MicroStrategy Archives

While I’ve blogged before about Palantir Technologies (e.g., Beware the Spectacular B-Round Valuation), this will probably be my last post about them because, since leaving MarkLogic, I am no longer terribly involved in the Intelligence Community space nor engaged against them as an indirect competitor.

I initially became interested in Palantir for several reasons:

They were an indirect competitor (e.g., butter/olive oil) in our Government sector and thus a potential strategic threat to MarkLogic.
They were a bold company, unafraid to spend lots of money for nice offices, ads in the DC subway, or sponsor fancy parties.
They, despite claiming to have no marketing, were very good at public relations. For example, this Charlie Rose interview, this Wall Street Journal story, or this interview on TechCrunch.

Part of the marketing was making controversial claims, such as:

We have no sales. (e.g., at minute 5:40)
We have no marketing.
We have no services. (Our field technical staff aren’t consultants, they are forward-deployed engineers.)
Positioning as a billion-dollar company when sales were probably in the tens of millions.
Talking about valuation on funding rounds.

Now, as a credibility-is-key marketer, these kinds of claims bug me at two levels: first, that people would make them and second, that the media would report them. Here’s my take on these 5 claims:

Whether you want to call it sales or not, someone meets customers, talks about what your software does, discusses how to price it, negotiates and signs a contract. In the normal world, that is called sales.
Whether you want to call it marketing or not, someone made the website, spent money to sponsor a party, setup the Charlie Rose interview, and designed and paid for the DC subway ads. In the normal world, that is called marketing.
Whether you want to call it services or forward-deployed engineering, you are sending smart people with engineering and computer science degrees to customers’ sites and helping them solve problems using your software. In the normal world, those tasks are called pre-sales engineering and consulting, depending on whether they happen before or after a sale.
The standard way, in the real world, to refer to a company’s size is by revenue. The one and only time I frequently heard people referring to company size by market capitalization (or valuation) was during the Internet bubble.
While this is primarily a style issue, most companies do not disclose valuation on venture funding rounds. I believe those who do are trying to generate hype. (And for a company that insists it has no marketing to want to generate hype is doubly irritating.)

At the big picture level, Palantir reminded me of MicroStrategy: big claims and hype, DC-centricity, elite school hiring focus, youth focus, a large field technical team, and a work hard / party hard ethos.

At this point I should admit to having some scars from having run marketing at Business Objects during MicroStrategy’s rise. Let demonstrate what a day in life looked like:

Dave, MicroStrategy says their mission is to “purge ignorance from the planet.” How come we can’t say anything visionary like that in our mission?
Dave, Michael Saylor says he’s going to build a modern-day Versailles just outside of DC. How come our CEO never says stuff like that?
Dave, MicroStrategy says they’re building a service where people will wear tiny microphones in their ears and it will notify them if their house catches fire. How come we don’t have product vision like that?
Dave, MicroStrategy just did a $52.5M deal in an industry where average sales prices are $250K and a big deal is a few million. Why can’t we do huge deals like that?
Dave, Michael Saylor says that there will be riots if his software doesn’t work and that this year people will die — literally — because they didn’t buy his software. How come we’re not mission-critical like that?

To which for several years I had to say “it’s all bullshit, it’s all bullshit, it’s a barter transaction and they’re double counting, and it’s all bullshit.”

It turns out being a naysayer isn’t fun work: for three years you sound like a whining, doubting-Thomas constantly on the back foot, constantly playing defense and then one day you’re proven right. But there’s no joy in it. And the naysaying doesn’t help sell newspapers so you don’t get much press coverage. And, in the end, all people remember is that “MicroStrategy was pretty cool back in the day” and “Dave’s a grump.”

It was during this period that I got interested in Corporate Cults because MicroStrategy struck me as one.

Hire young people with similar profiles from the best schools (e.g., MIT)
Work them long hours
Isolate them from friends and family
Blur distinctions between work life and personal life (e.g., company cruise, work hard / play together)
Tell them they’re the best
Tell them naysayers don’t get it

Six steps to make MIT engineers cult members. Thus, in addition to other MicroStrategy parallels, Palantir struck me as a corporate cult. Kind of a Logan’s Run (where no one is over 30) meets the Apple 1984 commercial (conformism à la the black jackets).

Since I left MarkLogic in January, Palantir got tangled up in the HBGary WikiLeaks mess (proposal here), generated some positive press in Forbes, and raised a $60M round of financing at a valuation rumored to be as high as $3B, bringing the total invested capital to an estimated $175M, a lot of money for an enterprise software company.

This begs the perennial question of “if they’re doing so well, then why do they need so much cash?” While there are potentially both good and bad answers to that question, my guess is the answer is roughly:

Because they can raise it at huge valuations for relatively little dilution. (Peter Thiel may be a huge help on this front.)
Because they intend to spend it to continue hiring and perpetuate the lavish-spending culture and hype machine.
Because they are executing a go-big or go-home strategy that is cash intensive and will, they hope, result in a huge exit valuation.

But why does Palantir make my head hurt?

Because, despite my general skepticism, I believe they get some things very right.
Because, despite their intent, they may have created a new kind of company.

Because I can be perceived as a Palantir detractor, I’ll say it again: Palantir gets some things very right. Which things?

