Lifting veil on Palantir, tech’s next major IPO
About a month before he became president, Donald Trump met with the leaders of the country’s top technology companies at Trump Tower in Manhattan.
The meeting included the CEOs of Amazon, Apple, Google, Microsoft and other household names like Tesla and Oracle. And then there was Alex Karp, CEO of a company, called Palantir Technologies, that few outside Silicon Valley and government circles had heard of.
Palantir, the only privately held company represented in the room, had become a major government contractor. And, indicative of its growing prominence, one of its founders, venture capitalist Peter Thiel, had supported Trump in 2016 and had helped set up the meeting.
Now, as Palantir prepares to go public in what could be the largest stock market listing of a tech startup since Uber last year, many are wondering: What exactly does this influential but littleknown company do?
Offering software — and, crucially, teams of engineers that customize the software — Palantir helps organizations make sense of vast amounts of data. It helps gather information from various sources like internet traffic and cell phone records and analyzes that information. It puts those disparate pieces together into something that makes sense to its users, like a visual display.
But it can take plenty of engineers and plenty of time to make Palantir’s technology work the way customers need it to. And that mix of technology and human muscle may lead to some confusion on Wall Street about how to value the company. Is Palantir a software company, which is traditionally a very profitable
“We seem to share fewer and fewer of the technology sector’s values and commitments.”
CEO Alex Karp
business, or is it a lessprofitable consulting firm? Or is it both?
“For investors, it is a bit of a Rubik’s Cube,” said Daniel Ives, managing director of equity research at Wedbush Securities.
Palantir, which was founded in 2003, has long described its technology as ideal for tracking terrorists, often embracing an unconfirmed rumor that it helped locate Osama bin Laden. The name Palantir is a nod to spherical objects used in the “Lord of the Rings” books to see other parts of fictional Middleearth.
Funded in part by InQTel, the investment arm of the CIA, the company built its flagship software, Gotham, with an eye toward use inside the CIA.
Palantir’s technology can also help track the spread of the coronavirus, as it is now doing for the Centers for Disease Control and Prevention. And it can help find immigrants living in the country without legal permission, which is how Immigration and Customs Enforcement, under orders from the White House, is using it, according to recently released federal documents.
The company is deeply wedded to its work inside the government. Although some Palantir employees have protested its work with ICE and other parts of the government, it has not backed off.
In a letter to potential investors, included in a filing with the Securities and Exchange Commission last week, Karp pointedly jabbed at fellow Silicon Valley companies and said he is proud of Palantir’s work with federal agencies.
“Our company was founded in Silicon Valley. But we seem to share fewer and fewer of the technology sector’s values and commitments,” he wrote. He added that “software projects with our nation’s defense and intelligence agencies, whose missions are to keep us safe, have become controversial, while companies built on advertising dollars are commonplace.”
Palantir has tried to expand its work in the private sector, serving bigname businesses like JPMorgan Chase, Airbus and Ferrari and offering new software tools that businesses can use on their own. A little more than half of Palantir’s revenue comes from commercial businesses, according to the SEC filing.
The 2,500employee company holds about a 3% share of what has become a $25 billion data analytics market, according to PitchBook, which tracks the performance of private companies. “That is a small but significant share,” said a PitchBook analyst, Brendan Burke.
Palantir has raised more than $3 billion in funding and is valued by private market investors at $20 billion, but it has not turned a profit since it was founded in 2003. In 2019, Palantir’s revenue topped $742.5 million, a nearly 25% increase over the previous year. But it lost more than $579 million, about the same as it lost in 2018, according to the financial documents made public last week.
The company, which has been based in Palo Alto, recently announced that it is moving its headquarters to Denver, which could cut expenses.
A Palantir spokeswoman declined to comment for this article.
Although the company has won an impressive array of federal contracts — in the last four years, it landed at least $741 million in guaranteed money and potentially as much as $2.9 billion, according to the documents — it has also stoked controversy among competitors and federal employees.
In 2016, the company sued the Army over the procurement process for a new version of an intelligence analysis system, claiming the process was unlawful and wasteful. Palantir ended up winning the contract, which accounts for $1.7 billion of the $2.9 billion in potential federal contract money it has won since 2016.
In April, an anonymous government official sent a lengthy memo to Joseph Kernan, the undersecretary of defense for intelligence, describing the inner workings of a flagship Pentagon operation, Project Maven.
An effort to remake U.S. military technology through artificial intelligence, Project Maven has drawn on the expertise of more than 20 U.S. companies, including Palantir.
The project points to how Palantir works with customers. It often taps specialists, called “forward deployed engineers,” who spend weeks, months or years customizing and expanding its software for the task at hand. The company builds whatever data software that needs building — databases and software connections and onscreen visual displays that help people get their work done.
The details of Palantir projects can vary. It usually connects different sources of data and provides a way for everyday employees to search through it. But in Project Maven, it is offering tools that help seasoned AI specialists build complex mathematical systems, called deep neural networks, that can recognize objects in images.
Inside Project Maven, Palantir provides software that holds enormous amounts of video footage captured by flying drones operated by the Army and the Air Force. AI specialists then use this software to build systems that can automatically identify buildings, vehicles and people in the footage.
The memo, obtained by the New York Times, said that although Palantir had come late to Maven, the company had grown to “touch almost every aspect” of the project through contracts worth about $40 million a year. The document accused Maven leadership of skirting Pentagon rules and ethics in giving preferential treatment to the startup, whose employees had developed unusually close relationships with their partners inside the military.
The memo and related emails showed the company’s considerable influence inside the government.
Among other complaints, the memo to Kernan claimed that a Palantir employee had sat in on a meeting where government officials — some of whom did not know the Palantir employee was in the room — discussed future contracts and their dollar amounts, which could give the company an “astounding” advantage when bidding for new work.
After the memo, the Defense Department began a formal inquiry into Project Maven, according to two people familiar with the matter who were not allowed to speak about it publicly. The outcome is not yet known. A Defense Department spokesman for Project Maven declined to comment.
Palantir’s unusual business model is not always a perfect fit for military contracts. Although Palantir sells a combination of software and consulting services, all costs are folded into a single software license negotiated with the customer. In other words, the consulting work done by its engineers is layered into the software licensing fees, according to company financial documents. Typically, the government pays for consulting work separately from software licenses.
This means customers often pay for technology that is not yet built. “It is very unusual,” said Jeff Peters, head of global business development at Esri, a longtime government contractor that competes with Palantir. “The business model is different from almost any other technology company.”
VMware Pivotal Labs, a division of Dell, has adopted a similar model to Palantir, saying that it helps customers produce software that actually does what it is supposed to do.
This unusual business model has led to complaints, including in the memo to Kernan, that Palantir locks customers into its technology. Although the company is in ways building custom software, that software is still owned by Palantir because it is sold under a commercial software license. That means Palantir can sell that customized software to other clients.
All this hangs over the company as it prepares to go public. If Palantir stumbles, many competitors are ready to build similar technology for the government, including traditional government contractors like Oracle as well as Amazon, Microsoft and a growing number of other tech companies.
“There has been an assumption that Palantir is the only major player in this space,” said Jack Poulson, executive director of Tech Inquiry, which tracks the government work of tech companies. “But it is clear that is not the case.”