After Character.ai: AI Can Hook You or Set You Free

Character AI announced bankruptcy a few days ago.

The a16z backed star of the AI character and companion sector had built a small empire of close to 28 million users at their peak in 2024, who sent more than 2 billion messages to their characters in their first months.

But after Google took their cofounders back with a $2.7B licensing deal, lawsuits from families who say the app harmed their teenagers, regulatory changes, and a decline in revenue, they're now on sale with Disney opening the bidding at $20 million for a license to some of their technology.

The demand for emotional connection with AI characters, companions and agents is real, but are we building human-centered AIs or products that resemble the social media model of making people addicted?

People are looking for emotional connection with AI

The world is facing a loneliness epidemic.

One in six people in the world feels lonely, according to the WHO. That's more than a billion people.

In the US, depression among adults under 30 doubled in eight years. The problem is even bigger among teenagers. And a lot of these people are already using assistants like ChatGPT for emotional support.

One in five adults under 30 say they get emotional support from chatbots in the US, and around one in five AI users say they talk to a chatbot when they feel sad in Latam countries.

Are we building a strong foundation to help people with AI, or are we making them addicted and worsening their mental health?

The market is growing

Spending in character and companion apps went from $82M in the first half of 2025 to around $328M in the first half of 2026.

In Asia the boom is in Korea: Zeta went from $3M to more than $10M a month in revenue this year, most of it from Japan, and Crack more than doubled its users in a year. China is the exception, where regulation is shrinking the market.

Regulators are calling to ban teenagers from using these apps, but in the US, 72% of teenagers have already used one.

Engagement is not care

In general, AI companionship and character apps help people feel less lonely in the moment, but as they spend more time talking to characters or companions, the same people begin to experience more loneliness, emotional dependence, and less real world socializing.

Does this mean that AI cannot be used for emotional support? To help humans gain more agency and feel more confident?

I believe not only that AI can be used for this, but that, as humans start to enter into symbiosis with these systems, this will become one of the most important areas for AI development in the world.

The main issue in the companion and character sector is that many companies are going the easier route: making people addicted.

Set them free or keep them hooked

Take someone vulnerable and create the illusion of a relationship, and they're caught.

And a lot of companies are taking this route without deep knowledge of, or care for, how human psychology works.

HBS researchers analyzed 1,200 real goodbyes in the six most downloaded companion apps. Replika, Chai and Character.ai implement manipulative tactics to keep users hooked, making them feel guilty for leaving, and creating FOMO.

It seems way easier to manipulate people in this way than to hook them on videos and slop all night long.

No wonder Character.ai has been sued by families who say it caused psychological damage to their kids. Some of them died by suicide.

If we don't change the way in which we build these systems, I believe that we will see more of this also among adults.

The opportunity: human-centered AIs

So, can companions, characters and agents interact with humans in healthier ways that encourage cognitive and emotional stability and expansion?

I believe they can if done the right way.

Systems that help humans ask better questions about themselves, instead of just telling them what they want to hear.

Companions and characters that don't nudge you to stay, that help you reduce cognitive overload, that recognize when you are spending too much time in the app and help you connect with other humans.

Systems that take into account how fragile human psychology can be, and care for their users, whatever character or companion they're talking to.

Emotional connection with AI will continue to grow as most human interactions with technology become mediated by these systems, both in companion and character apps and in the general assistants from the major labs.

Healthy companions, characters or agents should make you need them less over time.

It might not be as easy as the route of keeping people hooked, but setting humanity free is one of the greatest things we can aspire to with AI.

Sources

1. Character.ai bankruptcy and Disney's bid: CNBC, Variety
2. a16z investment and 2 billion messages: Character.ai via Business Wire, March 2023
3. Peak users in 2024: Business of Apps
4. Google's $2.7B licensing deal: PYMNTS, citing The Wall Street Journal
5. Lawsuits from families and settlements: The Hill
6. One in six people feel lonely: WHO Commission on Social Connection
7. Depression among adults under 30: Gallup
8. Teen mental health: CDC, Youth Risk Behavior Survey 2025
9. Emotional support from chatbots in the US: Pew Research Center
10. Chatbots when sad in Latin America: Kaspersky via Forbes Chile
11. Character and companion app spending, H1 2025: TechCrunch and Appfigures
12. Character and companion app spending, H1 2026: Decrypt and Appfigures
13. Zeta's revenue: 36Kr
14. Crack's growth: MTN
15. China's shrinking market: Caixin
16. 72% of US teens have used AI companions: Common Sense Media via TechCrunch
17. Loneliness and dependence with heavier use: Fang et al., OpenAI and MIT Media Lab, 2025
18. Manipulative goodbyes in companion apps: Harvard Business School, Harvard Gazette
19. Healthy design principles: Drexel University, April 2026, Aalto University, CHI 2026

Originally published on X.