7 ms·

Palantir’s SPAC bets backfire

122 points by lxm 4y ago

aswanson 4y ago
Sounds like the scheme lucent was using in the late 90s to boost revenue. Give clients loans to buy your equipment.
- funstuff007 4y ago
  a lot of shops do this. The most obvious example of this practice are car financing companies such as Ford Motor Credit and its ilk. I am not aware of how abusive (i.e. terrible underwriting standards) Lucent was using for this technique. The issue with the Palantir strategy is that the borrowers weren't actually borrowers, they sold often-times worthless equity to Palantir. And now Palantir cannot get its money back. Quite frankly, I don't know how Palantir investors were OK with the Palantir balance sheet getting loaded up with highly speculative investments. Growth at any cost, I guess.
  - mikeyouse 4y ago
    Mirrors the way that Thiel decided to invest in Palantir in the first place… just ignored the fund direction and didn’t consult LPs before moving the entire thing into a single company: https://www.twitter.com/HarveySawikin/status/1587834117785370625 https://www.twitter.com/HarveySawikin/status/158783411778537...
  - ffssffss 4y ago
    I think the answer is that the investors aren't OK with this and they've all closed their positions! The stock is down 65% in TTM.
  - stanleydrew 4y ago
    > I don't know how Palantir investors were OK with the Palantir balance sheet getting loaded up with highly speculative investments. Isn't the way this works that Palantir forms a partnership where it is the sole limited partner, hires a general partner or two, and then funds it? So the Palantir balance sheet just shows a single asset (the partnership interest)?
- Turing_Machine 4y ago
  GMAC, Sears, and similar were doing that long before the '90s. At one point, I believe Sears was making more money from financing than from outright sale of merchandise. Wikipedia says that GMAC was founded in 1919.
RC_ITR 4y ago
This will likely be remembered as (one of) the peaks of loose monetary policy foolishness. Palantir had cash that it basically chose to turn into revenue (plus shares of high risk unprofitable businesses). That’s the opposite of how normal companies work. In any normal environment it’s an obviously dumb move, but when rates are basically 0 and risky assets are worth an insane amount (in cash prices) it seems like it makes sense (until the rug is pulled). Like imagine if a client asked you to put up $100k of your own money to be given back $100k in freelancer fees plus some shares in their on-demand-X business with -100% contribution margins!
- mistrial9 4y ago
  dark prediction -- "loose monetary policy foolishness" in the USA, Australia and a few other western dollar oil economies, will never fade for those with security industry ties.
  - jessaustin 4y ago
    It's been this way for a long time. Tiny tax credits for poor malnourished children must be "funded in advance", while ridiculous unauditable military spending rains down from heaven.
SilverBirch 4y ago
Did this unconventional scheme happen just before an going public? Did it unravel shortly after the going public? Funny…
readonthegoapp 4y ago
i long suspected SPACs were a scam, and said as much, but reading the details of how this SPAC scam works... smells a lot like fraud. notable that the SPAC market took hits when 1) the government merely suggested that maybe SPACs were a scam that needed to be regulated (using more nuanced language, of course), and then again when 2) the government actually proposed some regulations that would prevent the fraud. but maybe that's just the nature of business. how did SPACs work? find some private company A (e.g. Bird -- the e-kick-scooter company) with little to no chance of ever making it to an IPO by traditional (read: non-fraudulent) means, SPAC suitor finds co-conspirator investor company CC (e.g. Palantir) to enter fake contract with private company A guaranteeing that company tons of revenue over some ridiculously short amount of time -- presumably paying for actual goods/services, which allows the SPAC (e.g. Chamath) to do his overhyping routine on the investor shopping channel, CNBC, to lure in retail investors (read: the marks) about the nature of the private company A's prospects going forward, consummate the SPAC / IPO, then everyone on the take tries to get their money out before the ponzi scheme implodes. good work, if you can get it. then Chamath out here lecturing everyone about how VC industry is a ponzi scheme. presumably, like SBF, he just wanted his cut, and then got angry for being called out for it, so went the (Canadian sprinter) Ben Johnson route -- yeah, I'm corrupt, but everyone is corrupt, so spare me the pikachu face. i don't know why Coindesk has been so publicly and strenously calling for SBF to be jailed, but be interesting to see if Chamath gets the same treatment. hopefully for him, his investors are/were not rich enough to request prosecution.
