Newchip died, and it seems no one is surprised. Yet, just weeks ago, their promotions were splashing vibrantly across the inboxes of aspiring founders.
Once a blend of a startup incubator and consultancy, Newchip commoditized the YC idea to PMF process. It admitted startups to its bootcamp cohorts, helping founders with business fundamentals, networking, and fundraising.
Its admission process was innovative to say the least. The programs fees were quoted to be anywhere from a few thousand dollars to up to $20,000. But that wasn't all. admitted startups were also asked to offer warrants worth up to $250,000, complete with an automatic cashless exercise clause. This clause would activate if the company exited within 18 months of the cohort launch.
They were actually quite successful with this model, bringing in thousands of eager portfolio companies and growing their portfolio to amass more than a billion dollars in total valuation. However, it wasn't long before cracks began to appear in Newchip's facade.
What went wrong? A mixture of poor compliance, miscalculations and misplaced expectations. Less than 5% of startups fulfilled the warrant information rights requirements. Soon, Newchip found themselves with a billion dollar portfolio that was only worth the few thousand dollars of initial fees paid by their members. This staggering difference between the book and actual value of the firm caused a freefall, and revealed what seemed to be more of an MLM than an accelerator.
This was further pushed by the recession. With limited slack in venture debt and failed hostile takeovers, Newchip was forced to liquidate and file Chapter 7.
Newchip's downfall serves a warning to venture capitalists who believe they can have their cake and eat it too.
Newchip continued to sacrifice quality for short term gains, pricing out good startups with their admissions fees and lackluster support. The incentive systems never really align in a pay-to-play incubator. Newchip continually found its cohorts full of founders with little material traction and looking for signal.
If you're a venture capitalist, you should be investing for the long haul - a decade at least. If not, you're better off being a SaaS company. The two models don't mix well; the risk profiles and time horizons are entirely different.
If your business is predicated on cashing out from exits, don't price out good companies. And for founders: if an investor would rather grab a few bucks now than commit to your vision for the long term, it may be time to rethink your partnership.