A $20b valuation and zero profits: Palantir and the fears of a tech bubble

After Uber and Airbnb, Palantir was the third largest private US startup by valuation. 12 months on, reports suggest that what propelled the company forward may be at the root of its unravelling|After Uber and Airbnb, Palantir was the third largest private US startup by valuation. 12 months on, reports suggest that what propelled the company forward may be at the root of its unravelling

After Uber and Airbnb, Palantir was the third largest private US startup by valuation. 12 months on, reports suggest that what propelled the company forward may be at the root of its unravelling

Palantir likes it dirty. In fact, it’s with messy data that the data analytics company’s iron-clad software excels.

Working with government organisations and local police departments in the 15 cities it operates in, Palantir has been used to prevent terrorist attacks, predict insurgent uprisings, locate drug cartels, catch high-profile hackers, and even zero-in on child molesters within hours of the crime.

Despite its “do-gooder” public persona, Palantir has received a lot of media attention for being the poster child for the much-feared Silicon Valley tech bubble. Valued at $20 billion, the analytics firm is yet to turn profit, raising eyebrows among Valley veterans.

A recent Buzzfeed article ripped into Palantir, suggesting that all is not well with the company that was once golden in the American data analytics market.

“Palantir is a very secretive company but the recent negative press raises valid points that need to be addressed if the gadflies are to be swatted into silence,” Richard Windsor, analyst at Edison Investment Research explained.

Buzzfeed’s research exposed that Palantir lost three of its top clients, Coca Cola, American Express and Nasdaq, in the last 13 months. Staff turnover doubled in line with the Silicon Valley average at 20 per cent, and Palantir’s attempt to create a cybersecurity product and a data sharing consortium among its clients failed. The article also raised serious issues around cash conversion with collections being just $420 million in 2015 despite $1.7 billion in bookings.

The article prompted a vigorous defence of the company from one the founders who no longer works at the company, but this has does nothing to address the problem. 

“We suspect that there is nothing wrong with the company other than that things have not gone as well as the company expected and promised. Furthermore, the little that the company has said raises more questions than answers,” Windsor added.

Bubble trouble

“The problem is simply that Palantir’s performance has not met the expectations that the company set with its investors and hinted at with the media when it raised money. Cost cutting and an increase in staff turnover are key indications that something has not gone to plan,” according to Windsor. He stressed that this does not mean that the company is badly managed in any way; just that it has not been able to meet the lofty targets it set.

However, the company’s inability to turn profit vocalises the rumoured doomsday predictions of another tech bubble that have made the rounds in Silicon Valley and the rest of the world. 

According to Elizabeth Clarkson, Sapphire Ventures‘ managing director, investors in the Valley have changed tack. Companies now take longer to fundraise, and investors expect strong metrics. “(It was an) era of growth of any cost, where companies only showed later-stage investors top-line information, rather than demonstrating a healthy growth margin. At the time, it wasn’t clear how companies would get on the other side of that. Now investors want to understand the business model, where are the revenues coming from, what the churn numbers are. Investors want to know how (businesses) would compete. So I’d say the market is normalising, rather than a bubble bursting,” she told GrowthBusiness. “Some early reports suggest that the US is trending towards valuations coming down. I’m waiting to see if the same is true in Europe.”

Cash conversion is king

The hype around Palantir’s staff turnover and failed projects don’t faze Edison Investment Research analyst, Richard Windsor, who asserts that these hiccups are necessary as Palantir transitions from being a start-up into a big company. “Building a business involves throwing mud at the walls and seeing what sticks,” he added. 

“In fact, it’s a sign of good management that losing strategies have been cut fairly quickly. Many founders become emotionally attached to their strategies and let losers run for far longer than they should.However, we think Palantir needs to defuse the bad press which in a vacuum will only swirl and grow in strength.”

As part of pulling itself out of the media rabbit hole, Windsor outlined the two main things Palantir may need to do: explaining how cash conversion works, to make up for the mistake of allowing the market to wrongly assume that bookings would translate into revenues within 12 months, and secondly, focus on market differentiation by highlighting how its technology is better than anything else in the space.

“In many ways, Palantir is a victim of its own success because with a $20 billion valuation and no profits, one has to perform to an excruciatingly high standard especially in this environment. At this price there is no margin whatsoever for error,” Windsor said. 

For Windsor, this is a turning point for Palantir to avoid being typecast as a company that is running on fumes. “On the surface, Palantir is very like Autonomy (the Cambridge-founded enterprise software company known for being mismanaged prior to its acquisition by HP). They both mine huge troves of corporate data to arrive at meaningful conclusions that can then be used to allow the business to perform better.

“Many of the issues raised by Buzzfeed were also issues at Autonomy when it was independent which a big reason why Palantir needs to nip this in the bud. Failure to address that could result in Palantir being labelled alongside Autonomy which would be truly awful outcome for the company.”

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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