AI Startup Fooled Microsoft With 700 Fake Chatbot Workers

💡 TL;DR - The 30 Seconds Version

💸 Builder.ai filed for bankruptcy after raising $445 million by claiming AI built apps when 700 human engineers in India did all the coding.

📊 The company inflated its 2024 revenue by 300%, telling investors it made $220 million when actual income was just $50 million.

⚠️ Wall Street Journal questioned their AI claims in 2019, but investors including Microsoft and Qatar kept funding the company for six more years.

💰 Builder.ai now owes $85 million to Amazon and $30 million to Microsoft in unpaid cloud bills, with 1,000 employees laid off.

🔍 Federal prosecutors in New York are investigating the company while regulators probe "AI washing" across the startup ecosystem.

🌊 The collapse marks the biggest AI startup failure since ChatGPT triggered the investment boom, exposing gaps in due diligence.

Builder.ai promised to make app development "as easy as ordering pizza." The London startup raised $445 million from Microsoft, Qatar's sovereign wealth fund, and other major investors. Its AI assistant "Natasha" would supposedly build software with minimal human input.

The reality was different. Around 700 engineers in India manually wrote code for every client project. The company marketed this human work as AI-generated output for years.

The deception finally caught up with Builder.ai in May 2025. The company filed for bankruptcy after lender Viola Credit seized $37 million from its accounts. An audit revealed the startup had inflated its 2024 revenue by 300% - claiming $220 million when actual income was just $50 million.

Red Flags Ignored for Years

The warning signs appeared early. The Wall Street Journal questioned Builder.ai's AI claims in 2019, finding that most coding was done manually. Former employee Robert Holdheim sued the company that same year for $5 million, alleging he was fired after flagging deceptive practices.

Court filings revealed Builder.ai told investors that apps were "80% built" by AI technology they had "barely even begun to develop." Multiple former employees later described the company as "all engineer, no AI."

Despite these red flags, investors kept writing checks. The company reached a $1.5 billion valuation at its peak.

The House of Cards Tumbles

Founder Sachin Dev Duggal stepped down in February 2025. His replacement, Manpreet Ratia, discovered the extent of the financial misrepresentations during his first months as CEO.

The company now owes $85 million to Amazon and $30 million to Microsoft in unpaid cloud computing fees. Around 1,000 employees have lost their jobs. US prosecutors in New York are conducting a federal investigation, demanding financial statements and customer lists.

The AI Washing Problem

Builder.ai's collapse highlights a growing issue in tech investing. "AI washing" involves rebranding basic technology services as artificial intelligence to attract funding during the current AI boom.

Phil Brunkard of Info-Tech Research Group noted that many startups "scaled fast without robust technology or governance," riding a wave of unchecked hype. The Builder.ai episode has become the largest AI startup failure since ChatGPT triggered the global investment frenzy.

Lessons from the Wreckage

The company's LinkedIn statement admitted defeat: "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."

Industry observers suggest Builder.ai may have engaged in "round-tripping" with Indian social media firm VerSe to inflate sales numbers. This tactic helped attract investment by creating the illusion of higher revenue.

Regulators are now probing how AI firms market their products. The Builder.ai case serves as a cautionary tale about the gap between AI marketing claims and actual capabilities.

Why this matters:

The collapse exposes how easily investors can be fooled by AI buzzwords when due diligence falls short
It signals a reckoning for the startup ecosystem where flashy AI claims may no longer guarantee funding without proof

Read on, my dear:

Times of India: How this Microsoft-backed billion-dollar London startup made 700 engineers sitting in India pose as AI tool

❓ Frequently Asked Questions

Q: How did Builder.ai hide 700 human workers from investors for so long?

A: The company set up operations in India where engineers manually coded projects while Builder.ai marketed the output as AI-generated. They used the AI assistant "Natasha" as a front-facing interface, making it appear that artificial intelligence was building the apps when humans were doing all the work behind the scenes.

Q: What is "round-tripping" and how did Builder.ai allegedly use it?

A: Round-tripping involves creating fake transactions between related companies to inflate revenue numbers. Builder.ai reportedly engaged in this practice with Indian social media firm VerSe, making their sales appear higher than actual customer revenue. This helped attract more investment by showing false growth metrics.

Q: Who is Robert Holdheim and why did he sue Builder.ai?

A: Holdheim was a former Builder.ai employee who sued the company for $5 million in 2019. He claimed he was fired after complaining that the company's technology was "smoke and mirrors" and didn't work as promoted. His lawsuit revealed that Builder.ai told investors apps were "80% built" by AI they had barely developed.

Q: Why did the new CEO Manpreet Ratia replace founder Sachin Dev Duggal?

A: Ratia was brought in February 2025 to restore investor confidence as financial problems mounted. After taking over, he discovered the company had massively inflated its 2024 revenue claims - reporting $220 million to creditors when actual revenue was only $50 million, a 300% inflation of the real numbers.

Q: What specific debts does Builder.ai owe to Amazon and Microsoft?

A: Builder.ai owes $85 million to Amazon and $30 million to Microsoft in unpaid cloud computing services. These are the platforms the company used to host and run their operations. The debts accumulated as Builder.ai's financial situation deteriorated, leading to their inability to pay for basic infrastructure costs.