Tuesday, May 28, 2024
Startups

This Austin accelerator made big claims; employees and customers say it didn’t deliver

Newchip, an online accelerator promising to help startups, has filed for bankruptcy and is now facing insolvency amid employee and client discontent.

Dozens of employees of the troubled organization staged a walkout on May 4, demanding that founder Andrew Ryan step down as CEO.

Ryan — who previously went by the name of Ryan Rafols — started Austin-based Newchip in 2016 after spending more than seven years as a city commissioner in Austin, according to his LinkedIn profile

Newchip initially started out, according to Silicon Hills News, “as an aggregator of top deals from various equity-based crowdfunding platforms,” and later evolved into its current accelerator model. In his LinkedIn profile, Ryan describes Newchip as an entity that provides “entrepreneurs with all of the skills and tools necessary to build, scale, and fund their startups from launch to exit” via its “online global accelerator and venture fund.”

Essentially, Newchip presented itself as an accelerator that would help startups meet and raise money from investors and grow their companies for a fee. But the accelerator failed to deliver on a number of its promises, some employees say, and left hanging founders who had signed up.

Some founders argued, in interviews with TechCrunch and in at least one public post discussion on LinkedIn, that Newchip’s fee — which varied from a few thousand dollars to up to $18,000 or $20,000 — was too high and not worth the services provided. Some insisted that it was difficult to impossible to get a refund when the accelerator did not follow through.

Chief among the long list of complaints by eight former employees who walked out and were interviewed by TechCrunch is “mismanagement” on Ryan’s part. The executive, they claimed, regularly was aggressive toward individuals in the company via written and verbal communications, and made poor decisions regarding leadership roles. 

One former employee who wished to remain anonymous told TechCrunch: “He would routinely often hire either naïve or ‘yes man’ type employees and get absolutely ruthless and degrading and demeaning to people while saying things like ‘I’m too good to be wasting my brilliance on this’ and just scream at people.”

In response as to whether he was demeaning to employees, Ryan acknowledged that his leadership style was based on “a military mindset” and that “there have been moments where the line between accountability and conflict has blurred.” He also admitted that in one particular instance, he could see how his reaction “might have come across as demeaning.” Ryan also added that he’s been “known to walk out of or abruptly end meetings lacking an agenda, emphasizing the importance of preparation.”

In a Zoom interview with TechCrunch and in two different LinkedIn posts (which can be found here and here), Ryan largely blamed the macro environment, managers and employees for the company’s demise.

Via email, Ryan said he ultimately accepted “full responsibility for the events at Newchip.”

He claimed to currently be “in discussions with numerous VC firms, family offices, and PE firms to formulate a continuity plan.”

Newchip, operating under Astralabs, filed for Chapter 11 bankruptcy in March, revealing that it had just $1.7 million in assets compared to $4.8 million in liabilities. Last week, a bankruptcy judge ended up converting the case to Chapter 7 liquidation. This is unsurprising, considering that, according to Silicon Hills News: “While Newchip raised $7.9 million from accredited and nonaccredited investors, Crunchbase data reveals a troubling history of financial losses. SEC filings show a net loss of $197,884 for 2016, a $748,999 loss in 2017, and the company claimed $4.5 million in tax loss carryforwards in its 2020 financial statements.”

Ryan claimed the employees staged the recent walkout to protest the fact that the company was going to be laying off more employees, and were led by a Newchip investor. While Ryan did not name the investor, that individual is believed to be Joe Merrill, who also served as chief of Newchip’s board. (TechCrunch reached out to Merrill but he did not respond to requests for comment.) Ryan added that the accelerator had already conducted several rounds of layoffs over the previous six months, going from more than 200 employees to about 75 at the beginning of this month.

Speaking to TechCrunch, Ryan said: “We had to make cuts across the team and there was gonna be massive layoffs […] Otherwise there would be no money to pay people and we had to cut the business down. And while I requested approval from the court to take on capital and we had investors ready to give us capital, our attorneys had failed to file the motion. And so we basically pushed them to file for [an] emergency filing.”

He claimed that employees were not happy with that move and demanded that he “wind the company down and basically liquidate everything,” which he said he could not do while in Chapter 11 proceedings. Ryan said he went on to terminate the board.

For their part, the eight former employees TechCrunch spoke with deny walking out due to potentially being laid off or not getting paid and instead cite Ryan’s “lack of leadership and mismanagement.”

In their walkout letter (which was shared with TechCrunch), the employees wrote of their concerns over the dismissals of “key personnel,” saying their “removal has led to an erosion of trust and morale within the organization, creating a toxic work environment.” The employees demanded the execs be reinstated and that Ryan step down as CEO “effective immediately.” 

No one was reinstated.

