Is Palantir Buying Revenue?

Palantir is making SPAC investments in companies tied to multi-year contracts

Palantir has established itself as a key player in the SPAC market just as companies are desperate to find investors to help propel their planned public listings. Palantir has announced at least eight private investments in companies preparing to go public via a SPAC. I hear more deals are in the works.

Alongside the investments, Palantir is negotiating multi-year contracts with at least some of the recipients of Palantir’s funding. For instance, Palantir is investing $21 million in a robotics company preparing to go public via a SPAC and Palantir struck a six-year agreement to sell the robotics company $42 million its services and software, according to filings.

“The business is generating a significant amount of free cash.1 We just find it a really great opportunity to invest in companies that we’ll be working with for an extremely long period of time, which would naturally make us long-term holders of the equity,” Kevin Kawasaki, who is running the investing program for Palantir, told me in an interview. Before joining Palantir in 2011, Kawasaki was a principal at Palantir co-founder Peter Thiel’s hedge fund, Clarium Capital.  

While news outlets have reported on Palantir’s SPAC strategy, those stories didn’t examine Palantir’s decision to couple investments with multi-year contracts in depth. I’ve been talking to a former SEC commissioner, a former senior tech industry accountant, investors, insiders at companies taking Palantir’s money, and other industry sources about the deal structure.

My sources, some of whom talked to me on the condition of anonymity, broadly had two reactions to the deal making:

  • It was a savvy strategy by Palantir to solidify customer relationships with companies hungry for cash.

  • The deal structure brought back memories from the dot-com era when companies spent money to generate revenue in complicated, sometimes dubious, financial maneuvers.

Pairing an investment with a customer relationship poses a slew of legal, ethical, and strategic questions for both Palantir and the companies striking deals with Palantir to navigate.

Former SEC Commissioner Robert J. Jackson, Jr. said in an email, “These conflicted transactions raise serious questions about whether SPAC investors are getting the transparency they deserve. When any company—including a SPAC—pursues a transaction that benefits a key shareholder, that arrangement should be disclosed to all investors. And these deals raise yet another question about whether ordinary American investors are being treated fairly in SPACs. After all, those investors don’t get the opportunity to cut a side deal to provide services to the SPACs they own.”

One key question the deals raised with my sources was simply: Do the companies signing customer agreements with Palantir genuinely need Palantir’s services at the scale they’re paying for them or are they signing these agreements in order to secure a hard-to-find private SPAC investor?

That’s a hard question to answer definitively. It’s easy to justify hiring a consultant or an external service provider like Palantir and nearly impossible to prove definitively that it was an unnecessary expense.

Some insiders with ties to companies that received investment agreements from Palantir wondered whether the company they were affiliated with really needed Palantir’s services. At least some of these companies who raised money from Palantir had struggled to secure funding ahead of their planned SPAC offering, sources told me. Landing a private investor ahead of a SPAC can be a key piece necessary to propel a company onto the public markets.

For Palantir, there’s a strong incentive to spend the money that it has to generate more revenue. Palantir is trading at a $44 billion market cap – more than 30-times its annualized first quarter revenue. That premium valuation multiple means that investors see the company as a growth stock. If the company’s revenues don’t continue to grow meaningfully, the company’s market capitalization could fall substantially.

The deal-making could receive scrutiny from its auditor.

“A transaction in which a company makes an investment in a customer, especially when the investment and a significant contract for products and services are executed in a close time frame, likely represents a significant unusual transaction requiring heightened scrutiny, expanded audit procedures and skepticism by the company’s external auditor,” said Jeffrey Johanns, a senior lecturer at the McCombs School of Business and a former technology industry auditor.

At least three of the companies in which Palantir is investing have agreed to spend more with Palantir than the face value of Palantir’s investment in them.

  • Take the robotics company Sarcos: Palantir agreed to invest $21 million in the company as it is taken public in a merger with the SPAC Rotor Acquisition. Meanwhile, Sarcos disclosed in a financial filing that it had agreed to spend $42 million with Palantir over six years.2

  • Or look at the drug developer Celularity: Palantir agreed to invest $20 million as it combines with the SPAC GX Acquisition. Celularity disclosed that it had agreed to enter a five-year, $40 million strategic partnership with Palantir.

  • Roivant Sciences filed an amended disclosure partially revealing the terms of its deal with Palantir. Palantir agreed to invest $30 million in Roivant Sciences. Then in a June 30 update to its S-4 registration Wednesday, Roivant revealed: “In May 2021, we entered into a master subscription agreement with Palantir Technologies Inc. (“Palantir”) for access to Palantir’s proprietary software for a five-year period. The remaining minimum payments for this software subscription are $39.0 million.”

