One of the biggest startup accelerators is being liquidated. Was it a scam or just another failed startup?
Y-Combinator is without a doubt the best known startup accelerator. Newchip, based in Austin TX, rivaled it as one of the largest, with a radically different business model.
On March 17, Newchip (under its corporate name of Astralabs) filed for Chapter 11 bankruptcy protection from creditors. This would allow the company to restructure and continue operating.
However, on May 11, in a shocking development, the bankruptcy court ordered Newchip shut down and liquidated, leaving thousands of startups that had paid to join the accelerator out in the cold.
Newchip claims to have helped 5000 pre-seed through Series A startups that graduated their program, with 1200 more in their current cohorts. Each startup paid $8K to $20K to join after being promised guidance, mentorship, and introductions to investors, promises that were largely unfulfilled.
Was Newchip a legitimate accelerator providing valuable services to young startups destroyed in an attempted coup by vengeful former employees? Or was Newchip the venture world’s version of Trump University, providing nothing but a generic canned curriculum while charging naïve founders a huge sum so the founder could live a lavish lifestyle? It depends on who you believe.
The Allegations
Not being an insider at Newchip, I’m piecing together what I’ve gathered from insiders I know and combined it with the information and allegations that have trickled online. If you have additional information, please post it in the comments or contact me.
The primary allegation is that the CEO and founder, Andrew Ryan, wired money from the company bank account to his personal account despite the prohibition while operating under bankruptcy protection. Ryan claims the wire transfers were between company accounts at different banks to move uninsured deposits from PacWest Bank to a safer account.
In a long, rambling email on May 12 (you can read the whole email here) Ryan claimed the company “encountered significant challenges during this global tech recession, which necessitated a downsizing initiative over Q4, again in Q1…In an effort to strengthen our position for the recession, our team pursued the filing of subchapter 5 to restructure our venture debts.”
In other words, like most of the startups they worked with, expenses were higher than revenues. They’d been funding themselves with debt and equity and the bill was coming due. Laying off employees wasn’t enough to get to break even. They had to use bankruptcy protection to reduce or eliminate the $4 million in debt they owed.
He then goes on to allege that: “A few former employees saw an opportunity to exploit this situation and initiated a hostile takeover attempt. When their efforts failed, they then resorted to manipulating the court system in order to force the company into liquidation.”
He also alleges a conspiracy by the same ex-employees in a swatting incident targeting the Newchip office just before the bankruptcy hearing to interrupt the team’s planning.
Inside Newchip Reviews
The 196 reviews of Newchip on Glassdoor make for interesting reading.
Mixed with a large number of clearly fake reviews were many scathing comments from former employees stating that the team consistently lied to startups to get them to sign up.
Extremely questionable ethics are ingrained into nearly every aspect of this business. A punitive legal contract rigged with booby-traps at every turn as ways for the accelerator to underperform and eschew its promises to the founders it professes to serve. Blatantly dishonest and incorrect success KPIs the sales team was given to use (unwittingly) for pitching the program to prospective founders. More customers than I can even recall complaining they’d been entirely forgotten about or completely ignored after numerous attempts to get outreach program staff… Newchip’s actions, repeated time and again, have proven it cares nothing about founders or providing them with a quality product or experience after they fork over the cash to join.
And this one:
You won’t be successful in this role unless you’re lying about practically everything the “Accelerator” come with… You will constantly receive complaints and refund requests from the one’s you sold to previously… Everyone in the sales department knows what they’re doing is unethical and often time it’s joked about.
There were also many reviews stating that the CEO was a disaster.
The CEO exhibited a pattern of narcissism, manipulation, threats, sexual harassment, lies, and even scams that made it difficult to work in a professional and respectful environment. It was disheartening to see how often the CEO would lie, even under oath, and this behavior created a culture of fear and mistrust among employees. The CEO would even purposely scam founders and use vague language to deceive them.
More disturbing were the assertions of a hostile work environment and sexual harassment by the CEO.
CEO Andrew Ryan who raids the company of money to live a lavish lifestyle in spite of his employees. Andrew has also been sued several times for sexual assault, so women stay away from this company.
Newchip Business Model
There’s no reason an accelerator needs to follow the Y-Combinator model of offering cash to startups in return for a big slug of equity on which they’d make a huge return if and when the company exits. Or the university model of no cost, no equity, non-profit, bug alumni and donors every year to sponsor.
