Deceptive Practices in Startups

The accelerator’s program was not as beneficial as it appeared. It had questionable policies, a demanding founder, and a toxic culture. Let’s delve into the issues Newchip faced.

Typically, startup accelerators provide mentorship, training, and funding assistance in exchange for equity. Some charge fees while others do not, depending on the agreement.

Newchip operated on a similar model, charging startups up to $20,000 for a six-month mentorship program and opportunities to connect with investors.

Newchip claimed to have assisted over 5,000 startups, asserting that 70% secured additional funding afterward. However, the reality was starkly different.

Numerous startups voiced concerns about unprofessional staff and inadequate training. Many reported limited connections with potential investors. One founder from a cryptocurrency startup noted that he merely utilized Newchip's branding for promotional purposes, deeming the program ineffective.

A former mentor remarked that the courses offered were rudimentary, covering basic concepts like business models and pitch presentations, comparable to free online resources.

While mentors aimed to support startups, Newchip frequently assigned them to fields in which they had little expertise, raising doubts about the accelerator's credibility.

If the program was merely subpar, startups would only incur a $20,000 loss. However, no one anticipated their entire business could be at stake due to Newchip's downfall.

Startups Bear the Burden

Upon joining Newchip, startups granted stock warrants, enabling Newchip to purchase $250,000 worth of shares at the current valuation, with a lifespan of 18 months.

However, Newchip implemented a catch: if startups failed to provide quarterly updates and annual financial reports, the warrants could extend to 10 years, allowing Newchip to retain them until the startup went public or was acquired.

Approximately 95% of startups neglected to submit the necessary reports. (Reading contracts carefully is crucial!) After liquidation, these warrants amounted to an astonishing $498 million.

In March 2023, Newchip filed for bankruptcy, declaring only $1.7 million in assets against $4.8 million in liabilities, without factoring in the warrants.

Newchip closed its doors, leaving the startups to navigate bankruptcy proceedings unaware, with their warrants sold off to cover Newchip's debts.

Many founders expressed shock and anger, but legal protocols were adhered to. The warrants were sold in batches, with 133 companies impacted thus far. One buyer acquired warrants for 24 companies for a mere $43,000. Some founders were compelled to shut down their businesses to minimize losses.

Reasons for Failure

Newchip presented itself as a typical accelerator, operating online to avoid rental expenses, with mentors volunteering their time. Its curriculum was uniform across all participants, aiming to attract enough startups to cover fees.

So, what led to its downfall?

The bankruptcy filing reveals insights. Newchip employed numerous "investment managers" to recruit startups, peaking at 200 employees, while most accelerators usually maintain only a handful to a few dozen.

Ryan Rafols, the founder, attributed challenges to the COVID-19 pandemic and the ensuing global recession. Media coverage surrounding the warrants sparked greed among some shareholders, pushing them to liquidate or acquire the company. Despite Ryan's attempts to salvage the situation, he could not succeed.

Some employees contend that while Newchip began with promise, it eventually resorted to exploiting startups, blaming Ryan's ineffective management.

Ryan, previously a government worker, was known for his demanding and harsh demeanor.

> An employee remarked that Ryan was “cruel, insulting, and demeaning,” often exclaiming, “I’m too good to waste time on you!”

There are allegations that Ryan misappropriated company assets. Employees once staged a strike demanding his resignation as CEO, which Ryan perceived as a conspiracy against him and refused to step down.

Ultimately, Newchip went bankrupt, leaving startups in the lurch. Ryan announced on LinkedIn his intention to launch a new venture to assist affected startups, but trust is a hard thing to regain.

Seek Out a Startup Mentor

As a startup accelerator, the downfall of Newchip can largely be attributed to its founder's decisions.

From a business standpoint, they misled startups regarding crucial contract terms and deceived both startups and mentors. Whether intentional or not, it is evident that Ryan lacked a vision for sustainable success.

Regarding management, he displayed unwarranted optimism concerning growth, recklessly expanded the team, and ultimately resorted to layoffs. His harsh management style fostered a toxic workplace, where he shifted blame during crises while covertly seizing company assets. These fundamental leadership missteps resulted in a loss of trust among his team.

In hindsight, Newchip fell victim to nearly all significant startup pitfalls. It’s no surprise that some affected startups humorously suggested that Newchip itself needed a startup mentor.

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