Palantir: The Hottest Startup You’ve Never Heard Of

The real differentiating feature of Palantir is the ability of its operating model to execute engineering talent arbitrage.

Palantir is the hottest “Unicorn” start-up that you’ve never heard of. While companies like Uber, Airbnb and Snapchat get most of the media exposure for hitting astronomical valuations, Palantir has remained quietly in the background despite being valued at over $20 billion.

It’s not surprising they’re not as well known – unlike the aforementioned companies that are geared toward consumers, Palantir is a B2B enterprise software company that offers a data analytics platform to a unique set of customers. Government clients include the CIA, NSA, US Army, and the Center For Disease Control. They have also been able to grow their revenue streams away from government contracts and have diversified into industries such as healthcare, finance, and legal research.

Their platform acts as an overarching hood over all the data sources a company manages, and allows their analysts to better synthesize and connect disparate sets of data to conduct rich analysis at breakneck speeds that would otherwise not be possible. Refer to this video as an example of what a Palantir deployment might look like for a healthcare client:

Business Model

Palantir prices its product by charging the client a large multi-million or even billion dollar deployment contract which includes onsite implementation teams, training services, maintenance, and a number of server cores. Since every client has a completely unique set of data sources, Palantir deployments are incredibly high touch and require a high level of customization.

The reason Palantir is able to charge such high prices in their contracts is that their services are an incredibly high value add for their customers. Additionally, Palantir’s prices are actually relatively cheaper than similarly priced tech solutions such as Bloomberg terminals or SAP. In a typical general example, a Palantir deployment over 3 years for comes out to $11,000 per user (3), which is less than the $24,000 price for a Bloomberg Terminal (5). Considering that the yearly salary of a typical analyst ranges from $40,000-$90,000, the per user cost over 3 years is a relatively small cost, especially if Palantir can enable those users to be more effective by an order of magnitude.

Palantir’s high touch installation also serve to help build long term momentum since it’s hard to remove a deployment once it has become the new standard for the client and years have been spent building it. This stickiness has allowed Palantir to quickly grow to half a billion dollars of revenue in such a short period of time, with no signs of slowing down (2).

Operating Model

What’s especially confusing about Palantir is that it doesn’t make it entirely clear whether it’s a product or services company. In addition to charging for usage of their actual software product, upon installation they also offer large contract bundles of engineering, deployment, and training services, all of which they charge a premium for.

I’d like to take the position that the real differentiating feature of Palantir is the service component, and the ability of its operating model to execute engineering talent arbitrage (7).

Most of Palantir’s clients include large bloated government agencies or companies from old traditional industries seen to be behind the times (healthcare, insurance, etc). Compared to companies like Google, Apple, Facebook, Amazon or the latest startups funded by Sequoia Capital or A16Z which are all desperate for engineering talent, the last place a top software engineer wants to work is in an old government building.

But paradoxically these more traditional companies have huge amounts of value waiting to be unlocked, with large data repositories that have yet to be bought into the 21st century and fully utilized by engineering talent capable of doing so. Palantir’s operating model, specifically with regard to the way it manages its labor capital, brilliantly takes advantage of this arbitrage opportunity.

Palantir takes advantage of this arbitrage opportunity by creating a top tier employer tech brand in Silicon Valley that attracts the best talent. One of the ways they do this is that they have an incredibly difficult interview process. By ensuring they are perceived to only “select the best”, Palantir is able to build an elite brand that attracts talented engineers. Once they attract top engineering talent, Palantir is able retain them by modeling its perks after Google while also offering some of the best market compensation (6). They also are able to sell to their employees the idea that at Palantir they are making a real difference by working on “problems that matter” such as cyber security threats, terrorism and credit card theft (1). This instills a sense of mission and purpose that many tech companies lack – hard to truly feel like your making the world a better place by optimizing ads on the Facebook Newsfeed.

Once Palantir has built their employee base, they can charge their clients a premium for the engineering talent they are desperate for. This is not to downplay their technology stack – but given how much customization it requires and that Palantir’s business model sells its product not by software packages but in the form of large deployment contracts per its business model, the way Palantir’s operating model attracts, invests in and manages its labor capital is one of the primary reasons for its current success!

 

Sources

1) https://www.palantir.com/2007/12/what-do-we-do/

2) http://techcrunch.com/2015/01/11/leaked-palantir-doc-reveals-uses-specific-functions-and-key-clients/

3) https://news.ycombinator.com/item?id=8325441

4) http://graphics.wsj.com/billion-dollar-club/

5) http://qz.com/84961/this-is-how-much-a-bloomberg-terminal-costs/

6) http://www.forbes.com/sites/susanadams/2014/03/07/the-highest-paying-internships/

7) https://www.quora.com/What-specifically-does-Palantir-do

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21 thoughts on “Palantir: The Hottest Startup You’ve Never Heard Of

  1. Fascinating article about the “talent arbitrage”. I wonder why other companies have not exploited this “talent arbitrage” yet. Many government data contractors, such as ADP, have been as dull as the government itself. Why and how is Palantir different?

