Tandem Applies Muscle to Mobile (Alternative Accelerators, Part 1)
“College” used to mean something pretty clear: a residential experience where you paid a certain amount for tuition, room, and board and, after about four years, you got a bachelor’s degree. These days, of course, there are just as many two-year community colleges as four-year institutions; you don’t have to live on campus; there are many financing options; and fewer than a third of public-university students actually earn their BA degree in just four years.
In the startup world, similar kinds of changes are leaking into the format for accelerators. The “traditional” accelerators, with Y Combinator, Techstars, and 500 Startups as leading examples, admit large cohorts (often 30 startups or more) into an intensive product-development bootcamp that lasts about 12 weeks. They usually offer a modest amount of seed funding (around $100,000) in exchange for roughly 6 percent of each company’s founding equity. But more and more accelerators these days are fiddling with each of these dials. They’re admitting smaller or larger cohorts, making their programs longer or shorter, and offering more or less funding (and taking a corresponding amount of equity).
I’ve recently met with the founders of two accelerators that are resetting these dials dramatically. One is a brand-new program called 9+, and I’m going to write about it next week. Today I want to focus on Tandem, a more established accelerator fund that focuses on startups developing mobile software and hardware.
Tandem admits roughly six companies at a time, and they stay in residence at the company’s downtown Burlingame office for about six months. The fund invests $200,000 per startup, in exchange for 10 percent of a startup’s equity plus a convertible note (a loan repaid in the form of preferred stock once a startup has raised a Series A funding round). Tandem’s portfolio of 23 companies include a handful of fairly well-known names such as PlayHaven, PagerDuty, Bash Gaming, Flightcaster (acquired by NextJump), and ZumoDrive (acquired by Motorola).
Co-founder Doug Renert says Tandem falls somewhere in between a venture fund and an accelerator. At one end of the spectrum, a VC will put in a lot of money, “go to a board meeting once every two months, and help however they can, but it’s not heavily weighted toward working with the company,” he says. Accelerators, on the other hand, “are mostly bringing in large classes, not investing very much money, keeping them for a short time, exposing them to a network, giving them a lot of information, and then letting them go so they can grow up.”
Tandem, by contrast, is taking a third way: “investing considerable capital over time, only doing a select number of companies, and working with those companies much more deeply than the VCs will and much longer than the accelerators will.”
The program at San Francisco-based 9+ is even longer, at 9 months. In essence, both traditional and alternative accelerators are looking for the sweet spot: the right amount of seed funding and training needed to optimize their startups’ chances for success. Each accelerator has a different idea about where that spot may be for the technology sector in which they specialize.
And each one is taking a different type of financial gamble. The Y Combinator model, in Renert’s view, is to “make 100 bets and say, ‘Hey, some of these guys will probably get there, because we’re pretty good at identifying smart people.’ And some will get there.” But he says Tandem’s model is different: it makes fewer, larger bets and puts more work into help each startup, in the hope that a larger percentage will turn into high-growth companies and achieve lucrative exits.
“We are going to apply a lot of focused attention and brute force to lift the companies up into the growth curve,” Renert says. “To that extent, we should have a higher success rate, because we are being more selective in who we support and we are working very closely with them.”
The brute-force approach leads Renert to label Tandem’s approach “muscle capital,” in contrast to venture capital. “It’s more about the people and the effort we put into companies, as opposed to the cash, although we do put in a reasonable amount of cash too,” he says. There’s also a bit of a fitness angle to the muscle-capital tagline: the accelerator’s symbol is a tandem bicycle.
Renert, a veteran of Oracle and an Internet communications startup called Tello, started Tandem in early 2007 with co-founder Sunil Bhargava. They raised a $12 million fund to invest in their first few batches of startups. But they didn’t actually start out with a focus on mobile technology. “It was a very different world,” Renert says. “It was before the term ‘lean startup,’ before the iPhone had been launched, before this wave of super-angels and incubators and micro-VCs.”
Within a year, though, Apple had launched its world-changing smartphone, Google had announced its plans for Android, and Facebook had opened up its platform to outside companies. So when Tandem raised its second $32 million fund in 2011, Renert and Bhargava decided to zero in on startups building mobile apps, tools, platforms, and devices (and, more recently, hardware). “We felt that was where the next big brands would be built,” Renert says. “And it made more sense to focus in one area rather than spreading ourselves thinly.” This summer the company filed announced it’s raising a third fund that could total as much as $100 million.
Tandem doesn’t have a huge network of mentors, but Renert says its partners spend a lot of time with each startup. In addition to Renert and Bhargava, the other principals on the team include Rohit Bhagat, the former Asia Pacific chair at the giant investment firm BlackRock; John Ellis, executive vice president at advertising technology company Turn and a veteran of Xerox PARC and AltaVista; and Joyo Wijaya, who advises Tandem startups on technology and engineering issues and doubles as vice president of analytics at Bash Gaming, a Tandem portfolio company.
Some of the teams admitted to Tandem have a working product. Others just have an idea. But none of them have arrived at the Silicon Valley nirvana of “product-market fit”—i.e., something people think is cool enough to pay for. So startups spend their first month or two at Tandem in close consultation with a principal, “looking at the market landscape, observing what current users are doing, and coming up with ideas around how to adjust or pivot the business so that we can get that market traction.”
The rest of the time is spent on execution: “stepping through the building and delivery of the product and the acquisition of the users. And after you make sure users actually want what you are selling, optimizing the pricing or revenue model behind that.” Of course, the startups themselves—not the Tandem principals—are making the important design decisions and doing the real engineering, sales, and marketing work. But Tandem provides brainstorming, prioritization, and product feedback. “Is this delivering the best experience to the user? It’s about exploring the changes that are going to get you from 500 users a day to 50,000,” Renert says.
He says the model is working so far: 80 percent of the companies in Tandem’s first fund have either been acquired for an amount larger than their starting valuation, or are still growing and continuing to raise money at higher and higher valuations. (By comparison, only about 40 percent of Y Combinator alumni companies have either exited or are still operating with funding, according to one estimate.) The second Tandem fund also “has a very positive return on paper, but it’s too early to know where the cash will end up,” Renert says.
Bash Gaming is one of Tandem’s most prominent alums; it expects to earn $75 million this year on its casino games for mobile gadgets, including Bingo Bash, one of the 10 highest-grossing iPad apps ever. Another is PlayHaven, which helps mobile game developers earn money through in-game ads, and helps them lure players back in through customized push notifications. The company now has offices in three countries and has raised $8 million from Granite Global Ventures and e.ventures. Then there’s PagerDuty, which offers a “911 dispatch” system for IT administrators; it’s attracted $12.6 million in funding from the likes of Andreessen Horowitz, Baseline Ventures, and Harrison Metal Capital.
Despite tentative wins like that, Tandem doesn’t yet have the brand presence of a Y Combinator, a Techstars, or a 500 Startups. To summarize what it does have, Renert reaches for an analogy from the music industry. Joining one of the classic, large accelerators is like competing in American Idol, he says: “You are in there with a lot of candidates and there will be a couple of winners who could do extremely well, but there will be a lot of people who won’t make it, and it’s up to them whether they get there.” Joining Tandem, on the other hand, is like signing with Clive Davis—the record producer famous for spotting and cultivating stars like Whitney Houston, Alicia Keys, Christina Aguilera, Kelly Clarkson, and Jennifer Hudson. Says Renert, “He’s going to do what he can to make sure they get across the finish line.”