The speed at which Palantir is closing agreements with some of the companies is faster than its typical sales cycle, sources said. Palantir says in its financial disclosures that its typical sales cycle “often lasts six to nine months but can extend to a year or more for some customers.” But sources say that some of these deals have been negotiated in a manner of weeks. 

Many growing companies begin commercial negotiations with another company only for the larger company to request shares in exchange for a discount on its services. But in this case, there’s a question as to whether these companies are signing lengthy customer agreements with Palantir at least in part to ensure they could raise sufficient capital as part of a SPAC process.

Palantir’s typical revenue per customer runs about $8.1 million a year, according to Palantir’s disclosures. Typically, Palantir explicitly targets large, secure customers who can continue to pay those bills. By contrast, many of the companies planning to go public via a SPAC lose money. For Roivant Sciences, for instance, the cost of its remaining payments to Palantir are a greater sum than all of its annual revenue, which totaled $23.8 million for the fiscal year ending in March 2021. The company’s net loss amounted to $809.2 million.


Palantir entered the SPAC market as the supply of private investors in SPACs appeared to be tightening.

The Securities and Exchange Commission helped slow the frenetic activity down by raising questions about accounting practices and by turning up its scrutiny on the market. The slowdown became self-perpetuating. Investors who had committed money to companies still waiting to go public were reluctant to strike new deals until those existing investments started publicly trading.

Even as the market has slowed, SPAC sponsors have remained eager to find target companies and to take them public. These sponsors are generally on strict timelines to find an acquisition target before their agreements with investors run out. If those agreements run out before they find a target, SPAC sponsors stand to lose money on the whole endeavor.

Similarly, many companies are eager to venture onto the public markets at a time when retail investors are widely seen as eager to invest in speculative technologies.

So, companies want to go public via SPACs and sponsors want to find a way to make that happen. But these deals usually require hefty investments from private investors (called PIPES) alongside the public listing to make the deals work. But it’s been hard for SPAC sponsors to line up these private investors.

This is where Palantir comes in. Kawasaki, Palantir’s global head of business development, has been pitching players in the SPAC market about the potential for an investment and partnership agreement, sources told me. “I would like to say that we had some special insight about the market here,” Kawasaki told me. “But a lot of it is really about us. We really have the resources and ability to do this.”

Palantir has struck investment deals with Lilium, Babylon Health, Boxed3, Pear Therapeutics, Wejo, and an undisclosed mobility company. Boxed disclosed the terms of its investment with Palantir. I wasn’t able to locate disclosures for customer agreements with Babylon Health, Lilium, Pear Therapeutics and Wejo.4

Even in cases where there are disclosures, it’s not clear to me, for instance, how long Palantir is required to hold onto the shares it buys in these companies. None of the companies that have struck deals with Palantir have disclosed their actual contractual agreement with Palantir as far as I’ve been able to find.

While Palantir may have entered thorny territory by investing in companies that are signing agreements to become customers, the deal-making could end up looking savvy. Palantir is taking stakes in companies whose value could grow, while building new long-term customer relationships. And Palantir’s technology could help these companies create more compelling products, only increasing the value of its investment in those customers.

“I think these are the best of times in cloud and it makes sense to be aggressive and this is aggressive,” says Jason Lemkin, a software investor. “I think investing in companies is a well-trodden path, albeit one you have to be careful with. I think doing it via SPACs is a new wrinkle.”

1

Despite recording a $123 million net loss in the first three months of the year, Palantir generated $117 million in net cash from operating activities in the quarter. (That’s partly explained by Palantir’s $194 million stock-based compensation expense.)

2

Even when companies disclose some of the details of their customer relationship with Palantir, the communication around the deal with Palantir can be somewhat confusing. On May 28, Sarcos CEO and chairman Ben Wolff described his company’s relationship with Palantir like this: “So we see a lot of potential for us to work together and we are in the early stages of exploring what that can look like.” But almost two months earlier, Sarcos had already agreed to a six-year, $42 million contract.

After I requested comment from Sarcos, a spokesperson asserted incorrectly that “Per the filing, the Sarcos contract with Palantir is $42,000 NOT $42 million.” After I pushed back, the spokesperson replied, “Yes, you’re correct Eric. Sorry about that. Please just refer to the amounts listed in the public filings.”

3

In a footnote on page 37 of its investor presentation Boxed discloses: “[I]n consideration of such investment, Boxed will enter into a commercial partnership agreement with Palantir with associated software licensing expenses totaling $20M over 5 years.”

4

I reached out to the companies on Friday and will update this story online if they flag any additional disclosures about their agreements with Palantir. A spokesperson for Babylon Health declined to comment. A spokesperson for Lilium pointed me toward the company’s analyst deck and announcement. I sent Palantir a detailed accounting of what I planned to report ahead of this story on Friday. I didn’t receive a detailed response. I spoke with Kawasaki on Monday about the firm’s strategy.