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  • Writer's pictureAmit Kukreja

The Palantir SPAC Strategy Is Risky But Necessary. Here's Why.

The Palantir SPAC strategy has been criticized highly over the past year. Some analysts like the concept, most traditional ones hate it. If you are investing in Palantir, it is incredibly important to understand what this strategy is, why they are deploying it, and how it can affect the company negatively or positively

What Are SPACs?

SPACs are Special Purpose Acquisition Companies, or "a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) or the purpose of acquiring or merging with an existing company." (Investopedia, 2022)

They have been around for decades, but became popular around 2019. As a result, before Palantir went public in late 2020, they decided to allocate around $230M (less than 2% of current they have on their balance sheet) to these types of companies. If you want to see the exact breakdown of how much they spent and their ownership percentage, you can check out this google sheets link made by T.J - he keeps up with all of Palantir's SPAC spending.

To traditional analysts, this strategy seemed like "buying revenue." Palantir would purchase an equity stake in a company, that company would pay a subscription to use their software at a discount, Palantir would participate in the upside if that company's stock goes on to appreciate while also counting the revenue they bring in from the SPAC paying to use Palantir's software.

Why This Strategy Is So Valuable for Palantir

So, why is this strategy actually important for Palantir? Why didn't they invest the same $200M into sales and marketing? Did they not think they could actually sell their product organically?

In my opinion, the SPAC thesis is actually the strongest element of Palantir's value proposition. Is it risky? Yes...but only if you believe the SPACs they picked will not succeed. If you think they've got a a decent shot to become bigger companies, it's brilliant.

The reason for this is because Palantir is selling a product that is not easy to convince legacy institutions (fortune 500 companies) to buy. They've done a strong job growing and making partnerships with some of the biggest companies in the world, but they don't have thousands of clients.

Part of the reason for this is because legacy companies don't understand the value of changing their entire digital infrastructure for the modern world. Adopting Palantir's product means to usher in a new way of organizing and understanding data within their enterprise. It's a big commitment, and it only gets done if management is ready to make the change and investment. Most companies don't have visionary, data-driven C-suite executives ready to do this.

SPACs on the other hand are in growth mode. They are essentially startups that have gone public. They are ONLY embracing the newest forms of technology to power their enterprises from the bottom up.

The reason Palantir invested in these SPACs has less to do with buying revenue and more to do with allowing these innovative startups drive their product into the market. The entire thesis around investing in companies using data as their competitive advantage was to show that the next generation of big companies started with Palantir as the foundation for their enterprise.

The SPACs succeeding will be a massive case study for Palantir. Shyam Sanker, COO of Palantir, has been quoted on numerous occasions saying that Palantir Foundry should be what AWS was for developers last decade - essentially saying that more and more companies will be building applications on top of Foundry.

Can This Strategy Really Work?

In order for this to work, Palantir has to show that new companies can start with Foundry, build on top of it, become bigger and grow, and ultimately continue to use Foundry as they scale. Palantir participates in the upside with their equity stakes, the SPACs continue to pay for the software, and the software now is seen as a must have if you are building a data-driven business - startups will want to go with Foundry over AWS.

If that happens, Palantir gets really big. But obviously it is risky. If none of the SPACs they invested in work out, or become moderately big, the software itself might be seen as the reason those SPACs couldn't scale (even if that isn't the case) so it is important for them to help these companies as much as they can grow to their fullest potential.

Not to mention, Peter Thiel and Joe Lonsdale are also heavy venture capitalists. Their business strategy likely oriented them to recognize there was huge potential in buying equity stakes in companies that they knew had a decent shot of becoming big by using Palantir's software over just putting that money into sales - letting those companies do the sales for them as they get bigger.

Some examples of innovative companies they have invested in:

Cellularity - Placenta based stem-cell therapy used to do R&D for drug discovery

Wejo - Creating connected vehicle data for companies to transition into the EV era

Sarcos Robotics - Creating industrial robotic suits for factories

Tritium Charging - Electric vehicle charging stations that are becoming normalized in various parts of the world including the UK

+ many more!

Here is a video of Alex Karp speaking about the Palantir SPAC strategy more in depth.

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