  2. Great read! Palantir has found a great way to bring talent to innovation-lacking industries. On the business side, I think it’s ingenious that they are able to lock themselves in as critical partners in their clients’ businesses, and there probably is a lot of opportunity to upsell to their clients throughout the deployment period. On labor capital, another benefit that I see working at Palantir would be its diverse clientele, which allows employees to stay challenged by working on different projects over time. If that engineer had joined to work for the government, I assume the likelihood of them getting bored and moving on would be higher.

  3. Thanks for writing about Palantir – didn’t know of this company before I read your post. It is fascinating to see that finally a company is using treasure trove of unstructured data hidden in big organizations.

  4. Palantir seems like an incredible company to work for, both in terms of being surrounded by incredibly talented peers, but also in terms of the magnitude and scale of the problems company works to solve. It’s actually a bit surprising to me that such talented engineers aren’t drawn to places like the CIA inherently – if they’re interested in those kinds of missions, direct employment at Palantir’s clients would be an attractive path. This makes me think that the true underlying attraction to Palantir is talented peers, so I wonder if the company could be able to sustain this advantage if government agencies were suddenly able to attract a groundswell of really talented engineers.

  5. Great read! It is quite surprising that Palantir is one of the first in the market to have successfully executed the ‘obvious talent arbitrage’. My question is how Palantir’s scale and reputation may, or may not, be challenged by competitors seeking to go after the same opportunity, and whether competitors will be able to expand the opportunity further into other territories.

  6. I have only just heard about this company so was pretty excited to see that you wrote about them. I can completely understand the stickiness of the product/service with customers. I am interested to learn more about how they either upsell or initially scope a project with a client. This is normally a really time-consuming and nitty-gritty task nailing down the details, but I am willing to guess that Palantir has a better way of doing it. Great read and good job!

  7. Great post. Palantir is truly amazing. I believe they have rewritten the operating model for a 21st century consulting firm. The labor arbitrage is key, but so is the unique IP they have developed. The technology components driving new approaches to the analysis of unique new data sources is also key. Still… they do feel just a bit overvalued?

  8. Very interesting perspective. Having spoken to some Palantir engineers, they have always said that the greatest differentiator separating them separates them from the big 3 consulting companies, is their operating model. Palantir has a couple of core products, e.g. Palantir Gotham, which are then customized to fit client needs. The big 3 consulting companies, on the other hand, are entirely reliant on their personnel with a linear function underlying the number of projects they can do given their number of employees. In contrast, Palantir’s model is less linear than the consulting companies because of their product being the core.

    I also wonder whether your view of Palantir’s operating model is all that unique. Many companies do contract work for the government, e.g. Booz Allen Hamilton or Monitor Deloitte. Are all of them also engaged in labor arbitrage? Expanding past the government example, would you then argue that any company that contracts for another organization is engaging in talent arbitrage? Is the only difference with Palantir then that they have top flight engineers?

    1. You bring up great points! One could definitely take the provocative “engineering talent arbitrage” phrasing I bought to the assignment and apply it to almost any other consultancy or company that contracts large amounts of labor.

      If I were to make any argument that it’s slightly more applicable to Palantir, it would be that Palantir is finally bringing to fruition the promises of taking advantage of all the “Big Data” these companies have been sitting on trying by applying both their core product as well as the top tier talent they deploy on site for years for various projects.

      Some of the conversations I’ve had with employees at these agencies indicate that they’re not unaware of the value of their data, but that they just don’t have the resources or technical know how of how to bring it all together — then comes in Palantir, that have both the engineering talent and core product to unlock that value, and then charge a premium for it, which is where I guess the “arbitrage” pricing comes into play.

      And you’re right — they do offer 3 great products that are incredibly powerful, and I don’t mean to downplay that they absolutely have a powerful technology offering for their clients.

