Just months after eBay Inc. (NASDAQ:EBAY) spun off PayPal Inc. (NASDAQ:PYPL), another firm related to the payments processor is set for an initial public offering. Eighty percent of the management team at this startup worked for PayPal; including one of PayPal’s founders.
No, I’m not talking about SpaceEx, although I certainly am a fan. Elon Musk originally founded an online banking company called X.com which merged with a cyber security firm called Confinity to create the PayPal we know and love.
Peter Thiel founded Confinity. Also known as “Don of the PayPal Mafia,” Thiel is a legend in Silicon Valley. Everything he touches turns to gold. After PayPal, he made early investments into Facebook, Yelp, and LinkedIn.
But he devoted most of his time to building a secretive firm known as Palantir Technologies.
Palantir Technologies Was Built From PayPal Parts
No one on the outside has a comprehensive understanding of Palantir’s operations. We know they provide intelligence solutions to government agencies, financial institutions, and research firms. We know they have close ties to the Pentagon, and we know they are valued at $20.0 billion. (Source: The Wall Street Journal, July 23, 2015.)
However, we only have a hazy picture of Palantir’s services. The firm describes itself as a data analytics company with a range of products to help detect patterns in complex data sets. The sophistication of their algorithms is what sets them apart from the competition.
In a podcast with venture capital guru Marc Andresseen, Thiel admitted that Palantir’s algorithms are based on source code from PayPal. (Source: Andreessen Horowitz, last accessed September 9, 2015.)
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When PayPal was in its early stages, the firm’s biggest obstacle to credibility was fraud prevention. Thwarting scam artists became a necessary condition to winning the trust of businesses and customers. PayPal overcame the fraud obstacle by developing a clever algorithm to detect unusual account activity.
Now the same minds that devised PayPal’s fraud detection systems train their sights on much larger problems. They apply the same pattern detection concepts to issues of finance, crime, and national defense.
For instance, when police investigators in the Netherlands were trying to shut down a child prostitution ring, they came to Palantir to help construct the case.
Using some of Palantir’s tools, the police force was able to track down several perpetrators and indict them. Enough evidence was collected and Palantir’s security features left a paper trail of how analysts got to their conclusions. An investigation that normally takes years was completed in six months. (Source: Palantir, last accessed September 9, 2015.)
Palantir Technologies Raised $450 Million in July
Many of the most highly valued startups in Silicon Valley are following a certain pattern. Show a successful business model, then raise money in several rounds of private placements, all while dismissing IPO rumors.
The constant denials result in a much higher IPO price when you finally admit what everyone already knew. A great example is GoPro, Inc. (NASDAQ:GPRO) which constantly dispelled rumors of going public, only to file for a confidential IPO. (Source: Forbes, February 7, 2014.)
An SEC filing showed that Palantir recently raised $450 million in a private funding round, bringing their total valuation to $20.0 billion. That’s $8.0 billion more than SpaceEx, and $9.0 billion more than Pinterest, to put it in perspective.
Only Xiaomi, Uber, and Airbnb have high valuations. Yet, the growth potential on Palantir is unlike anything I’ve ever seen before. The brilliance of Peter Thiel is that his firm doesn’t sell a product, per se, but the ability to make sense of chaos.