Palantir CEO Alex Karp
Who isn’t looking for the next big tech company?
For a
FORBES magazine story I recently wrote on cyber-security software-maker Palantir Technologies, I spoke with billionaire Facebook investor Peter Thiel, who said that Palantir is “tracking like the really great tech companies, like Facebook or Google.” Thiel thinks the company is the “most undervalued company in Silicon Valley” and will be worth around tens of billions of dollars in a few years’ time. Of course, Thiel is Palantir’s largest stakeholder, and his venture capital firm The Founders Fund has bankrolled much of the startup’s initial costs. But beyond the hype is a company that has accidentally stepped into the middle of controversy, is attracting some of the brightest engineers from top schools, and is making more money than anyone suspects.
Let’s start with the controversy. Up until a few weeks ago, only “Lord of the Rings” nerds knew what a “palantir” was (a seeing stone the company is named after). But recently, Palantir has found itself
in headlines for putting together a proposal, along with HBGary and Berico Technologies, to launch cyber-attacks and other “dirty tricks” against Wikileaks and its supporters, on behalf of Bank of America, and against website ThinkProgress on behalf of the U.S. Chamber of Commerce. Pro-Wikileaks hacker collective Anonymous found the proposal and emails by hacking into the account of HBGary’s chief executive.
Palantir responded by issuing an apology and severing ties with HBGary. It has also put the 27-year-old engineer Matthew Steckman — who may have been responsible for putting the offensive tactics on the proposal (according to the emails) — on leave and launched an internal investigation. Some have implied that Palantir’s senior staff must have known about the proposal, given the importance of the clients. But Palantir chief Alex Karp says that’s not how the company works: “The idea that a 27-year-old wouldn’t have the ability to make a decision about our proposal is very foreign to how we work. It would go further up the chain if it was a proposal, but it wasn’t.”
Indeed, the 330-person company is largely comprised of 27-year-old “forward deployed engineers” who are given a lot of free rein to make decisions. But in an industry like cyber-security, young engineers may not have the experience to make the best judgment calls. Even Karp concedes, “There was an oversight breakdown on the proposal phase of our work and we regret that.”
Palantir will need to do some PR clean-up, especially among its applicant pool. The company competes with the Googles and the Facebooks for top talent. Palantir’s Co-director of Engineering Bob McGrew, a third-year Stanford Ph.D. candidate in computational game theory, turned down a job at YouTube offered by co-founder Jawed Karim to go to Palantir. McGrew says the company’s save-the-world “mission” sets it apart. Stanford computer science student Jake Becker says Palantir’s exclusivity in hiring the best of the best makes the company an attractive employer. But Becker also says that the Wikileaks flap “is seriously damaging their reputation on campus.”
Meanwhile, competitors sniff and say that Palantir isn’t doing anything particularly new in the industry. “They are taking a different approach which is trying to bring the Silicon Valley-esque to the beltway,” says i2 CEO Bob Griffin. A primary competitor to Palantir, i2 is a 20-year-old company whose cyber-intelligence software is known as the Microsoft Word of the industry. “The reality is at the end of the day there is no different approach. It’s all the same: it is what is the tool that allows customers to do what they do best.”
Recently, i2 and Palantir settled a lawsuit, in which i2 accused its competitor of corporate espionage. Griffin says only that he was “very satisfied” with the settlement.
But these controversies will likely wash over in time. Some investors have been betting big on Palantir. The company’s last round of funding of $90 million last June, led by an unnamed private equity firm, valued the six-year-old company at a whopping $735 million. Dave Kellogg, former CEO of business intelligence software maker MarkLogic, speculates
in a blog post that “dumb money” might be involved here. “I think it means that… The company is trying to build and/or sustain a hype bubble and wants to be seen as hot. Most VC-backed companies do not disclose valuations,” he wrote. Kellogg also thinks Palantir is executing a “go big or go home” type strategy like PayPal did in its early days (Palantir was founded and backed by PayPal Mafia members), but he says he doesn’t see the same “landgrab market opportunity” here.
Other analysts and companies in the space agree, saying that Palantir’s revenues were probably around $25 million to $50 million last year. Gartner analyst John Pescatore says the market for “situational awareness tools” like Palantir’s is in the tens of millions of dollars, a fraction of the overall security intelligence services’ budgets, which are dominated by the likes of Raytheon, Boeing and Lockheed Martin.
But Karp says that he sees a “clear path” to $1 billion in revenue within the next five years. How close is he to that? Palantir’s 2010 revenue was “significantly north of $80 million”, said a highly reputable source familiar with the company who did not wish to be named. Karp says that Palantir’s revenues have been tripling every year since 2008 and that it became cash-flow positive in 2010.
Still $80 million or so is a long way from $1 billion. A lot will depend on how Palantir expands beyond its cyber-security niche. The signs could point either way here. It would not be a surprise if Bank of America did not end up using Palantir’s services anytime soon, given recent happenings. On the other hand, Palantir has already been able to line up a number of other top banks and hedge funds. One of these is JPMorgan Chase. Palantir signed a multi-year contract with the bank in December 2009 in the $5 million to $20 million range, and JPMorgan Chase Chief Information Officer Guy Chiarello gushes about the company, calling Palantir “the best bet I’ve made in quite a while.”
There’s no doubt that Palantir has a lot of bright young engineers working for them, but to really kick it up to the level of a Facebook or a Google, the company may need to start growing up.
Michael Caulfield/WireImage 
Stop me if you’ve heard this before, but by this time next year you’ll be buying stuff with your phone. Oh, you have heard that before? Like, every year since the ’90s? Me, too. And like flying cars or 3D printers, they’re always just a little further down the road. But at the risk of being embarrassed again, I think the day is finally upon us.
Artist concept of a neutron star within supernova remnant Cassiopeia A. Illustration credit: NASA/CXC/M.Weiss 
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