Newchip’s model was simple — charge tuition, run the program online, sign up hundreds of startups at a time, and make money. Which would be okay if they were upfront about it.
But nowhere on their website do they mention anything about fees. Instead they made the programs sound exclusive, with an application process like other accelerators. I’d be shocked if any startup failed to get accepted. Only after “acceptance” was the little detail of fees mentioned. Sneaky, sneaky.
(Of course, most other accelerators fail to mention until they send you the final contracts the little detail that of the $100K in investment they give you, $65K has to be handed back in “tuition” fees. Newchip is hardly alone in being sneaky about their fees.)
Newchip charged startups between $8K and $20K. That’s quite a chunk of change for an early stage startup that can’t even afford to pay their founders a decent salary.
Still, $8K would be worthwhile if it led to investment. Unfortunately, I’m not sure how often that actually happened.
Newchip claimed $2.25B in funding for their graduates. Talking to founders who’d graduated the program, many did find funding, but most gave no credit to Newchip for it.
Their marketing materials states that “accelerators help startups cut their fundraising time in half and over 70% of graduates of accelerators successfully raise capital.” That phrasing seems suspiciously generic, and probably intentionally misleading by not listing their own success rate.
Given the quality of many of the startups I saw in the program (mostly nice small businesses but hardly venture capital material), I suspect their success rate was far, far lower.
$8K to $20K for a bunch of generic lessons on business and few connections with real investors, leaves the only real value of the program the mentor founders got matched with. If they were lucky to get assigned a great mentor, the program may have been worthwhile. If not, it was a waste of money.
Most of the founders I spoke with that had been through the program were emphatic it was a waste of money. Some called it a scam. Only one said it had been worthwhile. A former employee told me that the program started with good intentions but over time became more sales focused, and the “business was trending to becoming a full scam” to the point where he felt guilty for the founders that he signed up and had to leave.
Newchip recently augmented the accelerator by creating a venture fund, Journey Venture Partners. This was a smart move. They used the possibility of a fund investment to attract more startups, pushed mentors to invest, and made money from the fees for fund management.
A Startup Success Story
One startup I worked with did say they found the program worthwhile. Beyond the useful mentorship, the tuition fees were more than offset by the AWS credits and other discounts they received.
They also thought the mastermind session and 3 pitch deck reviewers were very useful in honing their investor pitch. And they were able to get introductions to a number of VCs who have expressed interest in investing when they reach their milestones.
It’s important to note that this particular startup is based outside the US, and has less access to the usual array of startup benefits and connections to investors. For them, Newchip was a great fit.
So Newchip wasn’t an outright scam that took people’s money and provided nothing in return. There were many great mentors as well as employees working there who cared about the startups in the program and did everything they could to help. But the benefits were wildly overpromised, and many startups that weren’t suitable for an accelerator were “accepted” for their fees. And like any accelerator, what founders got out of it depended entirely on their circumstances as well as what they put into it.
How Does an Accelerator Go Bankrupt?
With an online program, there was no limit on the size of the cohort. With mentors volunteering their time and a canned, generic curriculum, there shouldn’t have been much cost. All they needed were customers — the startups — to join and pay tuition.
So how did they run out of money? Their bankruptcy filing can be found here, including the list of largest creditors.
They hired a lot of sales people (“venture associates”) to try to sign up more and more startups. In fact, they had around 100 employees, which is pretty shocking for an accelerator. And now they no longer had enough income to cover payroll.
They’d borrowed $2 million in merchant loans, plus another $2 million in debt. With the bank account balances dwindling and no way to make payroll much less repay the loans, they had to resort to the protection of Chapter 11 bankruptcy to try to continue operating.
They ran themselves much like the startups they were claiming to help. And they made the fatal error as many startups — hiring too many people assuming growth would accelerator, leaving them in a bind when sales fell.
But unlike early-stage startups that mostly rely on equity financing, Newchip had taken debt that had to be repaid. Oops. They should have found some better mentors to help with their own business plans.
My Own Newchip Experience as a Founder
In early 2019, I was co-founder of Appsurify, a startup using AI for software testing. Out of the blue, I received a message from someone at Newchip saying we were a great fit for their program.
