Newchip Reveal with Andrew Ryan Part II: The Real Story Behind Our Accelerator, Prices, and Our Dedication to Founders

To our Startup, Mentor, & Investor Communities Worldwide,

In light of recent online discussions surrounding our business model, our financial operations, and Chapter 7 liquidation; I wanted to take a moment to address it directly and transparently, as well as the events of the last week that led to it.

First, let me state that true diversity of opinion within our startup and investor community is a testament to our vibrancy and our commitment to innovation. If we’re all automatons that retweet everything; if we stop asking questions as individuals and as a society; if we stop asking how do we make the world better or does this system add value, then innovation and our society dies with it.

Second, I am grateful for the countless voices of support I’ve heard, and I equally appreciate those expressing criticism as well. I believe each perspective brings valuable insight as we navigate this period and seek to continue to evolve the incubator and accelerator models in our startup communities/ecosystems.

  1. I’ll start by explaining our business model below, as that in itself has been a significant part of disagreement for or against our prior online programs.
  2. I’ll also share why greed can kill a company and how we were more valuable to some “dead in liquidation” than “alive supporting our startups”.
  3. Lastly, I just want to be transparent on what we’ve been up against as a team in my request for support from the community, as we may not win this fight.

I also want to address and thank the supporters that found success in our accelerator programs, the many hundreds of you around the globe that have messaged me over these last few days, have given me strength in this crisis.

And to those that are left without resources right now – thank you for your patience as we work day and night to solve this. You are all on our minds as we endeavor to find a solution moving forward that supports your success.

You have my promise that I will not rest until there is a solution to either support our founders through either program continuity via us, or an acquirer, or a process for program tuition refunds even if it cost me my ownership stake.

The Vision & Business Model Explained

As we navigate the current challenges we face, I find it important to share with you the nuances of our business model, and the vision that drove the creation of the Newchip Accelerator program and it’s parent company ASTRALABS.

What was the business model?

Newchip ran on what we refer to as a coalition model or community model. Imagine a gym or a co-op where members pay a minimal fee for access to an array of resources far exceeding the cost of membership – that was our model.

When we launched our first cohort, we charged a nominal $300 tuition for the program because we subsidized the cost to deliver via investor capital.

Since then, we’ve continued to grow the available resource pool, the size of the company and team, and subsidized all of our programs with investor capital for years attempting to find a point where it could become profitable.

Our programs and their pricing were designed to be affordable for founders at every stage and we utilized a price to traction matrix to do so.

Each of our 6-month programs offered monthly payment plans of around $1,000~ per month and up to $3,000~ per month for high traction/funded Series A startups (I’m using ~ because it fluctuated up or down by a few hundred over time).

This is because our objective was to ensure founders derived significant value – far exceeding their tuition into our pooled coalition model, even if we couldn’t always facilitate every investor meeting or prevent a startup from failing.

How many startups failed?

It’s important to also talk about failure as well. About 1/3 of the startups that started our program would shutdown during our six month program.

That may sound alarming but that’s standard for the space. We could have personally chased founders down for money owed, but instead wrote off millions.

Truly, I tell you and I hope you believe after this that our journey has been a labor of love, marked by personal sacrifices and relentless commitment to supporting innovators even when it cost us everything else.

The metaphor of David versus Goliath in this regard resonates with us because we’re not Stanford or Ivy grads, we’re not the in-crowd, we were the rebels that sought to change the landscape by democratizing access for everyone.

But we found this increasingly difficult in an environment often dominated by larger, well-funded entities with significant names behind them vs. the garage we launched out of and our eventual scrappy warehouse HQ in Austin, Texas.

ASTRALABS Venture Studio: Partners from Launch to Exit

ASTRALABS was conceived as a vertically aligned suite of products and funding to assist founders from inception of their idea through their exit, with Newchip Accelerator serving as the core incubator, accelerator, and launchpad.

The vision was to build an ecosystem of startups co-mingled into our interrelated software platforms that we ran as a Venture Studio from the top where we invested in, mentored, and acquired startups from our accelerator programs.

Newchip Accelerator, though the loss leader in this portfolio, was designed to be that incubator and accelerator to drive longterm partnership, creating synergy within the ecosystem and fostering lifelong relationships with those startups.

Newchip’s business model was never to be hyper profitable. It has consistently lost money every year, don’t believe me, you can check our SEC filings here just search ASTRALABS.

As we go into detail below, you’ll see the revenue model was based on a hybrid of venture capital longterm potential returns from our warrants, and investments into other product verticals for LTV, not cash revenue from our accelerator tuition.

If that’s the case why the tuition?

The short answer is we charged a tuition to cover our cost to deliver and keep the lights on, all in the hopes that a startup might be successful later and the warrant make us ROI longterm – think venture fund but venture hospital.

We understand and agree with the disdain many in the community harbor towards the “anyone can pay-to-play model”. That type of model de-stabilizes the trust between an investor network and an accelerator – it truly hurts all parties.

