The Fall of Newchip Accelerator

On March 17, Newchip Accelerator filed for bankruptcy protection from its creditors to allow the company to restructure and maintain operations. However, on May 11, the bankruptcy court ordered Newchip Accelerator to be shut down and liquidated. This meant that the thousands of startups that paid to join the accelerator were now clueless about their plight.

Each startup paid between USD 8,000 and USD 20,000 to join after being sold packages of guidance, mentorship and access to investors which are the offerings of most accelerators. The promises made to the 1,200 startups in their current cohort remain unfulfilled.

The primary allegation, in this case, was that the CEO and founder wired money from the company bank account to his personal bank account while being prohibited from doing so under bankruptcy protection. However, Andrew Ryan claims that the wire transfers were between company accounts at different banks to move uninsured deposits around.

With the various crises such as COVID-19 and the conflicts between nations, Newchip Accelerator was on the startup path of having expenses higher than revenues. They were turning losses and living off equity and debt. With this being an unsustainable practice, they started laying off employees and this was not enough to pay off the $4 million in debt they owed.

Reviews about Newchip Accelerator are shocking. Some of them are clearly fake reviews but there are comments from former employees who claim that Newchip Accelerator is a big fat scam. According to them, the company’s operations were unethical with legal contracts well-drafted to make it safe for the accelerator to fail to perform.

Now the Newchip business model was unique. It resembles the recent online unaccredited schools. They would charge tuition fees and run an online programme. However, the tuition fees were only revealed after the acceptance of startups following their application process. The tuition fees would be quite a big sum of money for an early-stage startup where the founders are very often not perceiving any salary. Newchip did claim that their graduates secured a total of $2.25 Billion in funding but we cannot verify the number yet. Of course, if that is true, then a sum such as USD 8,000 would seem like a very good investment for any founder.

The actual confusion lies around Newchip going bankrupt. It was a simple business model with online courses to be sold and no restrictions on the number of clients they could onboard, this was the opportunity to earn huge revenues while having low costs. However, they had a huge team with many venture associates(those who sell the courses) to onboard many more startups. They simply could not match the salaries’ costs.

They were $4 million in debt and they had to file for bankruptcy.

The warrants are one of the many reasons why the accelerator had to be forced into liquidation. A warrant is an option to purchase a number of shares in the future at a fixed price which can either be the price at the current funding round or set at a premium to the current price. When startups sign up for Newchip, they give out warrants to acquire 3-5% at the early stage valuations. They usually expire after 18 months which meant the accelerator had to invest cash in an early funding round with other early investors and this is something accelerators do for only the brightest prospects. However, the contract stated that if startups fail to provide quarterly updates and yearly financial reports, these warrants were automatically extended for 10 years, giving the accelerator the chance to immediately generate cash upon a company’s exit.

Andrew Ryan claims that these warrants have made Newchip very valuable and this is why it is being forced into liquidation by former employees and partners.

The Newchip incident is one which has been quite under the radar so far and it is definitely something to look out for. What happens to those warrants and startups who have already paid their fees remains to be discovered. But there might be some angry founders. After all, these warrants might have been forgotten.?

There are many lessons to be learnt from what is happening to Newchip Accelerator:

1. Never underestimate the problems you face.
2. If you are the CEO of a bleeding company, it might be time to change things.
3. No matter how simple your business seems, it never is simple.
4. For entrepreneurs, read all contracts especially when equity is concerned.
5. Always plan the repayment of debt.