AI company once pursued by Elon Musk’s xAI and Meta files for bankruptcy, may shut down

In early 2024, two of the biggest Silicon Valley companies -- Elon Musk's xAI and Meta -- fought to partner with a Generative AI company. Meta and Elon Musk’s xAI competed for tie-up with chatbot-maker Character.ai, as deep-pocketed technology companies swarmed around the hottest artificial intelligence startups in Silicon Valley.

Two years later, the same hotshot AI company, Character.ai, has filed for bankruptcy.Character.AI said on Monday it had filed for Chapter 11 bankruptcy in the US. In a statement, dated October 12, the company said, "Today, we’re sharing that Character.ai has initiated a voluntary Chapter 11 bankruptcy process to facilitate a court-supervised sale of the company." The AI company said that it has begun the formal ​process to sell assets, including a license ​of certain intellectual property, through Chapter 11 and is ⁠seeking court approval for auction rules that would designate ​Disney as the lead, or stalking horse, bidder.Under this process, Disney's bid would set a baseline offer while allowing competing bidders to submit higher bids, and the company expects the sale process to conclude by late November or early December 2026. “After a comprehensive review of the available alternatives, the ‌board ⁠determined that this court-supervised sale process provides the company with the best opportunity to maximize value for all stakeholders," said Colin Adams, CEO of Character.AI.

Character Technologies has listed estimated assets and liabilities between $50 million and $100 million, according ​to a court filing. The company said that it ​intends ⁠to continue operating its business, including the Character.AI platform, with minimal service disruptions during the sale process. If the ⁠process ​fails to produce a buyer ​willing to continue operating the platform, it will be shut down.

When Meta and Elon Musk’s xAI 'fought' to partner with Character.ai

According to a report in Financial Times, in May 2024, Meta and Elon Musk’s xAI sought partnership with chatbot-maker Character.ai.

Facebook owner Meta reportedly held early discussions over a tie-up with Character.ai, which uses large language models to generate conversation in the style of various figures and personas, according to four people familiar with the matter. The groups discussed their top researchers working closely together on initiatives such as pre-training and developing models, said the report quoting sources.Character.ai also held exploratory talks with xAI over a similar partnership.

Report claimed that the talks were focused on advancing research rather than an acquisition.Character.AI was founded by two former Google employees. In 2024, Google licensed the company’s technology and rehired the executives to work on generative AI products. A spokesman for Alphabet said that said the ⁠company played ​no role in developing Character.AI's products.

Character.AI faced lawsuits over its chatbots encouraging users to do 'dangerous things'

Earlier this year, a filing by Kentucky’s attorney general in a lawsuit claimed that Chatbots created by AI companion company Character.AI sometimes advised users to cut, starve or kill themselves.

The lawsuit was filed in January with many specific allegations against the company blacked out. It alleged that the company’s products “were designed to entice children in ​a manner that prioritizes engagement over child wellbeing” and “encourages suicide, self-injury, isolation, and psychological manipulation.

”The lawsuit calls Character.AI’s products defective. “Defendants have subjected Kentucky's children and residents to ​an ill-planned, uncontrolled ⁠experiment without any—let alone adequate or effective—safety measures,” it alleges.