Back in May, Builder.ai, once a high-flying startup touted as a path-clearing AI-powered app builder, filed for bankruptcy in the U.S., culminating a spectacular fall that has become a cautionary tale in today’s AI frenzy.

The filing followed a flurry of activity that saw creditors seize its accounts, the revelation that it may have been using engineers in India instead of AI, and a probe into how Builder.ai’s founder spent money leading up to its collapse.

The collapse has sparked anger among Builder.ai’s investors, many of whom were stunned to learn of founder Sachin Dev Duggal’s multimillion-dollar share sales in the months leading up to bankruptcy.

Backed by investors including Microsoft and the Qatar Investment Authority, it raised over $500 million and achieved a unicorn valuation north of $1.3 billion.

So how did it start to crumble?

According to the Financial Times, Duggal liquidated more than $20 million in personal holdings while assuring investors that the company remained on solid footing. Those sales, executed before creditors seized Builder.ai’s accounts, have fueled questions about whether the founder prioritized personal wealth over corporate survival.

Insiders told FT that Duggal’s force of personality, combined with his branding as Builder.ai’s “chief wizard,” insulated him from tough questioning until it was too late. Board oversight lagged as the company aggressively marketed its AI vision, even as internal audits showed widening discrepancies in its finances.

The comeback kid that never was

Launched in 2016 under the name Engineer.ai, Builder.ai promised to enable businesses to build custom software with simple chat prompts that were, in its words, “as easy as ordering pizza.”

Investigations revealed that Builder.ai’s vaunted “AI” was largely a front for a vast network of human developers. Rest of World reported employees say the AI assistant “Natasha” handled barely any functional coding.

In reality, around 700 engineers in India were doing the heavy lifting. The Wall Street Journal similarly noted the company’s marketing eclipsed reality, because clients expected automation but instead got manual code delivery.

Financial illusions and legal blowback

Financial scrutiny uncovered staggering discrepancies: the company reported $220 million in 2024 sales, but audits pegged the actual figure closer to $50 million, a nearly 75% inflation. Allegations surfaced that Builder.ai and India’s VerSe Innovation engaged in “round-tripping,” billing each other to artificially inflate revenue. VerSe denied wrongdoing.

Creditor Viola Credit seized $37 to $50 million from Builder.ai’s bank accounts, leaving the firm with a razor-thin cash runway. Subsequently, the company entered insolvency proceedings in June, laying off roughly 80% of its workforce, about 1,000 jobs.

The fallout has also been personal for employees. Roughly 80 percent of Builder.ai’s 1,200-person workforce was laid off in June, many receiving little to no severance. Some staff in India told FT they felt “betrayed” after being reassured months earlier that new funding from Microsoft and the Qatar Investment Authority would secure their jobs.

Wider implications for AI hype

Builder.ai’s collapse exemplifies the hazards of “AI washing,” where companies exaggerate or misrepresent their AI capabilities to attract funding and buzz.

Industry analysts now point to rising skepticism, even from regulators, about ostensibly “AI-powered” ventures. For investors, the lesson has been equally costly. Builder.ai’s board included seasoned executives and venture firms that had bet on Duggal’s vision of democratizing app development.

Instead, the company’s implosion has become a case study in governance failure: investors relying too heavily on a charismatic founder, boards not scrutinizing inflated financials, and global backers eager to buy into the AI boom without demanding proof of genuine technology.

What about its founder?

FT reporters noted that Duggal has since relocated to Dubai, distancing himself from bankruptcy proceedings in the U.S. His exit has deepened frustration among former colleagues and investors left to reckon with the ruins of one of AI’s highest-profile startup flameouts.