The Syndicate Group Expands Investment Platform For Channel, Customers
‘For the past five years, we’ve only invested in five, maybe six, companies a year. And because of our value proposition, we have our pick of the litter in terms of which companies we want to invest in because we typically get access based on the value that we bring,’ says Chad Cardenas, founder and CEO of The Syndicate Group, an investment firm pools small-scale funds from multiple solution providers to invest in companies they hope will become future vendor partners and at the same time provide a return on their investment.
When talking about solution providers, it is common to talk about investing in their vendor partners. Usually that means getting certification, training and so on in order to be able to sell, deploy and service the solutions that it offers its customers.
One company, The Syndicate Group, offers solution providers a more literate definition of investing in their vendors. The Los Angeles-based investment firm pools small-scale funds from multiple solution providers to invest in companies they hope will become future vendor partners and at the same time provide a return on their investment.
The Syndicate Group, or TSG, creates a unique special purpose vehicle, or SPV, for each individual investment. As defined by Investopedia, SPVs allow a group of investors to acquire or fund specific assets via a separate company structure that serves to isolate the risks of such activities.
In the case of TSG, the goal is to provide a way for multiple solution providers as well as C-suite executives at tech companies an opportunity to invest in potential vendor partners alongside tier-one venture capital companies.
Chad Cardenas, founder and CEO of TSG, told CRN in an exclusive interview that his company, in terms of return on investment, has a success rate that would make any venture capital company envious.
“Historically, for the past five years, we’ve only invested in five, maybe six companies a year,” Cardenas said. “And because of our value proposition, we have our pick of the litter in terms of which companies we want to invest in because we typically get access based on the value that we bring. So that creates an inverse success rate to the point where we see 70, 80, 90 percent of the companies we invest in actually produce a profitable exit via an acquisition or IPO.”
And yet a return on investment is only part of the reason solution providers work with TSG, which has invested in such companies as Nutanix, Cohesity, AppDynamics and CrowdStrike, Cardenas said.
“Every time we make an investment, the capital is coming from a unique set of individuals and channel partners who are uniquely positioned to help that company get to market,” he said.
TSG has packed a lot of tech startup and investment experience on its board of advisors, including Nutanix co-founder Mohit Aron, former NetApp channel chief Leonard Iventosch, former NetApp Chairman and CEO Dan Warmenhoven, former Splunk CIO Declan Morris, former Covalent and Fortify Software CEO John Jack, and former Avnet President and General Manager Jeff Bawol.
TSG Tuesday expanded its investment platform by making it easier for its solution provider nvestors to get the materials and documents needed to make and maintain their investments, he said.
Here is more of what Cardenas had to say about TSG.
Define The Syndicate Group.
TSG is a boutique venture firm, but we don’t invest out of a fund. Instead, we customize capital raises to place strategic investments into a select few enterprise tech startups each year. And capital largely comes from highly strategic individuals and companies, mainly in the channel. So these are channel businesses and key contributors who work with channel U.S. businesses, and a lot of CxOs and CISOs as well.
Is TSG open to any solution provider to join? Or do you have specific requirements?
Pretty much any [solution provider] can join, but because our focus is specifically on enterprise tech [those] that are in our networks tend to be very strong in those areas. So a lot in cloud, cybersecurity, next-gen infrastructure, networking, compute, data management, data storage, those things.
How many solution provider are currently contributing funds to investing through TSG?
In our platform, I think it’s over 400 channel businesses globally. And thousands of individuals. I think we’re nearing 10,000 individuals from those companies.
Do they choose which companies they want their funds to be invested in? If so, how do they decide which to invest in?
They have total freedom of choice. And that’s a good question because that that is kind of the crux of the model, or at least the value within the model. If we were a fund and we had a bunch of strategic investors or LPs [limited partnerships] in that fund, it would be a totally different value set, and in my mind a diminished value proposition because one company may have a specific ideal channel partner profile, while the next company may have a very different ideal channel partner profile. And so because we are doing these individual customized capital raises and letting the channel businesses pick and choose which companies they want to invest in, and therefore which ones they want to help get to market, every time we make an investment, the capital is coming from a unique set of individuals and channel partners who are uniquely positioned to help that company get to market.
What’s the average investment in a startup through TSG?
Our average check size is between $2 million and $3 million alongside the lead tier-one VCs that are participating.
[For individual channel investors], we have businesses that invest directly off of the balance sheet, and those can be very large dollar amounts from several hundred thousands of dollars to upwards of $1 million. But way more often, the most common mechanism for these folks to invest is individually. And the average individual investment is I would say between $50,000 and $150,000.
What’s been the success rate of those investments?
It’s very successful. The percentage of companies that actually have a profitable exit and return a profit is the inverse of a typical venture model. So a typical venture model might have a 10, 20 or maybe a 30 percent success rate, meaning seven or eight or more out of 10 startups will fail or at least not return a profit. That’s because big firms are investing out of massive billion-dollar funds, and investing in dozens and dozens of companies every year. But then they get the occasional Snapchat or Uber or whatever 50X return on one investment, and that takes care of the other ones that don’t make it.
Our model is very different. Historically, for the past five years, we’ve only invested in five, maybe six, companies a year. And because of our value proposition, we have our pick of the litter in terms of which companies we want to invest in because we typically get access based on the value that we bring. So that creates an inverse success rate to the point where we see 70, 80, 90 percent of the companies we invest in actually produce a profitable exit via an acquisition or IPO.