- bfeynman 4y ago
  Eery if you replace "SPACs" here with Startups and VCs... isn't that how YC works as well? They buy revenue for all their startups and then offload it on new investors they bring in....
  - bombcar 4y ago
    Then you start noticing how many VC companies are using products from other VC companies …
  - slowhand09 4y ago
oxfeed65261 4y ago
https://archive.ph/tCUNt https://archive.ph/tCUNt
- drcongo 4y ago
  What a beautifully appropriate URL.
- maxrev17 4y ago
  [flagged]
- martynr 4y ago
  Serendipity is alive and well it seems :)
lanstin 4y ago
That reminds me of dot com times when two ad supported businesses would trade ads for themselves on each others platform and then both book some big and sales without any money changing hands. Like yahoo would show AOL ads for $100M and AOL would show Yahoo ads for $100M. I don’t know why people can’t stop themselves from fraud, but the whole auditing/financial controls stuff is proven again and again as of vital importance.
- akira2501 4y ago
  > I don’t know why people can’t stop themselves from fraud It's clearly a valid strategy that yields some desirable results in the short term. From history, it seems people usually convince themselves they can come back and fix it if they can just make it to the long term.
  - lanstin 4y ago
    Well in my programming i make similar choices, so I guess that makes sense but I always assumed people that went to school for business stuff had higher standards. I suppose code reviews and release requirements serve a similar function.
    - TeMPOraL 4y ago
      I think business schools teach business ethics just as much as tech schools teach engineering ethics. I.e. maybe some, sometimes, a little bit, possibly as an add-on course people mostly take because they need to take some filler classes.
- benjaminwootton 4y ago
  I know of a few situations where a company valued in the $billions are paying a fortune to a company valued in the $hundreds of millions for very questionable value. If the value of the buyer at the top of the food chain crumbles then the value of a whole ecosystem of vendors are hurt too. Large parts of the VC backed software industry are built on a house of cards.
adamsmith143 4y ago
Some HN poster made a good point about SPACs recently which is that the price discovery mechanism present in the IPO process turns out to be pretty important and it's likely one of the reasons so many SPACs immediately plummet in value when they get listed.
- gonehome 4y ago
  I don’t know if it was me, but I generally agree that SPACs seem like a bad idea for everyone except the person dumping the result on the public for quick cash. See: https://news.ycombinator.com/item?id=25900091 https://news.ycombinator.com/item?id=25900091
  - rurp 4y ago
    The incentive structure with SPACs is so blatantly perverse, I'm shocked they became so prevalent. The sponsor makes a boatload of money for any deal, regardless of how terrible it is, and always loses money if they don't make a deal. Given that setup, it would be shocking if there weren't a lot of bad deals. The popularity of these vehicles honestly makes me question the competence of many supposedly sophisticated investors and executives. I get that a lot of this was targetted at taking advantage of low information investors, but many professional investors dumped money into these things as well.
    - lazide 4y ago
      It wasn’t just homebuyers signing no contingency/no inspection deals for fear of losing out the last few years. When there is a lot of money chasing fewer and fewer deals, this is what happens.
      - gonehome 4y ago
        At least in the Bay Area you’ve always had to waive contingencies to have any hope.
- mmaunder 4y ago
maria2 4y ago
Investing money in SPACs to boost revenue is like peak ZIR environment. Kind of sad to see a lot of net worth obliterated by the higher interest rates, but seeing the deflation of this kind of wasteful enterprise makes up for it a little.
mmaunder 4y ago
The risk of a snake eating it's own tail i.e. company invests in another who has to become a customer as part of the deal. Microsoft just did this recently IIRC with Azure - I forget which company. If the biz fails you lose your investment and your customer. So it's a high risk move. In general I'd say for growth businesses that this is a red flag because it signals how much effort they're prepared to go to to increase revenue, and how much risk they're prepared to take on. It's worth asking why they can't get customers the traditional way, and why they have bandwidth internally to go to this amount of effort - bandwidth that should be applied to regular customers who want to buy. From an optics perspective it looks good because the press loves transactions. So you get the press around the investment, and the knock-on press around gaining a new customer. But the fundamentals around this have that not-so-fresh smell.
