Once valued at $1 billion USD, AI companion company Character.ai has filed for bankruptcy, making it one of the first unicorns of the ChatGPT era to go under.
The news: Character.ai, which allows users to create custom AI characters and chat with them, filed for Chapter 11 bankruptcy in the US on Monday. It agreed to sell some of its assets to Disney for $20 million USD, which has brought on some of Character.ai’s staff.
The context: Character.ai was founded by two former Google engineers. It started developing its own foundational AI models before abandoning that idea following a multibillion-dollar deal with Google.
According to bankruptcy documents, Character.ai’s spending indicated it was fatally reliant on AI compute to run its LLMs, and therefore, to serve its customers. Its monthly operating expenses were $18.5 million USD in 2025, most of which was spent on AI compute, with revenue of $2.8 million in December 2025. Expenses weren’t the only problem. The company also faced wrongful death lawsuits and litigation from the states of Kentucky and Pennsylvania over child safety and unlawful representation.
From the source: Character.ai’s bankruptcy is “the first AI bubble domino to fall,” argued 404 Media reporter Jason Koebler, who wrote that the company “lit a huge amount of money on fire running its product, did not bring in a lot of revenue, and faced enormous legal fees after causing harm to its users.”
Final thought: Koebler isn’t alone in pointing to Character.ai’s downfall as a sign of a potential AI bubble popping. But Character.ai was an application-layer “wrapper” company—meaning it completely relied on AI models it paid to use. With increasingly powerful LLMs available, most users could feasibly spin up a custom AI character on their frontier model of choice—removing any “moat” Character.ai might have had. If the company never had a real moat, then its failure is more likely a sign of chaff being cut from the ecosystem than a flag that frontier model companies are next on the chopping block.
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#1. Which of the following is a real person developing AI?
Your score:
Quiz answer: a) Mira Murati, but how confident were you? If you chose any other answer, you’re like the 53 percent of American men who told Harvard researchers they recognized the names of the non-existent AI leaders, with men being much more likely than women to have false confidence in their knowledge of AI.
Quiz answer: a) Mira Murati, but how confident were you? If you chose any other answer, you’re like the 53 percent of American men who told Harvard researchers they recognized the names of the non-existent AI leaders, with men being much more likely than women to have false confidence in their knowledge of AI.
Contributors: Alex Riehl (Ottawa staff writer), Douglas Soltys (editor in chief), Madison McLachlan (Montréal reporter), Sarah Rieger (managing editor), Trevor Nichols (web editor).
Feature image courtesy Character.ai.