There are tons of startup accelerators in Silicon Valley — which give startups seed funding and mentorship to help them get off the ground — but Tandem is a little different.It’s run by co-founder Doug Renert and two other guys, and the team focuses on being exclusive. While Y Combinator — one of Silicon Valley’s most popular accelerators — attracts more than 20 teams each “semester,” Tandem limits it to only a few teams that focus on mobile products.
The results are pretty amazing — 8 of the 9 startups that Tandem has helped get off the ground have either seen positive exits or raised boatloads of money.
Why does their system work? We spoke with Renert to figure out how. Here’s what we learned:
- Tandem invests $200,000 for 10 per cent of the company — no matter what. The valuation applies to all companies, so Tandem gets a pretty good chunk for its time.
- Tandem only brings on 3 new teams each quarter. They’re trying to keep it small so they can work closely with each team. It’s like a specialised trade school, where Y Combinator is a big public university.
- You have to be ready to distribute quickly. Tandem isn’t just looking for ideas — they want their founders to scale the companies quickly.
- Renert and his team have a 90 per cent success rate. Only one startup sold for a loss — and it came out of Y Combinator.
And here’s the full transcript from the interview:
BUSINESS INSIDER: So, how did this get off the ground? Start from the top.
DOUG RENERT: We started Tandem back in 2007, it’s been around almost five years. It was right after my partner and I had sold our previous companies. We were each thinking about the next company, but we felt like the lean startup was something we had lived through and didn’t feel like there was an ecosystem that supported a lean startup back then. We basically said let’s make our next startup a vehicle to help other startups that can build themselves efficiently and gain traction quickly without huge amounts of capital investment. So we refer to tandem now as an incubator, though it’s quite different than the incubators that sprung up in the late 90s and the last decade.
BI: How does it work? How is it different than, say, Y Combinator?
DR: There’s some similarities between Y Combinator, but if you look at those guys as the large universities that’s bringing in lots of students and giving them a great education but surrounding them with a lot of people, we’re a specialty school. If you’re a dancer, you’re going to go to Julliard and get a lot of attention from experts who focus on you and that particular area. We only do six companies at a time, they move in for a lengthy period of time (6 months) to our incubator space.
As they graduate, we help them bring on investors who can take them to the next level and we continue investing along the way. We have a $40 million fund — some money goes into those six companies at a time, but we reserve a good amount of it for continuing to fuel the companies as they grow.
It always starts with a $200,000 investment. The program is, we invest that money in exchange for a convertible note that converts to equity in the next round. We purchase 10 per cent of the company’s common stock, it’s always the same. We’re really transparent about it and we end up getting hundreds of applications each period and we bring in about 3 new companies every quarter. We have 3 companies exiting the program every quarter, hundreds of companies applying, so we end up selecting less than 1 per cent of the applications.
We like to see some good early execution, the teams are always early in their life cycle but they’ve typically built product already. We like to be able to evaluate how great are they at building products that users will love.BI: What’s the profile of a Tandem founder?
DR: It’s usually a team, not just one person. It’s often between two and five people, we like to just see a team that has the ability to build great products. It’s often times a combination of three things: design capability, technical capability and most importantly this innate understanding of how consumers want to interact with product. That’s something that people who are technically good designers may or may not have. It’s harder to find, but we know it when we see it — it’s the person who really understands how their user thinks and what’s connecting them.
We like to see between two and five people that, together, add up to a group that’s gonna build great product. We often times complement that with the experience and network and know-how of how to build a business. We’ll bring in more people who can help on the business side.
They have to get their initial distribution quickly and cost-effectively. That ends up being something that end users adopt directly, if there’s an enterprise sales cycle it just doesn’t fall into that category. We’re looking for someone who can distribute quickly and has very quick adoption.
BI: Do you have any favourite companies that have come out of it so far?
DR: We have companies like PlayHaven, that’s actually a platform for mobile developers. Now it’s used by over 1,000 developers, growing 100 per cent month over month, but it is a B2B business. PlayHaven was one from that first group.
Another company we’ve had was ZumoDrive, they were essentially an iCloud service before iCloud existed. They came out of Y Combinator, we built them up, they ended up with millions of users and did one round of fundraising and then were acquired by Motorola. They’re now the iCloud for all the Motorola phones. It’s now called Motocast — it’s essentially centered around this service. You can access all your content on your phone or tablet. That’s essentially part of Google and will probably be part of Android’s answer to iCloud. That was a great exit for us and the founders.