We’ve always endeavored to distance ourselves from that approach. Every program offered from Pre-Seed through Series A had metric and traction requirements alongside an extensive admissions application.

And we often refunded startups that no matter how hard they worked and we worked to support them, they still failed to get a term sheet – and this was our “guarantee”- historically about 10% of our revenue monthly went to refunds for it.

The major challenge with our model, is what happens when you build a business around a customer or client that is nearly guaranteed to churn at a 99% failure rate longterm and as high as 1/3 within six months and 2/3 over 12 months.

Given we were 2x-3x the average accelerator length at 6 months and supported startups longer with 12 months in IR, the cost to continue to support founders far exceeded what they had paid into the program – and this was pre-recession.

To give context in terms of pricing that’s about $500~ per month for the earliest stage startup and around $1600~ a month for Series A startups in our program.

These high losses from delivering programs to companies, only to refund them later, became extremely expensive to sustain and subsidize, thus we had to put rigorous standards in place to hold founders and our teams more accountable.

Without updated standards in place and requirements for tuition refunds, it would have cost us even more in the long-run given our low tuition, and would have ended in a taking from Peter (new cohorts) to pay Paul model if we didn’t solve it.

Building Short Term & Longterm Revenue

Our revenue strategy, if not centered on cash, had to be centered around something else. This focus was our Warrants. Warrant instruments typically accompany an investment and offer the investor an opportunity to reinvest later at a favorable price, however ours were in-kind as part of admission.

Our new model was deliberately different from the prevalent “10 for 20” one often seen in small/local accelerators and incubators; where it’s 10-20% equity for a $20k-$50k investment or even equity just for office space and mentor hours.

Instead, we opted to experiment with an 18 month option “bet” with the founders to invest in companies with great potential, and we continued to utilize our investor funding to cover the difference in program cost to build a portfolio.

We truly believed a low tuition model to cover the cost of delivery along with a Warrant would align both parties to a startup’s success long-term and incentivize excellence from both our accelerator team and the startup.

As part of our strategy, we aimed to raise a fund to invest in our companies. We successfully raised a micro angel syndicate and fund and brought on a team of enthusiastic fund managers to help raise capital to deploy to our startups.

However, as the needs of our founders grew, these managers were inevitably drawn into coaching and assisting founders with their fundraises. It became difficult to balance both raising a new fund – and supporting our founders.

We were able to invest in multiple startups per year despite these challenges, though not as many as we initially hoped for – and that is why we chose to build a robust investor network and IR team to invest in the rest of the portfolio.

As I reflect, our model had made us a hospital, treating startups and the ills that come from the various stages of growing pains vs. the fund managers we’d sought to become; focused on saving startups vs. capital raises and deployment.

This experience encapsulated for me the complexities of managing a fund while also providing intensive support to founders within an accelerator setting.

It’s a delicate balance to maintain, and we learned the critical importance of a clear demarcation between capital management and founder support.

Cohort & Graduate Breakdown

Given our scale we fell into observable distributions. Our top tier highest traction startups, comprising about 1/3 of our cohorts, often found our program and platforms extremely valuable and we could easily connect them with investors.

The lower 1/3 tier traction startups, typically utilized over >50% of our program resources, and despite our concerted efforts to support them and secure investor meetings, these startups often became cost centers, and many ultimately closed.

This was typically due to the lack of traction necessary to attract investors. And on an already unprofitable model, it required more and more capital infusions to sustain our “hospital” for startups and refund those that failed after the program.

We also learned that there is no way to predict success of one founder over another from day one of an accelerator with traction or experience, otherwise we would have changed our requirements for admissions.

The top signal we found during our program for success of a founder (with the definition being did they raise and were they in business 6 months after the program graduation) was: high course completion and high participation.

That was it, there was no other correlation besides what I would say was coach-ability and drive to overcome any obstacle.

How many graduated?

Given the risky nature of startups, the rigorousness of our program, and our program being 2x to 3x longer than other accelerators, about 1/3 of startups made it to graduation.

Now to think of this in sheer volume, however, 1/3 of our startups graduating is just under 1,000 startup graduates last year, making us one of the worlds largest accelerator programs – leaving nearly 2,000 that didn’t graduate or failed.

We additionally learned that it’s not like insurance where you can subsidize the bottom by charging more to everyone – every startup whether it’s Pre-Seed or Series A, needs more help than $1,000 or even $3,000 a month can afford.

And when 1 in 3 of your clients is successful, and 2 in 3 feel that you didn’t do enough to help them, it’s a no-win scenario; if we charged what it cost to give every founder all they needed, they wouldn’t have been able to afford it.

That’s why our model failed. However I still believe we grew too fast last year and ultimately should have not let the evangelism of “helping every startup” in every corner of the world get ahead of funding to subsidize programs.

I hope this gives insight into our strategy and offers a clearer understanding of our motivations and the challenges we faced. Next we’ll talk about how the warrants actually work and why we were better off “dead” than alive to some.

