They thought they were joining an accelerator — instead they lost their startups
Reading Time: 6 minutesLacey Hunter thought all was well as she put her startup through the three-month Newchip accelerator. Then the organization filed for bankruptcy in May 2023. Things went from bad to worse later that year when she discovered warrants of her company — rights to buy an ownership stake — had become part of the proceedings, which ultimately forced her to shut down her company.
In 2022, Hunter started TechAid, an AI smart-matching tool for humanitarian aid, and was just beginning the accelerator’s curriculum when Newchip filed for bankruptcy.
‘I made a few friends, but functionally, got nothing from Newchip,’ Hunter said. ‘I was shooting to have the curriculum done by August, but in May, the website went down.’
The now-defunct Austin accelerator had filed for bankruptcy amid employee and customer discontent. The court has since ordered the company to auction off the warrants it held in more than 1,000 of the startups that went through the accelerator program.
Normally, private companies like startups have control over which investors are allowed to buy shares and the prices they pay. But the bankruptcy court, which works to restore creditors rather than equity holders, isn’t allowing Newchip’s startups to exert that kind of control. Instead, the auctions are ongoing, with the first tranche already sold and upcoming tranches expected to be sold this spring and summer.
Founders are outraged — including some, like Hunter, who have actually lost their companies as a result.
‘There was no path,’ Hunter said. ‘I knew I was not going to be able to raise money. I mean, I couldn’t even get a no-strings-attached grant. I totally get that, but it still sucks.’
Newchip’s fall from accelerator grace
Newchip started out as an aggregator of top deals from ‘various equity-based crowdfunding platforms,’ according to Silicon Hills News, and later evolved into an accelerator that promised to help startups grow their companies and meet investors — for a hefty fee.
It charged startups between a few thousand dollars and $18,000 to $20,000 for its training programs, founders said. Startups also granted Newchip the right to buy $250,000 worth of shares in the company at a later date, but at their current valuation — this type of deal is also known as a warrant.
‘They were struggling with it. Andrew kept jumping in and interrupting them, and directly challenging them.’ And finally, recalled the source, Ryan said, ‘This was a test for individuals that I’ve asked to do this today. I was going to fire one of you, based on whoever did the worst job.’
He then singled out one person, told the room the person was fired, and, this person recalled, Ryan then said, ‘I do stuff sometimes to see who’s loyal and to see who is going to do what I tell them to do. This was a test and you failed. You’re out.”
After seeing Ryan fire this guy in front of the whole room, ‘I literally watched all of his direct reports sitting there saying to themselves, ‘I will never trust this man again,” the source said.
When Newchip (which also did business under the name Astralabs) initially filed for bankruptcy in March 2023, it was a Chapter 11 debt reorg. It then went into Chapter 7 — dissolution and liquidation — two months later.
Management had not been keeping up with the warrants to the point where it had missed that some companies had exited or raised money, losing out on the potential upside, noted Kerstin Hadzik, a consultant who was brought in to serve as interim CFO a few weeks after the initial bankruptcy filing.
In Hadzik’s view, Newchip might have also been saved from going into Chapter 7 if Ryan had been willing to step down as CEO and had presented the warrants as assets when initially filing for Chapter 11.
The judge repeatedly asked Ryan if he would voluntarily step down and let someone else, such as a chief restructuring officer, run the company. Ryan repeatedly dodged the question, expressing doubt that anyone could do so successfully. Ryan also noted that employees had requested ‘a new CEO’ and later claimed that he ‘was going to step aside … but the shareholders and investors, as part of them putting capital in, preferred that I stay here to make sure that we have the capital … to continue driving the business.’
‘The judge was offering like a lifeline,’ and Ryan ‘just said no,’ Hadzik recalled.
Ryan later alleged that there was an attempted coup on the part of an investor but sources say that Ryan had actually asked early investor Joe Merrill to serve as CEO before changing his mind and resuming the role himself. Merrill, who was an early investor in Newchip under its previous model and also co-founder of Sputnik ATX, declined to comment beyond noting that he believed the attempted sale of the warrants was a valid move.
Founders fight for their companies
She decided to hear out Ryan. What convinced her to ask for her money back was that Ryan ‘blew off our meeting.’ He reached out later, but she had already emailed Newchip asking for her deposit back on the basis that she had not started yet.
The founder got her money back, but Newchip didn’t void her contract, so she is now part of the bankruptcy lawsuit. That’s when she learned that someone could buy the warrants of her company for pennies on the dollar, and ‘it could screw your valuation going forward,’ she said.
There was a period of time when founders could object to their warrants being sold, according to Chad Harding, managing partner at Peak Technology Partners, the investment banking firm tasked by the court to sell the warrants.
‘We were in the process of obtaining a refund from Newchip when Newchip went bust,’ wrote Veronica Hey, CEO and founder of Australian startup Ok Away. ‘The contract is therefore null and void and the warrant attached to it is not applicable. None of this will stand up in an Australian court. If you continue to pursue in ‘selling’ this warrant you are selling something that does not exist and there will be repercussions.’
But startups’ objections were made in vain when the court overruled them. A bankruptcy court’s goal is to oversee the selling of assets to settle debts. If there is money left over, it’s paid to shareholders. Ryan is the majority shareholder.
The second tranche will likely be sold this summer and will include over 1,400 warrants for sale, according to Harding. The bid deadline will likely be late July, Harding said.
Founders of those startups included in the second tranche will also have the opportunity to object with a proposed deadline of May 31.
Ryan maintains that extensive efforts ‘have been made to notify stakeholders well in advance.’
When dreams become nightmares
Like TechAid’s Hunter, Garrett Temple blames the loss of his company on Newchip’s demise. He, similar to Hunter, also participated in Newchip’s accelerator program from January until May 2023. His startup, Novogiene, was a medical tech company focused on epidemic prevention.
Temple put around $7,500 on his credit cards to be part of the program and said that he never spoke with investors. His main reason for doing Newchip was to get investors for a $500,000 round, in part to pay for a small production run of his device so he could send it to universities and medical schools for pilot testing.
The meetings with investors were supposed to happen after a demo day that was scheduled for the summer. But when Newchip shut down in May, that demo day, and hence those introductions, didn’t happen. Temple wasn’t able to keep going and ended up dissolving Novogiene in the summer of 2023. As such, his company no longer existed for warrants to be sold to potential investors.
Temple said he spoke with his bank about getting money back from the program since he used credit cards. The bank was at first successful in getting $5,000 returned. However, about a month later, Temple noticed that money was no longer in his account and believes Newchip protested the funds.
Though Temple has moved on, he still has some intellectual property for Novogiene and says he is hoping at some point to license the technology to someone else or perhaps at another time pick up where he left off.
‘It was very sad to call it quits because getting the funding to make those units was the only hurdle before making serious progress,’ Temple said. ‘If they connected me with investors like they said, I could have made my invention, gotten efficacy and would be shipping units right now. I really do believe that.’
Accelerator operators sell dreams. But that doesn’t always mean that the accelerator will come through. And sadly, the founders who buy into those dreams can be the ones who end up paying the price.
Ref: techcrunch
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