#21 - Palantir goes public (pt. 2): Principles over profits
Back when I was at Facebook, I was walking around the office and found this poster plastered on the wall:
…At what point do principles outweigh profits? If you’re asking this question in the first place, you already just don’t get it.
Principles are clearly-stated priorities that you adhere to, live by, and try to advance. You have a stack-ranking of principles, and sometimes you forgo a lower principle in order to advance a higher principle. For instance, a BLM protester may value the principle of peace and order, but just because she protests in the streets, blocks traffic, and creates disorder, is she then necessarily unprincipled? Is she committing some form of intellectual suicide? Not necessarily! Racial justice may just be a more important principle for her. Reasonable people can agree or disagree about her principles and how she ranks them, but she is not unprincipled.
Companies have principles, too. In fact, companies have a fiduciary duty to maximize shareholder value, so we might even say that profit itself is a principle that companies ought to pursue. Moreover, a principled person or company holds strongly to its principles. In other words, its principles rarely change. I would hardly call someone principled who regularly changes what he values, like a new flavor of the month.
So, this question posed by this Facebook poster is non-sensical. There is no definitive point where principles suddenly outweigh profits. You define your principles ex ante, profit usually being one of them, you rank them, and you always sacrifice lower principles in favor of higher principles. That’s being principled.
Palantir
Apologies for the long-winded intro, but onto Palantir. Last week, I conducted a quick and dirty financial analysis of Palantir’s S-1, and now, I’m here to look at an interesting theme throughout its S-1: Its principles. Even though I concluded last week that Palantir shouldn’t be valued like a SaaS company, I’m not exactly a Palantir bear. Say what you will about Palantir, but it sticks to its principles.
Principle #1: Think independently
From the S-1:
The engineering elite of Silicon Valley may know more than most about building software. But they do not know more about how society should be organized or what justice requires. Our company was founded in Silicon Valley. But we seem to share fewer and fewer of the technology sector’s values and commitments. From the start, we have repeatedly turned down opportunities to sell, collect, or mine data. Other technology companies, including some of the largest in the world, have built their entire businesses on doing just that.
Of course, it’s become pretty fashionable over the last few years to take shots at Silicon Valley, but I think Palantir is putting its money where its mouth is. Indeed, Palantir recently moved its headquarters from Silicon Valley to Denver, Colorado, ostensibly to distance itself from the negative influence of the former. To be fair, this move may not be that big of a deal given the acceleration of remote work. But in any case, Alex Karp (Palantir CEO) has accused Silicon Valley of “increasing intolerance and monoculture,” and Peter Thiel (Palantir’s co-founder) says the Silicon Valley attitude has “an extreme strain of parochialism, that of fortunate enclaves isolated from the problems of other places — and incurious about them.” The fear is that this monoculture would compromise Palantir’s principles and stifle independent thought. For instance, Palantir, from the S-1 excerpt above, heavily values data protection, contrary to many other companies in the Valley. Ironically enough, though, and perhaps proving Palantir’s point, Silicon Valley has been dumping on Palantir for being an evil data hoarder! Make no mistake: Palantir helps companies organize and manage terabytes upon terabytes of their own data. However, just as Microsoft doesn't get the data you put into your Excel sheets, neither does Palantir harvest data from its customers.
Principle #2: Protect Western democracy
From the S-1:
We generally do not enter into business with customers or governments whose positions or actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies
Palantir even went so far as to call out China:
Our leadership believes that working with the Chinese communist party is inconsistent with our culture and mission. We do not consider any sales opportunities with the Chinese communist party, do not host our platforms in China, and impose limitations on access to our platforms in China in order to protect our intellectual property, to promote respect for and defend privacy and civil liberties protections, and to promote data security. Our decision to avoid this large potential market may limit our growth prospects and could adversely impact our business, results of operations, and financial condition, and we may not compete successfully against our current or potential competitors who choose to work in China.
As Palantir explicitly noted, this refusal to deal limits its business prospects. This doesn’t mean that Palantir doesn’t care about profits. Of course it does. This merely means that Palantir cares more about protecting Western democracy.
Interestingly, this may also be another shot at Silicon Valley. Over the past two years, many companies, including Apple and Google, have been under the spotlight for cultivating relationships with China.
Principle #3: Long-term over short-term
From the S-1:
Founders [have] the ability to control up to 49.999999% of the total voting power of our capital stock . . . [This] structure of our common stock is intended to preserve our existing founder control structure after completion of our listing on the NYSE, to facilitate our continued product innovation and the risk-taking that it requires, to permit us to continue to prioritize our long-term goals rather than short-term results, to enhance the likelihood of continued stability in the composition of our Board of Directors and its policies, and to discourage certain types of transactions that may involve an actual or threatened acquisition of the company . . . [T]hese Founders will effectively control all matters submitted to a vote of the stockholders for the foreseeable future.
The stereotypical idea here is that once a private company goes public, it forfeits long-term vision for short-term gains. Indeed, public companies need to undergo public shareholder scrutiny, which is largely based on mandatory quarterly earnings reports, and public shareholders rarely ever have the long-term vision of the eccentric CEO at the helm. In fact, shareholders may force the company into making some drastic decisions. For instance, earlier this year, an activist hedge fund put $1bn into Twitter and nearly forced out CEO Jack Dorsey.
The way to prevent this is to structure the company’s shares in such a way as to give the CEO (or whomever) the voting power. It’s not too uncommon with tech CEOs, especially if you buy into the thesis that tech CEOs have the necessary world-building / world-dominating vision that brought the company to success in the first place. Facebook has this in place with Zuck, Google did this with Larry and Sergey, etc., It’s clear that Palantir values Alex Karp, Peter Thiel, and co., so much that they are willing to forego short-term profits for their long-term vision.
📚 What I’m reading
The 300,000-year case for the 15-hour week.
Microsoft: New steps to combat disinformation.
China’s use of AI during COVID-19.