Unicorn Land: Warm Hot Chocolate and a Nap May Not Help
April 25, 2016
In the heady world of the unicorn, there are not too many search and content processing companies. I do read open source information about Palantir Technologies. Heck, I might even wrap up my notes about Palantir Gotham and make them available to someone with a yen to know more about a company which embraces secrecy but has a YouTube channel explaining how its system works.
I was poking around for open source information about how Palantir ensures that a person with a secret clearance does not “see” information classified at a higher level of access. From what I have read, the magic is in time stamps, open source content management, and some middleware. I took a break from reading the revelations from a person in the UK who idled away commute time writing about Palantir and noted “On the Road to Recap: Why the Unicorn Financing Market Just Became Dangerous for All Involved.”
I enjoy “all” type write ups. As I worked through the 5,600 word write up, I decided not to poke fun at the logic of “all” and jotted down the points which struck me as new information and the comments which I thought might be germane to Palantir, a company which (as I document in my Palantir Notebook) has successfully fast cycles of financing between 2003 and 2015 when the pace appears to have slowed.
There is no direct connection between the On the Road to Recap article and Palantir, and I certainly don’t want to draw explicit parallels. In this blog post, let me highlight some of the passages from the source article and emphasize that you might want to read the original article. If you are interested in search and content processing vendors like Attivio, Coveo, Sinequa, Smartlogic, and others of their ilk, some of the “pressures” identified in the source article are likely to apply. If the write up is on the money, I am certainly delighted to be in rural Kentucky thinking about what to have for lunch.
The first point I noted was new information to me. You, gentle reader, may be MBAized and conversant with the notion of understanding the lay of the land; to wit:
most participants in the ecosystem have exposure to and responsibility for specific company performance, which is exactly why the changing landscape is important to understand.
Ah, reality. I know that many search and content processing vendors operate without taking a big picture view. The focus is on what I call “what can we say to close a deal right now” type thinking. The write up roasts that business school chestnut of understanding life as it is, not as a marketer believes it to be.
I noted this statement in the source article:
Late 2015 also brought the arrival of “mutual fund markdowns.” Many Unicorns had taken private fundraising dollars from mutual funds. These mutual funds “mark-to-market” every day, and fund managers are compensated periodically on this performance. As a result, most firms have independent internal groups that periodically analyze valuations. With the public markets down, these groups began writing down Unicorn valuations. Once more, the fantasy began to come apart. The last round is not the permanent price, and being private does not mean you get a free pass on scrutiny.
Write downs, to me, mean one might lose one’s money.
I then learned a new term, dirty term sheets. Here’s the definition I highlighted in a bilious yellow marker hue:
“Dirty” or structured term sheets are proposed investments where the majority of the economic gains for the investor come not from the headline valuation, but rather through a series of dirty terms that are hidden deeper in the document. This allows the Shark to meet the valuation “ask” of the entrepreneur and VC board member, all the while knowing that they will make excellent returns, even at exits that are far below the cover valuation. Examples of dirty terms include guaranteed IPO returns, ratchets, PIK Dividends, series-based M&A vetoes, and superior preferences or liquidity rights. The typical Silicon Valley term sheet does not include such terms. The reason these terms can produce returns by themselves is that they set the stage for a rejiggering of the capitalization table at some point in the future. This is why the founder and their VC BOD member can still hold onto the illusion that everything is fine. The adjustment does not happen now, it will happen later.
I like rejiggering. I have experienced used car sales professionals rejiggering numbers for a person who once worked for me. Not a good experience as I recall.
I then circled this passage:
One of the shocking realities that is present in many of these “investment opportunities” is a relative absence of pertinent financial information. One would think that these opportunities which are often sold as “pre-IPO” rounds would have something close to the data you might see in an S-1. But often, the financial information is quite limited. And when it is included, it may be presented in a way that is inconsistent with GAAP standards. As an example, most Unicorn CEOs still have no idea that discounts, coupons, and subsidies are contra-revenue.
So what’s this have to do in my addled brain with Palantir? I had three thoughts, which are my opinion, and you may ignore them. In fact, why not stop reading now.
- Palantir is a unicorn and it may be experiencing increased pressure to generate a right now pay out to its stakeholders. One way Palantir can do this is to split its “secret” business from its Metropolitan business for banks. The “secret” business remains private, and the Metropolitan business becomes an IPO play. The idea is to get some money to keep those who pumped more than $700 million into the company since 2003 sort of happy.
- Palantir has to find a way to thwart those in its “secret” work from squeezing Palantir into a niche and then marginalizing the company. There are some outfits who would enjoy becoming the go-to solution for near real time operational intelligence analysis. Some outfits are big (Oracle and IBM), and others are much, much smaller (Digital Reasoning and Modus Operandi). If Palantir pulls off this play, then the government contract cash can be used to provide a sugar boost to those who want some fungible evidence of a big, big pay day.
- Palantir has to amp up its marketing, contain overhead, and expand its revenue from non government licenses and consulting.
Is Palantir’s management up to this task? The good news is that Palantir has not done the “let’s hire a Google wizard” to run the company. The bad news is that Palantir had an interesting run of management actions which resulted in a bit of a legal hassle with i2 Group before IBM bought it.
I will continue looking for information about Gotham’s security system and method. In the back of my mind will be the information and comments in On the Road to Recap.
Stephen E Arnold, April 25, 2016
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