The repair of injured tendons remains a great challenge, largely owing to a lack of in-depth characterization of tendon cells and their precursors. We show that human and mouse tendons harbor a unique cell population, termed tendon stem/progenitor cells (TSPCs), that has universal stem cell characteristics such as clonogenicity, multipotency and self-renewal capacity. The isolated TSPCs could regenerate tendon-like tissues after extended expansion in vitro and transplantation in vivo. Moreover, we show that TSPCs reside within a unique niche predominantly comprised of an extracellular matrix, and we identify biglycan (Bgn) and fibromodulin (Fmod) as two critical components that organize this niche. Depletion of Bgn and Fmod affects the differentiation of TSPCs by modulating bone morphogenetic protein signaling and impairs tendon formation in vivo. Our results, while offering new insights into the biology of tendon cells, may assist in future strategies to treat tendon diseases.