Via email, Ryan told TechCrunch: “In the end, we were unfortunately compelled to close the company despite having secured capital commitments to keep it moving forward due to the takeover attempt and false allegations made to the court that we could be liquidated for half a billion dollars if the court just signed off, which understandably led to frustration right now and a lot of our 1,200 active companies are rightfully upset. I empathize deeply with everyone affected and am taking every possible measure to rectify the situation.”

He also said the company would “be bringing in a new, more experienced CEO.”

Feeling misled

It isn’t just employees who say they were burned by Newchip. Andrew Goei, founder of PitchPages, a pitch deck and fundraising software startup, said he wanted a refund a few months into the program after he felt he was not getting the promised services, specifically the investor intros. 

In an interview with TechCrunch, Goei recalled Newchip’s salespeople telling him the accelerator “has this huge network and can introduce us to all these investors.” PitchPages would pay $8,000, and if the company didn’t get successful funding, the company would get its money back, Goei said. So his company signed up in August of that year.

“About two or three weeks into it, we still had no communication from them at all, even though we paid,” Goei said. At that point, PitchPages had paid about $6,000 to the program.

During that time, Goei said he met two mentors from the program who voiced concerns about Newchip and recommended Goei get a refund. Weeks would go by before customer support people would respond, and ultimately he was told there would be no refund, Goei told us. 

“It was very apparent that their whole model was ‘get as many startups as we can. We don’t care who they are. We don’t care what stage they’re in as long as they pay, that’s all that matters,’” Goei said. “And they would find any way possible and not give any refunds. What  was really sad about the whole thing is that Newchip was started by this guy who comes from the VC community.” 

Founder Orri Bogdan, too, told TechCrunch that Newchip’s salespeople told him that they would offer a full refund if he failed to raise funding through the outfit, but then “snuck in extreme stipulations with the intention of never refunding anyone.” 

The founder of VAE Labs, which is developing an edible energy spray, Bogdan says that as a result of Newchip’s terms, his startup declined its offer to “accept” his company in favor of joining a different accelerator.

“If we hadn’t gotten into DSHA, we would have definitely accepted and lost $7,500 to $18,000, with the higher price depending on if we accepted their $250,000 warrant or not,” Bogdan said. 

Refunds

Former Newchip employees told TechCrunch that the company “rarely issued refunds.” They also claimed that the company paid customers to remove negative reviews.

Ryan disputes both of those claims. He said it was stated in the customer contract that refunds were not given, for example, when companies folded. He also said that it was “a very common practice” for customers to use negative reviews to try and get a refund.

“They don’t qualify for refunds, so they leave a review and they email you back and say ‘Hey, give me my refund and I’ll take this down,’” Ryan said. “We gave about $150,000 in refunds a month. For a business that brings in about a million dollars in tax, that’s a significant amount  — that’s about three times the amount that you’d see in any case.”

Ryan also said he “tried to train some of the low-level marketing people” to keep up with positive review management, but that they “would often fail to do that.”

Via email, Ryan also claimed that Newchip “lost money on nearly each and every admission” to its programs “due to the high risk and failure of startups.” 

Claims of ‘mismanagement’

Though the employee group has more recently gone public with their grievances, they make claims of mismanagement going back years, including the clawback of sales commissions and Ryan giving himself bonuses during monthly financial deficits.

For example, the group said sales commissions were awarded when a contract was instituted, but allege that later they were removed for what they were told were unsigned contracts, even though the customer was actively paying.

Ryan disputes that allegation, telling TechCrunch that 200 to 300 contracts weren’t signed, amounting to around $1 million, and that he found out some team members were “lying to clients” and charging accounts anyway.

We strictly adhered to the principle of paying admissions commissions only after contracts were signed to our knowledge. Unfortunately, in Q4 of the previous year, we discovered instances of non-compliance within our admissions team concentrated in a handful of individuals making up about 10% of our team,” Ryan said via email.

At that time, the employee group says Ryan made himself head of sales. When asked if that was accurate, Ryan confirmed, though he said it was temporary while the company sought a replacement.

Ryan also told TechCrunch via email that his first year “to receive pay over $75k since 2016” was in 2020, when he received $92,000, and in 2021 it was $175,000 and in 2022, $287,000, “equating to approximately 1.4% of revenue.” He added that “about a third of amounts yearly were performance-based bonuses.”

At the time of writing, it remained unclear as to what would happen to the entrepreneurs participating in the program, the remainder of employees and the company itself. The group of former employees said they are reaching out to other accelerators and to the startup ecosystem to see if they can assist the founders affected by the liquidation. Ryan said he was “in search of a white knight” to support the company and take over its programs. 

This Austin accelerator made big claims; employees and customers say it didn’t deliver by Christine Hall originally published on TechCrunch

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