One of my favorite examples of investing in black boxes and the pitfalls therein is a little vignette I imagined while reading last year's "Lenders Raise Collateral Concerns Over WeWork CEO's $500 Million Personal Credit Line" (JPM; UBS)":
Ya think?
"Bob, we've been lending against the Emperor's personal wardrobe and it turns out there's actually nothing in the closet""Oh"*****Sure, Climateer Investing took "WeWork: 'Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.'" at face value:
Roger that, energy and spirituality. Over....But we didn't lend a half-billion against it for Chrissakes
Back in 2003, John Poindexter got a call from Richard Perle, an old friend from their days serving together in the Reagan administration. Perle, one of the architects of the Iraq War, which started that year, wanted to introduce Poindexter to a couple of Silicon Valley entrepreneurs who were starting a software company. The firm, Palantir Technologies, was hoping to pull together data collected by a wide range of spy agencies — everything from human intelligence and cell-phone calls to travel records and financial transactions — to help identify and stop terrorists planning attacks on the United States.
Poindexter, a retired rear admiral who had been forced to resign as Reagan’s national-security adviser over his role in the Iran-Contra scandal, wasn’t exactly the kind of starry-eyed idealist who usually appeals to Silicon Valley visionaries. Returning to the Pentagon after the 9/11 attacks, he had begun researching ways to develop a data-mining program that was as spooky as its name: Total Information Awareness. His work — dubbed a “super-snoop’s dream” by conservative columnist William Safire — was a precursor to the National Security Agency’s sweeping surveillance programs that were exposed a decade later by Edward Snowden.
Yet Poindexter was precisely the person Peter Thiel and Alex Karp, the co-founders of Palantir, wanted to meet. Their new company was similar in ambition to what Poindexter had tried to create at the Pentagon, and they wanted to pick the brain of the man now widely viewed as the godfather of modern surveillance.
“When I talked to Peter Thiel early on, I was impressed with the design and the ideas they had for the user interface,” Poindexter told me recently. “But I could see they didn’t have — well, as you call it, the back end, to automatically sort through the data and eliminate that tedious task for the users. And my feedback from the people who used it at the time, they were not happy with it at all. It was just much too manual.”
Smoking his pipe, just as he had when he testified to Congress 33 years ago about his role in facilitating covert arms sales to Iran, Poindexter told me he had suggested to Karp and Thiel that they partner with one of the companies that worked on Total Information Awareness. But the two men weren’t interested. “They were a bunch of young, arrogant guys,” Poindexter said, “and they were convinced they could do it all.”
Seventeen years later, Palantir is seeking to cash in on its ability to “do it all.” Over the years, the company has worked with some of the government’s most secretive agencies, including the CIA, the NSA, and the Pentagon’s Special Operations Command. As recently as two years ago, its value was estimated at $20 billion, elevating it to the loftiest heights of the tech “unicorns,” privately held companies valued at more than $1 billion. On September 30, Palantir is scheduled to go public, selling shares in a highly anticipated gambit that could make Karp one of Silicon Valley’s richest CEOs and cement the reputation of Thiel, the first outside investor in Facebook and a co-founder of PayPal, as one of the most visionary tech entrepreneurs of his generation.
Palantir’s public offering is founded on the company’s sales pitch that its software represents the ultimate tool of surveillance. Named after the “Seeing Stones” in The Lord of the Rings, Palantir is designed to ingest the mountains of data collected by soldiers and spies and police — fingerprints, signals intelligence, bank records, tips from confidential informants — and enable users to spot hidden relationships, uncover criminal and terrorist networks, and even anticipate future attacks. Thiel and Karp have effectively positioned Palantir as a pro-military arm of Silicon Valley, a culture dominated by tech gurus who view their work as paving the way for a global utopia. (Palantir declined to comment for this story, citing the mandatory “quiet period” prior to a public listing.)
It’s a strange moment, given the widespread alarm over the ever-expanding reach of technology, for a tech company to be marketing itself as the most powerful weapon in the national-security state’s arsenal — wrapping itself in what one Silicon Valley veteran calls “the mystique of being used to kill people.” But as Palantir seeks to sell its stock on Wall Street, even some of its initial admirers are warning that the company’s software may not live up to its hype. More than a dozen former military and intelligence officials I interviewed — some of whom were instrumental in persuading government agencies to work with Palantir — expressed concerns about the firm’s penchant for exaggeration, its apparent flouting of federal rules designed to ensure fair competition, and its true worth. The company has largely succeeded, they say, not because of its technological wizardry but because its interface is slicker and more user friendly than the alternatives created by defense contractors.
“Where you get into trouble is when the software gets so complicated that you have to send people in to manage it,” said one former CIA official who is complimentary of Palantir. “The moment you introduce an expensive IT engineer into the process, you’ve cut your profits.” Palantir, it turns out, has run headlong into the problem plaguing many tech firms engaged in the quest for total information awareness: Real-world data is often too messy and complex for computers to translate without lots of help from humans.
One of the central claims made about Palantir — its creation myth, in essence — is that its software was somehow instrumental in locating Osama bin Laden. The company, which has posted a news story repeating the rumor on its website, likes to shroud its supposed involvement in an air of mystery. “That’s one of those stories we’re not allowed to comment about,” Karp once said in an interview.
