What this bankruptcy says about AI startups

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After you win the economics Nobel, what would your first act be? Buy a Corvette? Gloat to your childhood bully? For co-winner Michael Woodford, his first act was … proctor an exam. The DAY that Columbia professor Michael Woodford found out that he and Robert Hall won the economics Nobel, he returned to his class with the pithy title "Cognitive Mechanisms and Economic Behavior" to administer an exam. He was welcomed to the classroom with cheers and applause. He held up his arms in triumph.

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Coming up:

Character.ai is going through bankruptcy. What can we learn from the AI startup's decline?

Why President Trump wants to import diesel fuel from Russia

Why stagflation was John Maynard Keynes' Achilles' heel

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When AI startups get vacuumed up, what's left behind?

What to know: Character.ai is a company that allows you to speak with a "companion" — an AI-powered fictional character, historical figure, or whatever you decide to build. It came out just before ChatGPT and quickly went viral in part thanks to its adoption on TikTok. It hit 28 million monthly active users at its peak.

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Character.ai had a lot of engagement, a big customer base, lots of talent … and Google promptly picked 'em up for $2.7 billion back in 2024. But Google didn't buy the company and absorb it! No, that traditional "acquihire" model would require all sorts of legal and regulatory approvals. Instead, they hired away the founders (and other big hitters on the team) and bought the nonexclusive license to the technology, leaving the company itself behind. That's called a "reverse acquihire," and it's happened at least six times in the past two years with AI startups. Now this week, Character.ai is filing for Chapter 11 bankruptcy.

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Why it matters: A "reverse acquihire" doesn't leave a company in the greatest position. After the Google deal, Character.ai had to change its business model away from the quite costly LLM training and toward developing AI characters. Its founders were gone. Sure, the shrunken company had $2.7 billion in the bank, but leadership was still looking to raise money as they struggled to monetize their user base.

So is the "reverse acquihire" what caused the pain? Or was it a symptom of a larger issue? Character.ai faced a mountain of litigation over alleged harm to minors plus copyright concerns from Disney. So what's left behind? A once very promising company, which Disney is very excited to pick over for parts of it for $20 million.

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Will this Russian diesel deal affect price?

What's going on: President Trump signed a deal last week to get diesel from Russia in an effort to lower fuel prices ahead of the midterms. Two weeks ago, we talked in the newsletter about the potential of a diesel export ban to lower prices. It didn't happen. One week ago, we talked again about Trump issuing an executive order to defer a tax from diesel. Now, this!

It's safe to say people were surprised by the move, given Trump signed a Russian sanctions law just last month that looked to tamp down on their energy revenues. Beyond surprise, a bipartisan group of senators is openly calling for the president to rescind the deal. They said it gives Putin the funds to power his war machine and "enables Russia to continue its brutal attacks on Ukrainian civilians."

Will this do anything? The same bipartisan group of senators said this deal will mean "limited to no relief to Americans." Goldman Sachs estimated the release of Russian oil would affect wholesale prices by $1 to $2 per barrel. The price of a barrel of diesel is around $200. So a $1 to $2 impact? Neil Atkinson, an independent energy analyst, says, "Frankly, [it's] a rounding error. It makes no fundamental difference to the global diesel market."

What's weirder to Atkinson, though … Russia hasn't really been exporting diesel. Its refineries have been damaged, and it's literally been importing diesel to make up for shortfalls. " So where these barrels of Russian diesel are going to come from to go either to the United States or elsewhere in the global market is a bit of a mystery," said Atkinson.

Today's Indicator

The Nobel Prize that wasn't

If you HAVEN'T listened: Reporter Greg Rosalsky opens the piece describing WHAT exactly Michael Woodford and Robert Hall won the economics Nobel for. They helped shape what's known as NEW Keynesian economics by bringing microeconomic principles to the traditional models of John Maynard Keynes. BUT THEN, Greg goes on to explain that the Nobel Prize did not initially include an economics award. No, that changed when the Swedish Central Bank, the oldest central bank in the world, wanted to celebrate its 300th anniversary with a bang. They would fund a new award for economics. It's a fascinating story which you can listen to below.

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If you HAVE listened: A leading philosophy of John Maynard Keynes is that governments could fight recessions by boosting spending, and deal with inflation by holding spending back. In the initial draft that didn't make it into the final episode, Greg touched on how STAGFLATION was a central thorn in the side of this concept. Specifically, back in the 1970s, during the Arab oil embargo, the U.S. dealt with the one-two punch of high unemployment and high inflation, bringing about stagflation. It challenged the Keynesian idea that when lots of people are out of work and spending less, inflation comes down. Because at that point, unemployment and inflation rose together. Isn't that nice? Greg Rosalsky writes Planet Money's newsletter … you can catch that here.

Rest of the week

In Our Spare Time

Producer Cooper Katz McKim is reading The AGI Chronicles

Man oh man, this is the page-turniest nonfiction book I've read in a while. Kevin Roose, co-host of the upcoming NPR podcast Machine Gods, formerly The New York Times' Hard Fork, tracks the handful of characters racing to make AI a commercial reality. It is far from a clear-cut story. There's no one character who came up with the idea and executed it … the existence of AI today comes down to many papers, many individual discoveries, and a whole lot of obsession. I didn't realize how much progress had been made in AI prior to 2020 and how concerned many industry leaders were about even creating AI (looking at you, Amodei) for fear of creating a super-intelligence that moves outside of human control. It's gossip-y, it's matter of fact … I would recommend.