- radicaldreamer 4y ago
  Illumina often does this with spinoffs and startups. They provide a good chunk of the funding for startups which primarily use Illumina hardware.
  - ljw1001 4y ago
    I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing. They’re trying to grow the market for their machines rather than take business from a competitor.
    - robertlagrant 4y ago
      > I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing That is changing[0]. [0] https://twitter.com/Bernard_Y_Kim/status/1605372507418021889 https://twitter.com/Bernard_Y_Kim/status/1605372507418021889
- theIV 4y ago
  I think you're thinking of > Microsoft buys near 4% stake in London Stock Exchange https://news.ycombinator.com/item?id=33952824 https://news.ycombinator.com/item?id=33952824
napierzaza 4y ago
somethoughts 4y ago
As a side hobby - I enjoy a bit of forensic accounting. Anyone have any idea where these SPACs were showing up on the balance sheet? I'm not seeing any Goodwill - which is a common location for these type of deals. Were they sticking it under current assets - cash and cash equivalents? Actually I do see marketable securities going from $234M at the end of 2021 in their 10K to $57M in November 2022's 10Q. But that's not near the $400M amount - "The data-analysis company invested more than $400 million in startups that simultaneously signed deals to buy Palantir’s software." http://edgar.secdatabase.com/1986/132165522000032/filing-main.htm http://edgar.secdatabase.com/1986/132165522000032/filing-mai... Interestingly I did find the Palantir 13F list of holdings. http://edgar.secdatabase.com/2477/95012322003032/filing-main.htm http://edgar.secdatabase.com/2477/95012322003032/filing-main... And it does look like the SPAC investments add up to ~$220M.
- chrisgd 4y ago
  I would think the 13F filing is the numbers you are looking for. Almost every SPAC that deSPAC’d (acquired a private company) is below the $10 mark that all SPACs close deals at, so even if this was the full list, it looks like they lost almost half, I would wager it is much more now. Edit: here is most recent. https://www.sec.gov/Archives/edgar/data/1321655/000095012322012355/xslForm13F_X01/18136.xml https://www.sec.gov/Archives/edgar/data/1321655/000095012322...
  - somethoughts 4y ago
    Interesting - the cumulative 13F valuation does add up to ~$57M which is their current 'marketable securities". Its quite surprising that such assets show up on the balance sheet as current cash.
    - chrisgd 4y ago
      I think all current assets would equate to being able to sell in 12 months. S
rurp 4y ago
So many of these investment amounts were exceeded by the payments the company agreed to make back to Palantir. Giving up equity for an "investment" that basicaly equals a free trial of some Palantir software seems like a terrible deal for the company. Is there a valid reason for this aside from the obvious ones of corruption and incompetence?
- cutemonster 4y ago
  Such a company still would have some extra millions, for some years, after the initial pay-back. Which maybe could look like a good deal, if your company was struggling ...
- panda888888 4y ago
  I'm not sure if these are "valid reasons" but here's my guess: Palantir is a professional services company with a handful of large customers, such as the US Government. It seems like they're trying to pivot away from consulting and into being a true software company with a large number of small customers as opposed to a small number of big clients. If their goal is to reach some benchmark number of customers, buying customers would make sense, just like how brands pay for followers on Instagram. Same goes for if they need to figure out how to serve these customers; offering free service to the first X customers is common. At a certain point, the marginal cost of software is near zero, so if they are only offering the software and not consulting, giving out extra licenses doesn't cost them anything. And if they get bites, they can always up-sell these clients on their consulting services.
  - rchaud 4y ago
    Everything about Palantir suggests they would be happy to become a software equivalent of Raytheon, exclusively servicing state/military customers with contracts that never expire.
ElfinTrousers 4y ago
A headline guaranteed to make me reach for the world's tiniest violin.

