Great Fall From Fame: Builder.ai Bankruptcy A Bigger Problem For Investments In Indian AI Startups?

Builder.ai, an artificial intelligence startup founded by Indian entrepreneurs and supported by Microsoft, Qatar Investment Authority, and other venture capitalists, announced that a creditor had taken the majority of its funds, prompting it to file for bankruptcy.

Manpreet Ratia, the CEO of Builder.ai, said in an interview that Viola Credit, which gave the startup $50 million in debt last year, had taken $37 million from the company’s accounts, leaving it with $5 million.

The company said in a statement: “Despite the tireless efforts of our current team and exploring every possible option, the business has been unable to recover from historic challenges and past decisions that placed significant strain on its financial position.” 

Founded by Sachin Dev Duggal in 2012, the startup, which was reportedly valued at around $1 billion and raised over $450 million in funding, rose to prominence for its AI-based platform that sought to streamline website and app creation.

Builder.ai, formerly known as Engineer.ai, had come under fire in 2019 when The Wall Street Journal disclosed that the majority of its coding was done by human engineers rather than AI. This, despite its strategy was to utilise AI tools to enable clients to build and develop applications.

The fact that Builder.ai engaged auditors to examine its financial records suggests that there might have been a problem behind the scenes. Former workers said it had repeatedly overstated sales estimates by more than 20%, according to Bloomberg. It had also reportedly reduced its projected revenue for the second half of 2024 by 25% last summer.

After the purported fund seizure, Builder.ai has let go of the majority of its staff. According to Ratia, the company’s remaining $5 million is in Indian accounts and can’t be utilised for employee payments because of limitations on the flow of funds from India.

Builder.ai is among a slew of Indian startups that have been forced to shut down or are in serious trouble due to financial and governance issues. In the past two years, more than 28,000 Indian startups have closed their doors. 

The downfall of these startups serves as a stark reminder of the pitfalls of rapid investment in AI firms that may look promising but lack strong fundamentals. A lot of startups have received funding at high valuations, which prevented them from raising subsequent rounds, particularly when the company was not doing well.

Amid investors’ aim to rehash the success tales of industry titans like OpenAI and Anthropic, the failed startups’ story underlines the dangers of backing “the next big AI opportunity” too quickly.

Their collapse also has the potential to further negatively impact the Indian startup ecosystem, particularly those in the AI space. Its failure highlights issues within the AI startup ecosystem, potentially affecting investor confidence and resource allocation.