We were about to close the next round when we ended up selling it to Motorola. We built that up over two years but let the founders decide on how to proceed. They’d passed on two acquisitions from bigger companies, but this one was attractive enough — Motorola has viewed it as the best acquisition they’ve made in years.
We had another one, Attassa, they were acquired by YouSendIt before they had raised anything more. They had done one seed round in addition to us. Right before we were going to do their venture round, they got their offer — it ended up being YouSendIt’s largest acquisition and they’re leading the mobile product. That’s been a great outcome for us and the founders. The way we usually see these things, some of the businesses have the potential to grow and become billion-dollar businesses. Some you start questioning how you’re gonna get there. Because of the lean startup model, even if they purchase you for $25 million, they can still be very lucrative for everyone involved.
BI: What’s your background?
DR: I actually went to Princeton undergrad, have a J.D. and an MBA, ended up practicing law in the Valley representing technology. I grew up with technology in its heyday in the 90s. I Joined Oracle in 1997 and ran corporate development — handling the strategic transactions — and ended up being a General Manager for another 4 years. I did my own startup called Tello, was the CEO there, we did it the traditional way by raising a lot of capital and ended up with a reasonable outcome. But that’s really what inspired me that there’s another way to do it where a founder can have a lot more control. That’s what inspired me to do Tandem.
At Tandem, I handle business development, partnerships, marketing and sales. My partner Sanil, he was an engineer originally from Stanford and worked at Oracle for a number of years. He’s more of a creative product guy and figures out how you’re gonna wow the customer. He’s the creative mind and we end up complementing the founding teams quite well. We have people on our teams that handle everything from software architecture and analytics to social media, SEO and public relations. We have a whole team here that helps the founders with all aspects of the business.
BI: How will you compete with someone like Y Combinator?
DR: One of those key points is focus, we have become pretty well known in the mobile space. We don’t get thousands of applications from people trying to build general e-commerce sites or financial services. We really cater to people who are trying to build disruptive mobile products and services. In that circle, we’ve become pretty well known to the extend we get hundreds of opportunities every quarter.
That’s the interesting part, we’ve been a little bit of a well-kept secret. When we were first starting we ourselves wanted to see if this model worked. Tandem 1 was a bit of an experiment, now that Tandem 1 worked really well we’re not moving from keeping it from a well-kept secret to beating the drum much more. Being able to back four times more companies each year does that. We’re now able to talk about success rates, which make it easier. Tandem 2 will be about building the brand much more.
Eight out of 9 of the companies from our first fund have had positive outcomes so far, either in liquidity events or raising money at higher valuations. We’ve had four liquidity events and then four companies that are continuing to operate and grow with venture investors and then one company that sold for a loss. It was a music business out of Y Combinator — it was pretty straight forward. They weren’t able to see the solutions they had envisioned and that meant we weren’t able to get what we wanted to market in a reasonable time frame, and there were some rights issues. It was just getting more challenging day-to-day. It ended up getting acquired by a Sequoia-backed company in the music space — but it didn’t get to where it needed to get to.
There’s no sure fire way to source deals and to know they’re gonna be rock solid, even if they come out of other incubators. We continue to find teams from all over. We’ve had great businesses come out of Y Combinator and the one failure we had came out of Y Combinator. Sourcing has not been a problem and I think that’s just a reflection of how much entrepreneurship. That was one of our questions: are there enough people out there. There really wasn’t that much evidence in ’07, lo and behold we’ve been getting more and more incoming flow of entrepreneurs every year. It’s just a reflection of how vibrant the whole space is. They can’t seem to meet the flow of entrepreneurs who are running around starting their own businesses.
BI: Where do you guys go from here?
DR: On the last Tandem we did fewer companies, it was a smaller fund, but we had success on over 90% of the businesses in the sense that they exited for composite liquidity or continue to grow by bringing in outside VCs at higher rates. This fund, we’re keeping that hands-on laser focus on businesses. We’re doing two or three investments this month and we’re opening up the applications for the next group. We’ll be announcing the winter 2012 participants very soon and we’ll be choosing the next class in March.
We’re certainly trying to build the brand bigger. The bigger the brand, the bigger the funnel. Because our hit rate is so high and there are more successes coming out, the word spreads among the entrepreneurial community. In our first fund we did 9 and in this fund we launched at the end of the last year we’ve announced 4 and there’s gonna be another two or three announced in the next few weeks. Then we’ll have two or three more coming in March. It’s a consistent flow of companies, about 12 a year coming forward.