Neutral Tandem, Inc.
Management prior to IPO: Ron Gavillet, Co-Founder, General Counsel and Executive Vice President of
Chicago reigns as a leading transportation center, connecting millions of people and products to their destinations. It makes sense, then, that the city also serves as a nerve center that links hundreds of millions of callers across the country and delivers reliable and affordable voice communications.
Phone calls from one carrier to another require switches, or tandems, to join them. Previously, only existing telecom companies provided these tandems, and they had little motivation to improve upon current methods or make tandem switches available to their competition. Eventually with this system, traffic bogged down the switches and per-minute usage fees charged among competitors trickled down to consumers.
But one company - Neutral Tandem, Inc. - found a solution. Founded in 2003, the company operates on the principle that an incumbent shouldn't own tandem networks; instead, an independent party should operate them. The founders so passionately endorsed the concept that Ron Gavillet, Neutral Tandem's general counsel and executive vice president of external affairs until the company's IPO in 2007, quickly raised the capital to buy switches and authored the firm's initial patents to become that independent connection provider.
The model rapidly broke monopolies on the interconnection facilities. Today, from its Chicago headquarters, Neutral Tandem provides service to nine of the top 10 wireless carriers in the United States, which account for 95 percent of the country's total wireless subscribers. It serves 189 markets in the U.S. and continues to expand its reach. Its tandem network exchanges traffic for more than 100 wireless, wireline, cable and broadband service providers.
This independent alternative reduces communication costs by allowing providers to avoid incumbents' per-usage charges. This lowers costs for consumers, while also providing top-of-the-line technology and service.
Neutral Tandem's technology also alleviates congestion and busy signals in everyday use, resulting in greater reliability. Further, it furnishes a second level of call-connection capability, providing an important security benefit in emergency situations.
Neutral Tandem's originality and affordability are paying off. Revenues multiplied by 15 times between 2004 and 2006, to $52.9 million from $3.4 million. And a company that started with one employee grew to 230 employees at year-end 2010, with 107 of them in Illinois.
The company also has achieved growth entering new markets. Today, a spider web of independent tandems extends from Boston to Los Angeles, Minneapolis to Miami, and points in between. Yet Neutral Tandem's growth and its innovative technology have not come without expenses. The rising costs of switches, entrance to new markets and operations led its executives to seek capital from investors looking for a prime opportunity.
Raising Venture Capital
Since 2003, Neutral Tandem has tapped venture funding three times. Initially, Mr. Gavillet sought capital to purchase interconnecting switches, to obtain patents and for expenses associated with establishing the company. He handled this early work from a kitchen table.
Two firms invested initially in the company-Doll Capital Management and New Enterprise Associates. Both firms focus a lot on start ups, especially in the technology and communications fields. As Neutral Tandem began to grow, further investments became critical to its success and, in its second bid for capital, the company caught the eye of Chicago-based Mesirow Financial.
Mesirow, as a limited partner to Doll Capital, had followed Neutral Tandem's development and liked its experienced management team and well-executed business model. By the end of 2004, Neutral Tandem was moving toward a positive cash flow model and also was building its network nationally. In November 2004, Mesirow became the newest outside investor in a series B investment pool as the three firms provided more funding for Neutral Tandem's continued expansion and success. By the end of this series, Neutral Tandem had raised $35.5 million in investment funds.
In 2006, Montagu Newhall Associates Inc. led a third round of funding. Neutral Tandem's initial three investors along with Montagu Newhall and Wasatch Advisors, Inc., invested $12 million, which allowed Neutral Tandem to continue growing its network, enhancing its technology and creating national marketing initiatives.
And on Nov. 2, 2007, it raised more than $90 million in an initial public offering, and it trades on the NASDAQ under the symbol "TNDM."
As Neutral Tandem continues to expand into new markets and maintain customer satisfaction, it is establishing itself as a leader in the industry and generating an appeal to consumers, regulators and investors. In 2010, it posted revenues of $199.8 million, up 18.3 percent from 2009. Net income was $32.6 million, a 21 percent drop from the $41.3 million in 2009. Also in October 2010, it acquired Italy's Tinet S.p.A. for $103.1 million in a transaction that continued to expand the company's global footprint and provide its customers with solutions for a variety of media.
Running the Venture Capital Course
For Neutral Tandem, venture capital paved the way for the company's growth and its bright future now as a public company and the premier independent telecommunications tandem company delivering easier, more affordable services to consumers.
Neutral Tandem by the Numbers
Neutral Tandem's Venture Capital by the Numbers