122 points by lxm 4y ago

aswanson 4y ago

Sounds like the scheme lucent was using in the late 90s to boost revenue. Give clients loans to buy your equipment.

funstuff007 4y ago
a lot of shops do this. The most obvious example of this practice are car financing companies such as Ford Motor Credit and its ilk. I am not aware of how abusive (i.e. terrible underwriting standards) Lucent was using for this technique. The issue with the Palantir strategy is that the borrowers weren't actually borrowers, they sold often-times worthless equity to Palantir. And now Palantir cannot get its money back. Quite frankly, I don't know how Palantir investors were OK with the Palantir balance sheet getting loaded up with highly speculative investments. Growth at any cost, I guess.
- mikeyouse 4y ago
  Mirrors the way that Thiel decided to invest in Palantir in the first place… just ignored the fund direction and didn’t consult LPs before moving the entire thing into a single company: https://www.twitter.com/HarveySawikin/status/1587834117785370625 https://www.twitter.com/HarveySawikin/status/158783411778537...
- ffssffss 4y ago
  I think the answer is that the investors aren't OK with this and they've all closed their positions! The stock is down 65% in TTM.
- stanleydrew 4y ago
  > I don't know how Palantir investors were OK with the Palantir balance sheet getting loaded up with highly speculative investments. Isn't the way this works that Palantir forms a partnership where it is the sole limited partner, hires a general partner or two, and then funds it? So the Palantir balance sheet just shows a single asset (the partnership interest)?
Turing_Machine 4y ago
GMAC, Sears, and similar were doing that long before the '90s. At one point, I believe Sears was making more money from financing than from outright sale of merchandise. Wikipedia says that GMAC was founded in 1919.

RC_ITR 4y ago

This will likely be remembered as (one of) the peaks of loose monetary policy foolishness. Palantir had cash that it basically chose to turn into revenue (plus shares of high risk unprofitable businesses). That’s the opposite of how normal companies work. In any normal environment it’s an obviously dumb move, but when rates are basically 0 and risky assets are worth an insane amount (in cash prices) it seems like it makes sense (until the rug is pulled). Like imagine if a client asked you to put up $100k of your own money to be given back $100k in freelancer fees plus some shares in their on-demand-X business with -100% contribution margins!

mistrial9 4y ago
dark prediction -- "loose monetary policy foolishness" in the USA, Australia and a few other western dollar oil economies, will never fade for those with security industry ties.
- jessaustin 4y ago
  It's been this way for a long time. Tiny tax credits for poor malnourished children must be "funded in advance", while ridiculous unauditable military spending rains down from heaven.

SilverBirch 4y ago

Did this unconventional scheme happen just before an going public? Did it unravel shortly after the going public? Funny…

readonthegoapp 4y ago

i long suspected SPACs were a scam, and said as much, but reading the details of how this SPAC scam works... smells a lot like fraud. notable that the SPAC market took hits when 1) the government merely suggested that maybe SPACs were a scam that needed to be regulated (using more nuanced language, of course), and then again when 2) the government actually proposed some regulations that would prevent the fraud. but maybe that's just the nature of business. how did SPACs work? find some private company A (e.g. Bird -- the e-kick-scooter company) with little to no chance of ever making it to an IPO by traditional (read: non-fraudulent) means, SPAC suitor finds co-conspirator investor company CC (e.g. Palantir) to enter fake contract with private company A guaranteeing that company tons of revenue over some ridiculously short amount of time -- presumably paying for actual goods/services, which allows the SPAC (e.g. Chamath) to do his overhyping routine on the investor shopping channel, CNBC, to lure in retail investors (read: the marks) about the nature of the private company A's prospects going forward, consummate the SPAC / IPO, then everyone on the take tries to get their money out before the ponzi scheme implodes. good work, if you can get it. then Chamath out here lecturing everyone about how VC industry is a ponzi scheme. presumably, like SBF, he just wanted his cut, and then got angry for being called out for it, so went the (Canadian sprinter) Ben Johnson route -- yeah, I'm corrupt, but everyone is corrupt, so spare me the pikachu face. i don't know why Coindesk has been so publicly and strenously calling for SBF to be jailed, but be interesting to see if Chamath gets the same treatment. hopefully for him, his investors are/were not rich enough to request prosecution.

