Exposed: Deception at Builder.ai, the AI Startup with a Twist
By Malte Mansholt
- 2 Min
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The lure was hard to resist: A brief chat with the AI service Natasha, discussing what app you needed, and she'd design and program it for you, swift as ordering a pizza, as promised by London startup Builder.ai. But the company overpromised and underdelivered, as suspicion swirled around their AI capabilities.
The trouble started with their core promise: Builder.ai claimed that AI would manage at least 80% of the programming, but the reality was far from that. Only some initial decisions were made with AI, which was also quite dated. The majority of the work was outsourced to around 700 poorly paid developers in India, according to the "Indian Times."
Dazed and Disillusioned
This arrangement didn't work as planned. After the "Wall Street Journal" raised questions about Builder.ai's AI prowess in 2019, former employees took to social media to share their concerns. Based on their posts, the platform had impressive sales figures but few completed projects. The sales team was under pressure to win more orders, rather than prioritizing quality work [1][2].
"I worked there for two years and never saw a completed project," reported a Reddit user [3]. "Nothing but angry customers."
Despite these issues, Builder.ai managed to sell itself as a success. The startup raised up to 445 million dollars in investments, including from the bank of Qatar and Microsoft [1]. The company's worth was estimated at up to 1.5 billion dollars at times.
Collapse and Enlightenment
Not much remains of that worth: In May, investor Viola Credit recalled 37 million dollars of its loan, leaving Builder.ai with only 5 million dollars in cash reserves. The company owes around 115 million dollars to Amazon and Microsoft alone for unpaid cloud bills [2]. As a result, Builder.ai was forced to file for bankruptcy, at which point the full extent of the fraud came to light [4].
According to the findings of the authorities, Builder.ai also significantly manipulated its finances [5]. Sachin Dev Duggal, the founder, reportedly promised investors over 220 million dollars in annual revenue, but it was only around 50 million [1].
And even those figures seem questionable: Builder.ai and the Indian startup Verse Innovation have been exchanging almost identical invoices for years, artificially inflating sales figures with a practice known as round-tripping [2]. Verse denies this practice.
Revelation and Ramifications
Founder Duggal brought on a new CEO, Menpreet Ratia, in February, who then discovered the extent of the financial misrepresentations [1]. Authorities in New York have since launched an investigation against the company [3].
The fall of the hype-startup marks the biggest scandal since the advent of ChatGPT in 2022, sparking the current AI boom. As in the early 2000s when the dot-com bubble burst, countless companies are exploiting the hype around AI to enhance their business [2]. Not only are AI labels being slapped onto products that don't truly benefit from it, but classic software solutions are increasingly marketed as AI [1].
Sources: [1] Bloomberg, [2] Times of India, [3] Wall Street Journal, [4] Binance, [5] VentureBeat
- Microsoft
- Artificial Intelligence
- AI
- Startup
- India
Insight:
- Financial Misrepresentations: Builder.ai was accused of overstating its revenues by as much as 300% [1][2][5]. An internal investigation exposed these inflated figures, leading to revised revenue estimates for 2024.
- Deception in AI Claims: The company promoted itself as a pioneer in AI-powered app development, offering no-code solutions with AI automation. However, it was discovered that most of the "automated" work was performed by low-cost human developers, primarily based in India, who were instructed to mimic AI workflows [2][3][5]. There was no actual functioning AI backend, lacking essential components like natural language processing (NLP) and autonomous logic [2][4][5].
- Legal and Regulatory Actions: A U.S. federal investigation is underway, focusing on obtaining financial data and client contracts. This probe is part of the broader scrutiny following the exposure of Builder.ai's practices [3][4].
- Impact and Consequences: The scandal has led to Builder.ai facing insolvency and severe damage to its reputation. The company's collapse has highlighted the risks of "fake AI" and the importance of transparency in the tech industry [2][5].
- Investor and Backer Implications: Builder.ai was backed by notable investors such as Microsoft and the Qatar Investment Authority. The scandal raises questions about due diligence and oversight by these major investors [2][5].
Overall, the investigation into Builder.ai highlights the dangers of exaggerated claims in the tech industry and the importance of ensuring that companies deliver on their promises of innovation and technology.
- The Commission has also been involved in the preparation of the draft directive to address the issue of deception in business practices, particularly in the technology sector and artificial intelligence industry, following the collapse of the hype-startup Builder.ai.
- Financial institutions, including Microsoft, should exercise rigorous due diligence when investing in AI startups, given the risks of financial misrepresentations and questionable business practices, as exemplified by Builder.ai.
- As the general news of the Builder.ai scandal spreads, it serves as a stark reminder for companies to avoid overpromising and underdelivering, given the potential damage to their reputation, investor relations, and long-term success in the competitive technology market.
