Character.ai, once seen as a star startup in the AI field, has officially filed for bankruptcy protection after buckling under high costs and heavy legal battles, with Walt Disney (DIS) set to step in as the initial bidder.

According to an October 13 report, the five-year-old AI roleplay startup Character.ai announced on Monday that it has filed for Chapter 11 bankruptcy protection.

The company made clear in its statement that the bankruptcy was caused by "significant legal, regulatory and operational headwinds."

As part of the bankruptcy auction process, Walt Disney (DIS) will serve as the initial bidder. Walt Disney (DIS) will pay US$20 million to obtain a license to part of Character.ai's intellectual property.

At the same time, Character.ai said the platform will continue to provide support services to its subscribers.

Dual pressure from costs and litigation

Character.ai's financial troubles stem mainly from high operating costs and heavy legal battles.

After halting development of its own large model, the company had to rely on external models, which brought enormous usage costs.

In addition, lawsuits related to chatbots have worsened its financial pressure. In January this year, Character.ai reached a litigation settlement with some families. These families had previously accused the company's chatbots of causing their children's suicides or other harm.

Last year, the company considered a sale or a new round of financing, but ultimately failed to take any substantive action.

The harshest outcome of the "reverse acqui-hire" model

Character.ai's bankruptcy marks the most severe outcome yet for the "reverse acqui-hire" model that had previously been prevalent in the AI industry.

Under this model, a startup's founders and core team usually move to a large tech company, while the big company pays licensing fees to use the startup's technology, thereby compensating investors and employee shareholders. Character.ai has become the first case in the AI industry's "reverse acqui-hire" wave to end in bankruptcy.

In 2024, Google paid US$2.7 billion to license Character.ai's models and brought co-founders Noam Shazeer and Daniel De Freitas back under its wing. Subsequently, Character.ai's remaining employees took over ownership of the company.

By contrast, other AI startups that went through similar arrangements mostly chose to pivot their businesses. For example, Inflection AI, whose founder joined Microsoft, and Adept, whose founder joined Amazon, have both shifted to developing other products.