They hire brilliant people. They deliver on the hype in this department.
They solve hard problems. I hear customers are generally quite happy.
They solve the whole problem. They don’t just drop software in your driveway and run away.
They aren’t afraid to ask for huge checks, order of magnitude in the tens of millions.

Personally, I don’t buy the argument that all field technical staff are “forward-deployed engineers” as opposed to pre- or post-sales consultants. But I would believe that you can hire better people by telling them they’re engineers as opposed to pre-sales consultants. And, I could even believe that someone could convince himself — if perhaps not his accountants — that field technical staff are not customizing an application but instead developing a product.

That last point is important. Why?

If field technical staff are engineers, then the associated revenue is presumably license fees and the cost is R&D.
If field technical staff are consultants, then the associated revenue is services and the cost is COGS.

Why does this matter? Because most software company boards and investors see the world in a pretty black-and-white way:

License revenue is good. Services revenue is bad. (Largely because gross margins run 98% on the former and 20-30% on the latter).
R&D expense is investment and ergo good. Cost of goods sold is bad.

Almost all Silicon Valley boards will want an emerging enterprise software company to run with a consulting business that’s no more than about 20% of total sales. In practice this means a company can have at most about 1.5 consultants (pre- and post-sales) per salesperson. Any work that can’t be done either as R&D investment or by that small consulting team needs to get handed off to partners. This means the vendor loses control over customer success (which customers don’t like) and the vendor doesn’t end up owning all the IP required to solve the whole problem.

Now, my guess is that Palantir’s board doesn’t care about any of the preceding four paragraphs, probably because of cult arrogance: we don’t care what pedestrian accountants say because we are changing the world and building the ultimate set of products. Accounting, schmaccoutning.

This works well as a private company, particularly if you don’t plan on going public. But the constraint on consulting growth hamstrings most enterprise software companies forcing them into a component-orientation, a drive-by license sales model, and a disregard for customer success — the traditional negatives that helped the drive the SaaS movement.

But, regardless of the reason, Palantir is a different type of company.

Like a system integrator (SI), they have a small sales force, a large field technical staff, solve whole problems, and ask for big checks.
Like a software company, they hire world-class engineers and try to capture everything in product.

Is Palantir an enterprise software company with no sales, marketing, or services (as they would like to believe) or are they the first SI to figure out how to build a world-class software business as most SI’s aspire?

You can argue the difference is just semantics, but I’d argue the latter.

I’ve written a fair bit about Fast Search and Transfer on this blog (e.g., The Blood-Letting Begins, Fast to Restate 2006, Fast Search Train Wreck: Who’s Accountable?, Microsoft Bids $1.2B for Fast) and I’ve done so for a number of reasons:

Competition. While MarkLogic is not a search engine we did end up competing with Fast at several major media (i.e. publishing) accounts, so they had my attention.

Seen this before. Fast reminded me of MicroStrategy, against whom we successfully competed at Business Objects, but whose tactics caused me more than a bit of angst over the years. (One might argue this comparison was prescient.)

Speaking out. I felt that despite the presence of evidence (e.g., financial analyst reports from a Scandinavian bank that did some pretty convincing analysis) that things were awry that everyone (i.e., industry analysts, customers) seemed to turn a willing blind eye first to the indicators of the problems and then to the problems themselves — either dismissing them entirely or as characterizing them as simple “accounting issues.”

Knew the right way. Also, from my near-decade’s worth of experience at Business Objects, I had a strong sense for what I felt was the “right way” to run a European software company. Basically, play by the same rules as everyone else — dual list on the NASDAQ and report financials under GAAP.

Anyway, with the Microsoft acquisition, I figured the story was done. While I was always amazed at the valuation — particularly for a company in the midst of an accounting scandal — the problems were well publicized and I figured Microsoft had to have looked into every angle.

A recent story in Portfolio, entitled Fast Troubles for Microsoft, suggests this was perhaps not the case. Excerpt:

Even as it agreed in January to plunk down $1.23 billion to buy a promising but problematic search company in Norway, Microsoft knew that the company had some accounting matters to address.

Now, it appears, the acquired company, Fast Search & Transfer, may have some criminal matters to work out: Suspicions about the Norwegian search-engine company’s revenue reporting are now in the hands of the Oslo police.

Norway’s financial supervisory authority, Kredittilsynet, said its review of Fast Search’s previously disclosed accounting problems not only appeared to have violated accounting standards, they may have broken the law too.

[…]

In its haste to grab Fast Search, however, Microsoft looked past the company’s problems: They include, but aren’t limited to, accounting irregularities that began to appear as Microsoft began to look over its books.

In the second quarter of 2007, Fast Search reported an operating loss of $38 million on revenue of only $35 million—a full $20 million below forecasts. The loss widened in the following quarter, leading the Norwegian stock exchange to delist Fast Search on December 12.

That same day, Fast Search said it would review its accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far below Goldman’s forecast.

Still, Microsoft pursued the acquisition, completing the deal on April 28.

Kredittilsynet, the supervisory agency, was equally determined. It referred Fast Search to investigators at Økokrim, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime.

Økokrim last week concurred that the nature of the irregularities and the amount by which Fast Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation.

Rather than let the matter rest, the market supervisor turned it over to the Oslo police for investigation. Aftenposten, a Norwegian newspaper, characterized Kredittilsynet’s decision to involve the police as an unprecedented step in that country.