied with laws on children’s privacy and safety.
The company settled part of the litigation, added safety features and banned minors from using the service. For a platform whose core user base was young people, that decision must have struck at the foundation of its business.
In June 2025, Karandeep Singh Anand, who had experience at Brex and Meta, became CEO. The company has added AI video generation and a social feed, and is also trying to attract users with formats such as interactive stories and microdramas.
The economics of AI services whose popularity does not translate into profit
Data from research firm Sensor Tower showed that Character.AI ranked among the top apps for time spent. But generative AI has a distinctive cost structure: the more it is used, the more expensive it becomes. Every time a user sends a message, it incurs the cost of the computing resources needed to run the AI behind the scenes. The longer users spend on the service, the greater the pressure to monetize it—and having many devoted fans can itself become a burden.
Even with new features such as video generation and social functions, the company was unable to make its business more sustainable. The case illustrates, with numbers to back it up, how difficult it is for consumer AI services to combine growth with monetization.
In my view, “keeping users” and “getting them to pay” are separate challenges. Should the company rely on advertising or a monthly subscription? Because the product is a conversation partner, stricter safety measures change the experience and affect users’ engagement. Few AI services have yet managed to strike this balance.
Asset sale to Disney and the future of the platform
Under the deal, Disney will acquire some assets for $20 million and also receive a non-exclusive, perpetual license to the company’s technology. Transition support is expected to be provided by former Character.AI employees who moved to Disney last month alongside former CEO Anand.
CEO Colin Adams said the business would continue operating during the sale process, which is expected to conclude between late November and early December. So far, however, no bids for the assets or prospective buyers have emerged. Adams said he hoped a viable offer would come in and operations would continue, adding that otherwise the platform would shut down.
The deal with Disney concerns some of the company’s assets and rights to use its technology; it is separate from whether the Character.AI service itself will continue. For users, the key question is whether a buyer emerges in the sale process over the coming weeks.
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