I was surprised. That’s not how accelerators work. YC doesn’t recruit founders individually and ask them to apply. Even small accelerators don’t work that way.
The message assured me we’d been specially selected. I wasn’t sure whether to feel honored or skeptical. I did have 2 previous successful exits under my belt and was sure our prospects were far better than other early-stage startups. It wasn’t impossible someone had noticed us. So I looked into the program.
Unlike most accelerators, Newchip didn’t take equity, which I strongly preferred. And the program was entirely on-line, which was unique prior to covid. As an older founder with a family, not having to uproot my life and live in an Airbnb in San Francisco for two months was a real attraction.
To get much information, though, I had to fill out a simple form. I was surprised when the next day I received a letter of congratulations — we’d been accepted into the program. WTF?
Having built 2 startups, I didn’t need more lectures on the business model canvas. I needed connections to pilot customers and introductions to investors. I had questions. We set up a call. I asked whether they had any expertise in the QA testing space. His boss would have to get back to me. If not, why were we accepted? His boss would have to get back to me. The associate I spoke with seemed young and clueless.
When I rejected the program, the hard sell began. Messages from his boss extolling the benefits of their program and how they’d help us find investors. The $700K in benefits they’d provide like discounts on Hubspot and AWS credits. (The same ones as every other program.) The cohort was nearly full so we needed to sign up today! It felt more like a used car dealer than an accelerator for startups.
Every few months, I’d get a fresh outreach from someone new there with the same email telling me congratulations we’d been accepted. Clearly a script with a CRM.
Other than the regular spam, I forgot about them for a couple of years until I became responsible for accelerator outreach at Chemical Angels. I had to build relationships with accelerators working with startups in the chemistry and materials sectors.
Newchip had by then become one of the largest accelerators with hundreds of startups in their program. Though sector agnostic, some of their startups were a good fit to apply to Chemical Angels. So I reached out to them.
Unlike most other accelerators that required us to pay for sponsorship, said we were too specialized, or told us to just send someone to their demo day, Newchip encouraged a relationship.
So I put my skepticism aside. I didn’t know much about their business model at the time, and I had no objection to accelerators charging a nominal fee instead of taking equity.
In addition to promising to set up introductions with relevant startups, they asked me to become a mentor. My focus is climatetech (despite my career in IT and telecoms startups, I’m originally an energy engineer with a masters in energy policy) and they assured me they had lots of exciting climatetech startups in the program. So sure, why not?
I signed up as a mentor. That’s when things got weird.
Mentoring at Newchip
Mentors commit to work with assigned startups for 12 hours over 6 months. The first startup I was assigned was great. They were working on EV battery technology and I developed a great relationship with the founder. I was happy to help build their pitch deck and advise on business strategy, though I did start to wonder what they were getting from the curriculum.
The curriculum itself turned out to be the usual business model canvas and pitch deck building that looked crafted by a first year business school student followed by a demo day. It covers the same topics as my articles here on Medium and on PitchingAngels and frankly, mine are better. And free. Y-Combinator also puts their curriculum online with their YC School that anyone can join for free. But okay, the standard accelerator stuff. You pay a fortune for classes at Stanford, or less for classes at a local community college, even though you could learn the same thing from a textbook and YouTube videos on your own, so there’s nothing unethical about charging $8K for 6 months of startup training.
Although I’d only agreed to mentor one company at a time, they assigned me a second one. I took a quick look at their summary. It was a nice small business idea, but not suitable for venture capital. It had nothing to do with climatetech and there was little I could do to help them. I politely reminded the mentor coordinator I was still working with the first startup.
A month away from finishing the assignment with the first startup, they assigned me my next one. It was a SaaS company in an industry where I had no expertise. I had to remind them that I’d only agreed to mentor cleantech startups.
A few days later they assigned me another. This company made consumer cleaning products. Huh? It turned out the Newchip team thought cleantech meant cleaning products rather than sustainability. Jeez. I was quickly losing confidence that they knew how to run an accelerator.