bfeynman 4y ago
Eery if you replace "SPACs" here with Startups and VCs... isn't that how YC works as well? They buy revenue for all their startups and then offload it on new investors they bring in....
- bombcar 4y ago
  Then you start noticing how many VC companies are using products from other VC companies …
- slowhand09 4y ago

oxfeed65261 4y ago

https://archive.ph/tCUNt https://archive.ph/tCUNt

drcongo 4y ago
What a beautifully appropriate URL.
maxrev17 4y ago
[flagged]
martynr 4y ago
Serendipity is alive and well it seems :)

lanstin 4y ago

That reminds me of dot com times when two ad supported businesses would trade ads for themselves on each others platform and then both book some big and sales without any money changing hands. Like yahoo would show AOL ads for $100M and AOL would show Yahoo ads for $100M. I don’t know why people can’t stop themselves from fraud, but the whole auditing/financial controls stuff is proven again and again as of vital importance.

akira2501 4y ago
> I don’t know why people can’t stop themselves from fraud It's clearly a valid strategy that yields some desirable results in the short term. From history, it seems people usually convince themselves they can come back and fix it if they can just make it to the long term.
- lanstin 4y ago
  Well in my programming i make similar choices, so I guess that makes sense but I always assumed people that went to school for business stuff had higher standards. I suppose code reviews and release requirements serve a similar function.
  - TeMPOraL 4y ago
    I think business schools teach business ethics just as much as tech schools teach engineering ethics. I.e. maybe some, sometimes, a little bit, possibly as an add-on course people mostly take because they need to take some filler classes.
benjaminwootton 4y ago
I know of a few situations where a company valued in the $billions are paying a fortune to a company valued in the $hundreds of millions for very questionable value. If the value of the buyer at the top of the food chain crumbles then the value of a whole ecosystem of vendors are hurt too. Large parts of the VC backed software industry are built on a house of cards.

adamsmith143 4y ago

Some HN poster made a good point about SPACs recently which is that the price discovery mechanism present in the IPO process turns out to be pretty important and it's likely one of the reasons so many SPACs immediately plummet in value when they get listed.

gonehome 4y ago
I don’t know if it was me, but I generally agree that SPACs seem like a bad idea for everyone except the person dumping the result on the public for quick cash. See: https://news.ycombinator.com/item?id=25900091 https://news.ycombinator.com/item?id=25900091
- rurp 4y ago
  The incentive structure with SPACs is so blatantly perverse, I'm shocked they became so prevalent. The sponsor makes a boatload of money for any deal, regardless of how terrible it is, and always loses money if they don't make a deal. Given that setup, it would be shocking if there weren't a lot of bad deals. The popularity of these vehicles honestly makes me question the competence of many supposedly sophisticated investors and executives. I get that a lot of this was targetted at taking advantage of low information investors, but many professional investors dumped money into these things as well.
  - lazide 4y ago
    It wasn’t just homebuyers signing no contingency/no inspection deals for fear of losing out the last few years. When there is a lot of money chasing fewer and fewer deals, this is what happens.
    - gonehome 4y ago
      At least in the Bay Area you’ve always had to waive contingencies to have any hope.
mmaunder 4y ago

maria2 4y ago

Investing money in SPACs to boost revenue is like peak ZIR environment. Kind of sad to see a lot of net worth obliterated by the higher interest rates, but seeing the deflation of this kind of wasteful enterprise makes up for it a little.

mmaunder 4y ago

The risk of a snake eating it's own tail i.e. company invests in another who has to become a customer as part of the deal. Microsoft just did this recently IIRC with Azure - I forget which company. If the biz fails you lose your investment and your customer. So it's a high risk move. In general I'd say for growth businesses that this is a red flag because it signals how much effort they're prepared to go to to increase revenue, and how much risk they're prepared to take on. It's worth asking why they can't get customers the traditional way, and why they have bandwidth internally to go to this amount of effort - bandwidth that should be applied to regular customers who want to buy. From an optics perspective it looks good because the press loves transactions. So you get the press around the investment, and the knock-on press around gaining a new customer. But the fundamentals around this have that not-so-fresh smell.