      I’ve heard though that one of the limiting factors for their ability to scale is that they need to hire just as many “FDEs” or Forward Deployed Engineers to linearly with their increasing number of clients. They’ve been recruiting like crazy because they have greater demand than they can supply, and part of the reason is that they don’t have enough engineers to deploy to meet that demand. One of the things they’re trying to do is make their product more scalable so that it requires less high touch involvement of these engineers to implement, and if they succeed in this regard then I’d definitely change my view! 🙂

    2. Nate – this is by far the best article I’ve read so far! – it’s past D/L so I’m writing this comment because I’m intrigued rather than getting the work done :).
      Ben:
      – YES, companies that contract for other orgs are engaged in labor arbitrage. As you “brain drain” all intelligence to top notch consulting and PE firms, you end up “starving” traditional organizations from this talent, leading them to become more dependent on you. In addition, such jobs invest a lot in training their employees and have tremendous amount of knowledge and skills which are passed on to the next generation of “leaders”. As a consultant gets to work with 10s of Gov institutions, he’ll develop more know-how than working at only one.
      – Brain Drain is also done at country level (US!!)
      – Booz Allen Hamilton and Monitor Deloitte rely more on business judgement for decision making while companies like Palantir focus more on analytics driven decision making. I see them as complimentary services for NOW rather than substitutes. BAH would use the data to make strategic decisions from CEO/ Minister perspective. Palantir services would get this data flowing through the org/ Gov department to make sure middle managers are using data to drive their decision making rather than gut instinct

  9. So interesting! Thanks, Nate. I’d never considered this before. I wonder if a similar gap exists in other industries? It’s been so interesting to watch as new start-ups apply the Uber operating model to other industries and make a killing. Would love to know if you think there are opportunities to adapt the Palantir labor arbitrage model elsewhere. If so, let’s launch something and make it big!!:)

  10. Nate – thanks so much for writing on a lesser-known but just-as-important and equally fascinating company. Their valuation and war chest of government clients is incredible. What a great video as well to explain how Plantair creates value in this growing age of “Big Data” and I think your point about their stickiness is an important one… from their talent acquisition (which reminded me a bit of Valve!) to their ability to customize much needed data solutions for clients, I would certainly bet on them as a TOM winner!

  11. Great post Nate! I’m curious how the payments work for a second contract after the initial deployment contract? I expect that Palantir’s costs are significantly lower for extending a second contract to an existing client, so I assume that either 1) Palantir captures significantly higher margin on follow up contracts with existing clients or 2) Palantir charges less for continuing clients. I had not heard of Palantir before, so this was a really interesting read.

  12. Big fan of Palantir and the niche it’s filling – I actually worked on Allen & Co’s investment a couple of years ago. Curious as to your thoughts on the scalability of its business model. Given its projects are so high-touch (as you mentioned), how well and how rapidly do you think it will be able to grow, particularly as its assignments become increasingly diverse outside of just the government sector? Would also be interested to hear your thoughts on its ability to continue attracting top engineering & dev talent, as that seems to be the other constraining factor.

  13. Great post, Nate. I’d be interested to know if any of the Palantir employees ever wind up being poached by the CIA or NSA. Granted, working for the government can be frustrating and bureaucratic, but as you mention there is a great deal of tangible value being delivered.

  14. Loved the post! Palantir is basically a big data analytics firm, with some twists in their algos… I wonder how many competitors are going to pop up and eat their lunch with more innovative methodologies. This business’s only barriers to entry seem to be talent in general, which is being churned out yearly from programs all over the world. It seems to me that the next palantir is just around the corner

  15. This is my favorite post Nate, thank you!

    Palantir is clearly positioning itself as a data analytic company on the website, which says “The first important thing to note is that we don’t actually do the analysis ourselves. We don’t devise winning trading strategies and we don’t catch terrorists. We write software that enables other people to pull off these feats”. I can see why they might want to enforce they don’t do the actual work on their sensitive government contracts for legal and ethical reasons, however I wonder how they are viewing this positioning on the private sector. Traditionally big consulting firms have gone beyond the data analytic and helped management on the decision making process/implementation planning. Palantir’s positioning might be leaving money on the table by not targeting these steps and I wonder why they are doing this. Is it temporary, because they are still refining their products/service model, or are there skills they feel they cannot replicate?

  16. Very interesting post! I’ve heard that some consulting firms now view Palantir as a major potential competitor given its unique data analytic capabilities. I wonder how the consulting industry might be disrupted and forced to adapt their business model to also deliver customized data analytic capabilities that Palantir is delivering.

    Also the healthcare example presented in the video above is fascinating, but looking at Palantir’s website, it seems like the potential to apply their services can be infinite. I’m intrigued by the idea of applying Palantir’s technology in other areas such as crisis response and disaster preparedness.

  17. Such a true statement: “These more traditional companies have huge amounts of value waiting to be unlocked, with large data repositories that have yet to be bought into the 21st century and fully utilized by engineering talent capable of doing so.” Having spent some time working in the government I can totally vouch that this is the case in pretty much every part of the US gov.

    Did you know they are opening a Seattle office?

  18. Such a fascinating company; it’s especially interesting to see how critical talent is to their operating model and how they’re able to attract and retain the right people.

  19. Very interesting Nate. It’s curious how the company actually sounds like a consulting firm with better analytics and deep engineering talent. Definately a disruptor in the industry.

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