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!
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.
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.
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.
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:
> 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)?
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.
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....
YC was supposed to be small in scale, $100k tops if I remember. That would buy a tiny amount of runway these days, but certainly not Airbnb/Uber levels of subsidized prices that lead to the easy sales.
Your interpretation of SPACs is very lacking. The shortcut they provide is often to circumvent normal due diligence that would show probably fundamental problems with companies operations. Sure normal companies may go down after IPO - but that's after banks perform their own investigation, and most importantly line up large institutional buyers that will lock up the float and tend to keep price more stable.
The way this manifests, and the actual substantial difference between an IPO and a SPAC, is that you can't provide forward-looking revenue guidance in your S-1 (IPO filing docs). For awhile people were saying that an interpretation of the rules meant it was ok to provide that guidance if you went public via SPAC, and the SEC didn't quickly put a stop to it.
You can't lie about or misattribute past revenue no matter what, IPO or SPAC, that would be fraud, but in an SPAC you can say "we project that even though we had no revenue this year, based on our product roadmap and sales pipeline we will have $5B revenue in 2024". In an IPO you can't say anything like that.
So, you ended up with a bunch of companies just making up future revenue projections and there's nothing holding them to it.
In the end the SEC basically said "eh, we're going to provide some new guidance on how we're interpreting those rules, you probably weren't allowed to do that anyway, but now we're going to make it real clear that you're not allowed to do that, and maybe we'll go back and say you were never allowed to do that in an SPAC and you were all violating securities law."
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.
> 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.
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.
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.
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.
> I don’t know why people can’t stop themselves from fraud
In my experience it's because more minor or gray instances of it that we never see get swept under the rug or ignored, and people get pressured or encouraged into bigger and bigger, more clear-cut fraud until it gets caught.
Survivorship bias works with vice like anything else.
That scheme isn't necessarily zero sum. If Yahoo simply didn't have the inventory to show certain ads but AOL did and vice versa then it would be a mutually beneficial deal that fills ad slots that would otherwise go unfulfilled.
Say Yahoo gets a lot of queries for plumbers but plumbers for whatever reason were using AOL to run their campaigns.
That's an argument for two companies to show ads on each other's platforms, but not an argument for the vastly inflated prices they were pretending to charge each other. At least for public companies, regulators should crack down on that kind of thing.
Yes, but big artificial revenue growth coupled with equally big artificial expense growth can look like a growing company and hide the fact that non-bogus revenue is actually shrinking. I don't think sophisticated investors will be fooled by this, but with a public company many potential investors might be deceived.
"You have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets." (via Michael Lewis)
Obviously you can't create new money this way (not without involving an external substrate for scam, such as crypto tokens), but I think if you tried hard enough, you could create for yourself a tax liability on those billion dollars.
Huh? Replace dog and cat with “Art piece I had an appraiser that I hired claim it was worth this”. Happens all the time. Monetary value is totally arbitrary. If not, tulips in holland wouldn’t have been valuable enough to buy a house at one point and then moments later been totally worthless.
You would owe capital gains tax if these were considered like breeding livestock. You would probably want to sell the pets again so you could offset your gain with loss.
Otherwise, I think this sale would be considered ordinary income (other than the fact that it's for an outrageous amount). If you did this as a person, you would have an enormous tax bill and no cash to pay it. As a business, you could deduct your expenses and end up with 0 taxable income, although the IRS probably wouldn't like it.
> online grocery-delivery company Boxed Inc. received $20 million and signed a five-year, $20 million contract. Days after receiving Palantir’s money, Boxed paid $15 million to Palantir as part of the contract
Funnily this happens in football too, most recently Juventus (a fairly old and famous Italian club) are being investigated for financial fraud including around one such deal with Barcelona (which did a number of them), where two players were swapped for overinflated values, on different days to fall in different fiscal quarters.
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.
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.
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.
It's pump and dump with a fresh coat of paint. In 2005 I ran WorkZoo (a job search that competed with Indeed) and we were hot stuff just after Google's IPO. Vertical search was going to be the 'next big thing'. We had a group approach us wanting to reverse merger us onto the public markets clearly to pump the stock post the Google IPO hype. We told them what they could do with their idea. Honestly I'm far happier being able to look myself in the mirror and smile than having potentially profited from crap like that.
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.
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.
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.
LSEG recently used leverage to buy market data firm Refinitiv which was somewhere around 5x the size of LSEG itself. They are risk averse, but clearly not as much as they used to be. That acquisition came with a large amount of hardware in DCs around the world which MS has been gunning to get into Azure.
I've witnessed the reverse happen very successfully: Fortune-500 company signs a multi-million-$$, multi-year contract with a vendor while at the same time investing in them.
>> 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
Those seem like rhetorical questions designed to call them on the B.S. My new philosophy is not to ask those kind of questions, but instead (optionally) say why it's dumb, and (definitely) just don't bother with them.