radicaldreamer 4y ago
Illumina often does this with spinoffs and startups. They provide a good chunk of the funding for startups which primarily use Illumina hardware.
- ljw1001 4y ago
  I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing. They’re trying to grow the market for their machines rather than take business from a competitor.
  - robertlagrant 4y ago
    > I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing That is changing[0]. [0] https://twitter.com/Bernard_Y_Kim/status/1605372507418021889 https://twitter.com/Bernard_Y_Kim/status/1605372507418021889
theIV 4y ago
I think you're thinking of > Microsoft buys near 4% stake in London Stock Exchange https://news.ycombinator.com/item?id=33952824 https://news.ycombinator.com/item?id=33952824

napierzaza 4y ago

somethoughts 4y ago

As a side hobby - I enjoy a bit of forensic accounting. Anyone have any idea where these SPACs were showing up on the balance sheet? I'm not seeing any Goodwill - which is a common location for these type of deals. Were they sticking it under current assets - cash and cash equivalents? Actually I do see marketable securities going from $234M at the end of 2021 in their 10K to $57M in November 2022's 10Q. But that's not near the $400M amount - "The data-analysis company invested more than $400 million in startups that simultaneously signed deals to buy Palantir’s software." http://edgar.secdatabase.com/1986/132165522000032/filing-main.htm http://edgar.secdatabase.com/1986/132165522000032/filing-mai... Interestingly I did find the Palantir 13F list of holdings. http://edgar.secdatabase.com/2477/95012322003032/filing-main.htm http://edgar.secdatabase.com/2477/95012322003032/filing-main... And it does look like the SPAC investments add up to ~$220M.

chrisgd 4y ago
I would think the 13F filing is the numbers you are looking for. Almost every SPAC that deSPAC’d (acquired a private company) is below the $10 mark that all SPACs close deals at, so even if this was the full list, it looks like they lost almost half, I would wager it is much more now. Edit: here is most recent. https://www.sec.gov/Archives/edgar/data/1321655/000095012322012355/xslForm13F_X01/18136.xml https://www.sec.gov/Archives/edgar/data/1321655/000095012322...
- somethoughts 4y ago
  Interesting - the cumulative 13F valuation does add up to ~$57M which is their current 'marketable securities". Its quite surprising that such assets show up on the balance sheet as current cash.
  - chrisgd 4y ago
    I think all current assets would equate to being able to sell in 12 months. S

rurp 4y ago

So many of these investment amounts were exceeded by the payments the company agreed to make back to Palantir. Giving up equity for an "investment" that basicaly equals a free trial of some Palantir software seems like a terrible deal for the company. Is there a valid reason for this aside from the obvious ones of corruption and incompetence?

cutemonster 4y ago
Such a company still would have some extra millions, for some years, after the initial pay-back. Which maybe could look like a good deal, if your company was struggling ...
panda888888 4y ago
I'm not sure if these are "valid reasons" but here's my guess: Palantir is a professional services company with a handful of large customers, such as the US Government. It seems like they're trying to pivot away from consulting and into being a true software company with a large number of small customers as opposed to a small number of big clients. If their goal is to reach some benchmark number of customers, buying customers would make sense, just like how brands pay for followers on Instagram. Same goes for if they need to figure out how to serve these customers; offering free service to the first X customers is common. At a certain point, the marginal cost of software is near zero, so if they are only offering the software and not consulting, giving out extra licenses doesn't cost them anything. And if they get bites, they can always up-sell these clients on their consulting services.
- rchaud 4y ago
  Everything about Palantir suggests they would be happy to become a software equivalent of Raytheon, exclusively servicing state/military customers with contracts that never expire.

ElfinTrousers 4y ago

A headline guaranteed to make me reach for the world's tiniest violin.