A New Blueprint for VCs: Hands-on and Milestone based financing
Tandem Computers, founded in 1974 by Jimmy Treybig, became a pioneer in fault-tolerant computing, creating systems that could withstand hardware failures without downtime. This innovation was crucial for industries where uninterrupted operation is essential, such as banking, telecommunications, and stock exchanges. Treybig, previously with Hewlett-Packard, envisioned a computer system with redundant processors—a design inspired by aviation's layered safety features—that would allow for continuous function even if a component failed.
Tandem’s early funding journey was not straightforward. Tom Perkins of Kleiner Perkins saw promise in the concept, while other prominent investors, including Venrock and Arthur Rock, passed on the opportunity. Perkins initially provided a modest $50,000 seed investment to validate the technical feasibility. This allowed Tandem to bring in top engineering consultants and experts, many from Perkins’s Hewlett-Packard network, to address the project’s technical complexities.
Once the concept showed viability, Perkins advanced Tandem to a Series A round, contributing $1 million in early 1975 and securing Kleiner Perkins a substantial 40% stake in the company. Perkins’s conviction in the project led him to proceed without additional venture partners, an unusual move in venture capital but one that enabled streamlined decision-making. This capital was instrumental, covering development costs as Tandem quickly transitioned from an ambitious idea to a market-ready product.
By 1977, Tandem began achieving significant commercial success, with revenues skyrocketing fourteen-fold by 1980. In 1984, the firm delivered a 100x return on Kleiner Perkins’ initial investment, firmly establishing Tandem as a major success in venture capital history. This trajectory reinforced Perkins’s idea of “inverse proportionality between technical and market risk,” demonstrating how overcoming technical hurdles early on could create robust barriers to competition and drive profitability. Tandem ultimately became a dominant player in high-availability systems, a position it held until its acquisition by Compaq in 1997, which later merged into HP, where Tandem’s technology continues to influence server designs.