When you ask those questions it lends legitimacy to what they're doing by offering thr chance to justify it. By shooting it down directly they would first have to address the dumb part.
I'm on the fence on this. From one angle it looks like a conflict of interests, from another one looks like the opposite of a conflict.
1. Conflict: Microsoft becomes a large shareholder in company X, then uses their seat to steer that company into using Azure rather than AWS, despite AWS offering a better deal. Bad.
2. Alignment: Company X wants to get Azure cloud services. It tells Microsoft if their offering is so great, are they willing to get paid in stock rather than cash? If Azure lowers the company's compute costs by tens of millions per year, then the company will show an improved income statement, analysts will love that, the stock will skyrocket, and Microsoft ends up better with the stock than with cash. Microsoft is incentivized to provide the best user experience. Good.
They don't own the company. They own shares in a publicly traded company. Those shares go up and down in price. If they provide an outstanding service, the shares appreciate in price, and this shows as profit on Microsoft's balance sheet. And Microsoft, like all companies, are incentivized to show profits rather than losses.
I think this is probably going to be subject to the principal-agent problem. The bits of Microsoft that would make Azure better might be quite a long way from the bits that would like this intangible asset to appreciate. And they'll report them separately anyway, so as long as Azure is getting the revenue, low-performing assets won't drag down Azure's numbers.
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."
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.
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.
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?
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 ...
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.
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.
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[ 3.9 ms ] story [ 148 ms ] threadPalantir 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!
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.
https://www.twitter.com/HarveySawikin/status/158783411778537...
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)?
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.
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.
In the end it's just a "shortcut" for a private company to go public by acquiring an already listed company
Retail investors tend to loose, but just the same as they would with a proper IPO or any crypto ICO
You can't lie about or misattribute past revenue no matter what, IPO or SPAC, that would be fraud, but in an SPAC you can say "we project that even though we had no revenue this year, based on our product roadmap and sales pipeline we will have $5B revenue in 2024". In an IPO you can't say anything like that.
So, you ended up with a bunch of companies just making up future revenue projections and there's nothing holding them to it.
In the end the SEC basically said "eh, we're going to provide some new guidance on how we're interpreting those rules, you probably weren't allowed to do that anyway, but now we're going to make it real clear that you're not allowed to do that, and maybe we'll go back and say you were never allowed to do that in an SPAC and you were all violating securities law."
Could the changed interest rate environment have something to do with $PLTR`s problels?
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.
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.
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.
In my experience it's because more minor or gray instances of it that we never see get swept under the rug or ignored, and people get pressured or encouraged into bigger and bigger, more clear-cut fraud until it gets caught.
Survivorship bias works with vice like anything else.
Say Yahoo gets a lot of queries for plumbers but plumbers for whatever reason were using AOL to run their campaigns.
Otherwise, I think this sale would be considered ordinary income (other than the fact that it's for an outrageous amount). If you did this as a person, you would have an enormous tax bill and no cash to pay it. As a business, you could deduct your expenses and end up with 0 taxable income, although the IRS probably wouldn't like it.
> online grocery-delivery company Boxed Inc. received $20 million and signed a five-year, $20 million contract. Days after receiving Palantir’s money, Boxed paid $15 million to Palantir as part of the contract
See: https://news.ycombinator.com/item?id=25900091
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.
When there is a lot of money chasing fewer and fewer deals, this is what happens.
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.
That is changing[0].
[0] https://twitter.com/Bernard_Y_Kim/status/1605372507418021889
> Microsoft buys near 4% stake in London Stock Exchange https://news.ycombinator.com/item?id=33952824
Edit: ( though obviously it’s not as clear cut as it used to be :/ )
Those seem like rhetorical questions designed to call them on the B.S. My new philosophy is not to ask those kind of questions, but instead (optionally) say why it's dumb, and (definitely) just don't bother with them.
When you ask those questions it lends legitimacy to what they're doing by offering thr chance to justify it. By shooting it down directly they would first have to address the dumb part.
1. Conflict: Microsoft becomes a large shareholder in company X, then uses their seat to steer that company into using Azure rather than AWS, despite AWS offering a better deal. Bad.
2. Alignment: Company X wants to get Azure cloud services. It tells Microsoft if their offering is so great, are they willing to get paid in stock rather than cash? If Azure lowers the company's compute costs by tens of millions per year, then the company will show an improved income statement, analysts will love that, the stock will skyrocket, and Microsoft ends up better with the stock than with cash. Microsoft is incentivized to provide the best user experience. Good.
I don't see how this follows. If they own the company, or using Azure is imposed by C-Suite, what incentive is there to improve their product at all?
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-mai...
Interestingly I did find the Palantir 13F list of holdings.
http://edgar.secdatabase.com/2477/95012322003032/filing-main...
And it does look like the SPAC investments add up to ~$220M.
Edit: here is most recent.
https://www.sec.gov/Archives/edgar/data/1321655/000095012322...
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.