The only known basis for the claim, which has been repeated in dozens of articles, comes from The Finish, Mark Bowden’s book on the 2011 raid that killed bin Laden. Bowden does not actually say Palantir was used in the raid, but he credits the company with perfecting the data collection and analysis that Poindexter had initiated with Total Information Awareness in the aftermath of 9/11. Palantir, Bowden writes, “came up with a program that elegantly accomplished what TIA had set out to do.”
No one I spoke with in either national security or intelligence believes Palantir played any significant role in finding bin Laden. Thiel, according to Poindexter, wasn’t even interested in building on TIA’s work. “His people were telling him they didn’t need it,” Poindexter recalled.
From the start, Palantir has drawn on a circle of loyal insiders to build the company. In the late 1980s, as an undergraduate at Stanford, Thiel founded a conservative student publication called The Stanford Review to wage war on what he saw as the university’s liberal agenda, including “mandatory race and ethnic studies” and “ ‘domestic partner’ status for homosexuals.” (Thiel, who is gay, married his longtime partner in 2017.) The Review served as a breeding ground for Palantir: Over the years, according to an analysis by a Stanford graduate named Andrew Granato, 24 of the company’s employees came from the staff of Thiel’s student publication.
Palantir’s initial technology was likewise adopted from one of Thiel’s other endeavors: PayPal. In 2000, engineers at the online-payment company wanted to use software to help identify fraudulent transactions, but they found that computer algorithms alone couldn’t keep up with how quickly criminals adapted. Their solution was a program called Igor, after a Russian criminal who was taunting PayPal’s fraud department, that flagged suspicious transactions for humans to review.
In 2003, after PayPal was sold, Thiel approached Alex Karp, a former Stanford classmate with a Ph.D. in neoclassical social theory, with a novel idea: Why not apply Igor to track terrorist networks through their financial transactions? At the time, the CIA unit responsible for locating bin Laden had little experience, or even interest, in such an approach. Thiel put in the seed money, and after a few years of pitching investors, Palantir got its first major breakthrough in the national-security world with an estimated $2 million investment from In-Q-Tel, a venture-capital firm set up by the CIA. According to a former intelligence official who was directly involved with that investment, the agency hoped that tapping the tech expertise of Silicon Valley would enable it to integrate widely disparate sources of data regardless of format. “I have mixed feelings about the CIA,” Richard Perle told me, “but their angel investment in Palantir may have been their most inspired move.”
In-Q-Tel’s investment provided Palantir with something even more important than cash: the imprimatur of the CIA. As doors started to open in Washington, Palantir began to attract fans in the secretive communities of intelligence and national security. One former senior intelligence official recalled visiting the company in Menlo Park, California, around 2005. Palantir didn’t even have its own space — it was working out of the offices of a venture capitalist involved in the firm. “We go out back to the carriage house, and there were sleeping bags under the desks,” the former official recalled. “That’s where the engineers who were doing the code were actually living and sleeping.”
But contracts with spy agencies were never going to provide Palantir with enough scale to satisfy investors. The company needed new customers, especially in the lucrative world of defense contracting, and Thiel knew just how to get them. In Zero to One, his 2014 book on entrepreneurship, Thiel notes a critical move in PayPal’s success: In the early days, the company essentially paid people to sign up, handing out $10 to each new customer.
Under federal rules for procurement, which are laid out in a telephone-book-size manual, you can’t pay Pentagon officials to buy your product because that would constitute bribery. And it makes no sense to entice individual soldiers to use your product, because they don’t have the power to make procurement decisions. But that, remarkably, is exactly what Palantir did.
Not long after In-Q-Tel’s investment, the company began providing software and training to members of the armed forces about to deploy to Iraq and Afghanistan. Rather than focusing on lobbying the Pentagon from the outside, Palantir introduced its product from inside the military, creating both an internal demand and a network of pretrained users. “They would basically contact the soldiers and say, ‘Hey, I would like to give you some training on this tool you will get in theater. Would you like to get trained on it?’ ” recalled Heidi Shyu, then the Army’s chief weapons buyer.
Chris Ieva, a Marine infantry officer who was attending the Naval Postgraduate School in 2006, was an early beneficiary of Palantir’s unorthodox marketing technique. The school is located in Monterey, California, just down the road from Silicon Valley, and Palantir had already established a foothold at the institution. Ieva was excited when he was invited to visit the tech start-up, where he saw engineers walking around with T-shirts that read GOOGLE IS OUR BACKUP JOB.
But Palantir wasn’t trying to recruit Ieva as an employee. Instead, he said, he got funding worth about $10,000 to support his graduate work, which paid for a high-end computer and access to critical data. Ieva was also supplied with Palantir’s software, which the school was leasing for $19,000 a year; the company provided an analyst at its own expense to work with students. “In return,” Ieva told me, “I had to publish a thesis, and the findings would sort of go back to them.” By the time he deployed to Afghanistan in 2011, Ieva was a true believer in Palantir. He was not only trained to use the company’s software but given a personal version to take with him....
....MUCH MORE