Then they gave me a new startup. This was the craziest one ever. The company claimed to have invented technology to recycle plastics. Sounds interesting. And a great fit for me. I asked the founder for details to review before our first meeting. Sorry, confidential. I asked for a pitch deck. Sorry, can’t share that. His LinkedIn profile showed no background in chemistry or materials. So when we met, I asked how I was supposed to help. He wanted intros to investors. He wanted me to introduce him to investors so he could get $10 million to build a factory. He promised they’d make millions. Could he tell me about their system and technology? Nope. Could I see a business plan? Nope. Just introduce me to your investor friends already!
This smelled like a poor attempt at fraud. So I told the Newchip team the startup looked suspicious. Their answer was the company’s incorporation documents were in order so it clearly wasn’t a fraud. Huh? Facepalm. The cluelessness there was astounding.
It turned out nearly everyone I interacted with at Newchip was a recent college grad. They had no startup experience. No venture capital experience. No mentorship experience. They hadn’t even worked a real job before. Newchip had a lot of people working there, but nobody who knew anything.
I’d planned to take my name off the mentor roster, but found that I could cherry-pick the most suitable startups and request them as my mentees. In this way, I was able to work with a number of great founders and hopefully brought value to their experience.
It appears that many mentors were not even aware that the startups were paying cash to join the program. Certainly, Newchip never makes that clear. And at least some startups were told by the Newchip salespeople that the fees were required to pay the valuable mentors for our time.
Mentors were indeed paid by Newchip. With a tiny amount of Astralab/Newchip stock. Last year I was awarded $272.50 in Newchip stock for my mentoring services on which I had to pay income tax. At least with the bankruptcy, I’ll be able to write it off as a loss this year.
The Warrants
In this posting on Sunday May 14, CEO Andrew Ryan sets out the reasons he says Newchip was forced into liquidation.
When startups sign up for the accelerator, they agree to give Newchip warrants to acquire up to 3–5% of the equity in the company at early stage valuations. Standard accelerator stuff.
Ryan states that Newchip’s business model was always to break even on the accelerator fees to cover operating costs, and generate long term profits from the warrants from successful graduates of the program. Again, standard accelerator stuff. YC and most others accelerators can afford to make investments in their cohorts using the money generated from the equity and warrants in earlier companies that exited.
The warrants usually expire after 18 months, requiring the accelerator to invest cash in an early funding round along with other early-stage venture investors. Something they’ll only do for the few startups that truly take off.
However, the contract stipulates that if the startup fails to meet their obligations to provide quarterly updates and yearly financial reports, the warrants are automatically extended for 10 years instead of terminating after 18 months.
Instead of having to invest at an early stage and hold equity hoping the company succeeds, 10 year warrants can be held until the company exits and then be exercised to immediately generate cash.
Since 95% of the startups failed to provide the required updates, Newchip now holds warrants to invest up to $250K in 5000 startups at low valuations.
Of course, most of those 5000 startups have failed and their warrants are worthless. But it only takes a small percentage of that 5000 that have gone on to be acquired or had a large IPOs to be worth some serious coin.
In a financial analysis by Sputnik ATX, an Austin-based venture capital firm, they estimate the portfolio of 5000 warrants to be worth $489 million. Almost half a billion dollars. Wow! And they identify $54 million in value from warrants that can be exercised immediately from companies that have already exited.
They’ll need good lawyers, though, since companies that were acquired or went public won’t be happy when they learn that Newchip owns rights to 3–5% of their business from warrants they thought had expired years ago. I expect a lot of court fights.
This portfolio of warrants can be sold off to investors, or become an asset of whoever acquires them out of liquidation. Ryan claims this made Newchip more valuable dead than alive.
What Happens Next?
The CEO Andrew Ryan claims to be trying to challenge the court order of liquidation. I’m not a bankruptcy lawyer, so I’m not sure how feasible that is.
The big question though is the value of the warrants, and how they get treated through the liquidation.
Someone, including the CEO, could buy all of Newchip out of bankruptcy. Or the company can be shut down and the assets, which are probably just the warrants, can be auctioned off to the highest bidder.
Hopefully the warrants will generate a big enough bidder so that startups that had paid their fees can be given a refund.
Founders that have a good relationship with their mentor will continue mentoring. We were volunteering our time anyway, so whether we’re doing it as part of the accelerator or not doesn’t matter.
And perhaps after writing my previous novel about an evil startup based on Theranos, I’ll write my next one about an evil accelerator based on Newchip.