Who are some of the companies that TSG has invested in?
We’ve had very successful outcomes with companies like AppDynamics, CrowdStrike and Nutanix. More recently, we’ve invested in companies like Cohesity, Abnormal Security. Drata in the SOC [Security Operations Center] and compliance space. We’ve had companies successfully exit. The most recent would be Trifacta, acquired by Alteryx. Valtix acquired by Cisco. We’ve had some very, very great outcomes over the years.
We acknowledge that it’s not a perfect model. There have been and there will be companies that don’t make it, that don’t have a profitable exit. But those are very few and far between, based on our model.
Talk about the new platform TSG introduced this month.
Well, we’ve had a platform that we’ve been developing for the past five years to help automate and streamline this type of investing. For folks that aren’t familiar with SPV, special purpose vehicle, investing, it’s very, very different than investing out of a fund. It can be very complex and quite complicated from a logistics standpoint because every time you make a new investment, you’re standing up a new legal entity. You’re standing up a new set of investors. You’re inviting folks into a data room to view all the details around that particular investment, everything. And for those who choose to participate, we have to create documents for them. They have to execute those docs. We have to approve everything and countersign. And then you have to manage all of these entities after the fact on an annual basis from an accounting perspective and a legal perspective. It can be a very cumbersome process.
Over the last several years, we have built a very sophisticated software platform to automate a lot of those back-end processes. And for our investors, for our channel partners, we make it a very elegant and streamlined process to plug in and be connected into emerging tech and participate from an investment perspective. We’ve incorporated a lot of major changes and upgrades and features and functionality because we’ve received so much valuable feedback over the years. So we’ve doubled down on really making this a big investment for the business. And in particular, on behalf of these channel folks that plug in as investors and as innovators with emerging tech, making the experience a better one for them.
Who at TSG actually determines what companies to invest in? In particular, who brings the investors potential startups to invest in?
We go through a detailed process in terms of income, inbound interest, vetting the companies, and figuring out how we want to invest. And it’s a worthy exercise, I think, because people are so curious about how we are able to pick such a high-quality deal flow and pipeline and portfolio. But the short answer is, we basically get I would say inbound interest or referrals from three main sources. One would be the venture capital firms that we co-invest with, such as Greylock Partners, Sequoia Capital, Lightspeed Venture Partners, Andreessen, all the big tier-one VCs you can think of. We have relationships with these firms. We co-invest with them. We interact with them on a regular basis around what’s trending in the industry, which companies they think are special, which ones we think are special. And so our reputation now is such that a lot of these firms will reach out to us in advance of leading a round in a company they think is not just a special company and a good investment, but is uniquely suited for the channel. And they’ll say ‘Hey, TSG, we think this could be a good fit for you guys. Why don’t we make an introduction to the founder CEO? And if everybody agrees it’s a fit, you can run your program for them in this round that we’re leading.’
The entrepreneur or founder-CEO community has also become very active with us in terms of referring folks into the program. I’ll give you an example. And this happens in two different ways. Mohit Aron, the founder and former CEO of Cohesity, prior to Cohesity was at Nutanix. When we ran our program for Nutanix, he became familiar with the program, and everybody loved it. So when he started at Cohesity, we had a relationship in place. And he wanted us to come in, run the program, and we wound up doing it three separate times in their B, C and D rounds of funding. He’s also referred other founder CEOs, entrepreneurs that he thinks are building businesses, that would be a good fit for our program, and vice versa.
The third source, and what I think is probably the most important and valuable, is the channel community. So in our platform, we have a mechanism for [solution providers] to actually review our current pipeline of startups and give feedback on them, and also to suggest companies that should be on our radar if they’re not already. And that’s a very valuable input, if you will, because a lot of these [solution providers] are very innovative. And they are living and breathing these technology problems and solutions every day on behalf of their clients..
You yourself came out of the channel. Talk a little bit about your background and what you bring to the TSG platform?
I started my career at NetApp in the mid- to late ’90s, and was there for five or six years. And then I helped start Trace3. We built that business for 15 years before our private equity event in 2017. Trace3 at a high level was very focused on emerging tech as a strategic differentiator. As president and CIO, Chief Innovation Officer, at Trace3, I assisted in the strategy of helping the company become a thought leader on emerging tech in the industry. We spent a lot of time building relationships with the CxO community, the CISO community, the venture capital and entrepreneur communities in Silicon Valley. And we found really great startups at early stages in their growth so we could develop a reseller relationship with them. That was a very successful model. But then I and some other folks got to thinking maybe we should be investing in these companies as well because we would benefit from the value growth upside that we are helping to create in the event of an actual exit down the road. And startups would benefit because we would have skin in the game, personal skin in the game in terms of investing in these businesses. And we would probably push even harder to drive success for some of these really great technologies and companies. That was the genesis of what we’re doing now. That if we put together the right model to create alignment between startups and channel partners and eventually the CxO consumers of these technologies, then everybody would win. And that alignment would happen earlier in the stages of growth, and everybody would benefit accordingly.
Does TSG invest in any channel companies? Right now there’s a big push to roll up MSPs, for instance.
Not right now. We’ve never done that before. But it’s a very interesting idea. I’ll say this. We’ve put a lot of thought into this model, this idea of aggregating strategic investors to invest in a particular company. We believe this model can be applied to many different industries and types of companies and types of strategic ecosystems within tech, and even outside of tech. And so I think there could be something there in the future, but we’re not focused on it right now.