Why are we in business if not to be profitable? What is so valuable that parties want to get to these Warrants in liquidation?

Our Admission process required warrants of up to $250,000 with every admitted startup. These warrants feature an automatic cashless exercise clause set to trigger if the company exits or is acquired within 18 months of cohort launch.

And similarly like a gym membership rather than take direct equity, we made bets with founders on attendance and compliance: can you respect our information rights, give quarterly updates during the period and unaudited financials yearly?

If not, the warrant automatically extended vs. ending at 18 months to a 10 year term warrant option. This basically became as good as preferred stock because if a company doesn’t exit within 10 years, it is statistically not likely to do so.

We didn’t know how many would fail to do this. At first we felt that maybe 30% wouldn’t, and planned to sell those to funds or to their own investors. We were not prepared for the number of startups that would fail to update their investors.

The actual number of startups failing to meet their obligations for updates far surpassed our expectations; less than <5% of startups have complied with the warrant information rights requirements to date.

This took us by surprise. Many would keep up for a time, miss one or two, but nearly all missed sending the financials yearly – even though these are strong points we made in the program. So similar to a gym, our future returns became based on startups not “showing up”, i.e. sending updates, after graduation.

For the layman, a 10-year extension on a warrant with an automatic cashless exercise, is similar to preferred shares of 3-5% and for some startups that could be more depending on how they exited or their rounds.

Instead of us having to wire capital for the investment, the automatic exercise sets that the founder would just need to calculate the ROI, and wire us the return on investment upon their exit.

Here is a report and explainer of our warrant for those that want more clarification:

https://drive.google.com/file/d/181ZECs0N2PEXLyklmM8-FoRxzMIIwBaV/view?usp=sharing

So why the struggle and the hostile takeover?

We hold approximately 5,000 of these warrants, with an estimated face value upwards of >$1 billion dollars (5,000 x $250,000), that’s not including growth, i.e. future rounds, or failed companies.

In the face of economic downturn, some parties saw liquidation as the best way forward and did what they could to get us to it.

As a CEO, I’ve seen how the allure of potential money, how greed, can drive people to seek immediate gains rather than invest in long-term growth.

My focus has always been on our startups, and I was not ready to leave them cold in the rain even when the opportunity was presented and I was told I’d still make at least $20M in a liquidation – I just couldn’t live with that.

Despite the overwhelming push to shut us down, induced chaos, threatening text and calls to myself and the team, I spent my time raising the capital to support our startup portfolio’s program continuity, while some worked to close us down.

It’s unfortunate that once the magnitude of these warrants’ potential value came to light, some parties thought it best to liquidate and auction off the company, perceiving the company as more valuable “dead than alive”.

Our plan regardless this quarter, before this chaos, was to sell off packages of warrants to major funds, and take a majority of that capital and redistribute it via a new venture fund into the startups in our accelerator programs.

However, some shareholders that wanted an exit now vs. deploying the money in a fund to our startups, and amongst other motives sought to force a liquidation; and that is how we got to where we are today plain and simple.

We never anticipated some would commit to a hostile takeover or go as far as they did – if I did I would have just given it all away.

I would rather have given up the entire company, than see all of our employees lose jobs and 1,200 startups lose access to resources to help them survive and thrive in this recession.

Started in Covid, Ended in Recession

I’ll close out on this. Our journey started amidst the global uncertainty of COVID, where we stepped up to fill the void when other accelerators were shuttered.

We were the only remote accelerator operating and helping startups through COVID which was our claim to fame. Now, we all find ourselves in another challenging phase – a new recession.

At Newchip, we didn’t adapt fast enough, we didn’t make tough decisions when we could and when we were forced to make them, we made rash decisions like filing for Subchapter 5- and as a leader I should have listened to my gut.

I didn’t know the repercussions of where Subchapter 5 could take us and I definitely didn’t think it would be used against us or manipulated to force a closure of the company without due process.

We made decisions hurriedly because we didn’t practice what we preached and there is a lesson to learn in that.

Any CEO out there, trust your gut, make decisions that you know are right, seek the counsel of your team, and if they disagree that’s okay, so long as they agree to commit to it, support your decision, and follow through on it.

To add insult to injury, while we fought to make it through, we had a failed coup that in retaliation brought down the company and has been planning for weeks to launch a competing brand now to take our startups over and charge them.

I am sincerely sorry that you all got brought into this – greed can blind even the best of intentions.

This present situation is a stark contrast to what we stand for and the values we’ve upheld since our inception. We will learn from it no matter where this goes but ultimately I as CEO have to own any failure of the company, if we fail.

And until then, I am putting every possible effort into overcoming this challenge, safeguarding our vision and commitment to you, our community, regardless of what may come – and seeking the support of the investor community.

If you’re able to support our portfolio of companies in anyway, message me on LinkedIn and I’ll send you my email address

Andrew Ryan,
Newchip Founder

more insights