How To Spot $1,000,000,000 Ideas: A Palantir Case Study

Every great company starts with an idea. How can you separate the bad from the good, and the good from the great?

Today, we’ll explore what Palantir did and how its founders think about generating the best ideas for you.

Palantir was founded in 2003 after Peter Thiel had massive success building PayPal.  

The vision was clear to transform data collection and analysis.

Before diving too deep here are the 7 questions that Peter Thiel asks to evaluate new ideas and startups. 

1. Do you have the right team?

2. Are you starting with a big share of a small market?

3. Is now the right time to start your particular business?

4. Do you have a way to not just create but deliver your product?

5. Have you identified a unique opportunity that others don’t see?

6. Will your market position be defensible 10 and 20 years into the future?

7. Can you create breakthrough technology instead of incremental improvements?

Let’s dive straight into it.

Right Team

Peter started with a core bunch

Joe Lonsdale: An intern at Paypal and early executive at Clarium, Peter Thiel’s macro hedge fund. He was a master at making money, he took $10 million and turned it into $7 billion in 5 years.

Nathan Gettings: One of the lead engineers at Paypal fighting fraud and knew how to make the software work.

Stephen Cohen: A standout computer science student at Stanford who simultaneously worked full time helping Joe build Clarium into a powerhouse. 

He had one more seat he needed to fill, the CEO role he needed someone who wasn’t 20 and could present complicated ideas in its simplest form. Out comes Alex Karp, a Stanford law alum and Ph.D. under Jurgen Habermas. He had finesse and some gray hairs.

While all these guys were brilliant, none of them had government experience which made selling extremely difficult.

But Peter had an ace up his sleeve, he had close contacts at In-Q-Tell, the CIA venture capital firm, that got him in the door. But their lack of experience meant that for over 100 meetings they would clash with the government like a hammer hitting iron. 

It wasn’t until 2005 that they got their first customer. Thank God they all still had their jobs at the hedge fund and Peter Thiel was happy to spend $30 million to make it work.

With a blank check book, you can do almost anything. 

But I digress.

Big Share of Small Market

They had technology that could fight fraud. Instead of starting with all fraud, they decided to target counterterrorism (this is also a product of its time, post 9/11 counterterrorism was the big trend.). 

Picking this specific niche was genius.

1. If their technology was the reason behind how the government found Bin Laden how couldn’t they analyze your company’s data and improve your regular business? 

• They started hard to prove to everyone else that they could do what they said without a shadow of a doubt.

2. Dominating counterterrorism could pave the way for every other industry after that. Once your foot is in the door it's easier to force your way in.

• Ever notice how easy it is to eat an entire bag of chips when you open it and eat the first one? This is what they did.

3. When the government signs contracts it’s for many millions. Each year they award $500 billion in contracts, yes that’s with a B.

Right Time

If you’re raising money and a VC asks you why is this the right time to build what you’re building? Answer it like this.

2000:

• The amount of data on the internet increased by 150x over the last decade.

2001:

• September 11th: The US is attacked.

• October: The US goes to war against Afghanistan

2002:

• PayPal lost $10 million to fraud and developed “IGOR” to fight it. 

2003: 

• Peter Thiel gets the idea to use IGOR to fight terrorism and the inability to analyze the vast amount of data being produced.

• Palantir is birthed.

2004:

• The US starts awarding large amounts of money to security agencies looking to fight terrorism.

• The FBI expressed interest in a product that could analyze different data sources.

2005: 

• Palantir signed the CIA as its first customer

The world was in the right place with anti-terrorism at the forefront of everyone’s mind, money was available for what they were building, they had the right technology, and data was needed to be analyzed effectively. 

Delivering The Product

I look at this through 4 parts. 

1. Clarity: Is the value you’re delivering clear to those looking to buy?

2. Ease of purchase: Is it easy to purchase the product and be onboarded?

3. Ease of use: Is it exactly what people are looking for and is easy to use?

4. Ability to sell: Having what is needed to sell the product or service.

Let’s start with clarity, remember they brought in Alex Karp because of his ability to distill complicated concepts into simple terms? Well, he figured out it was not that simple. 

They had to do over 100 meetings before they understood how to speak the government’s language and build something they wanted.

For ease of purchase, they were always in front of their potential buyers. They also did one thing that no one else was doing. They did tons of demos, they would tell people to show me what you can do in a year and I’ll show what we could do in a day. It was often better.

It did take them a year of working with the CIA closely to get to that point, so they refined their ease of use over time.

For the ability to sell, they had the right contacts at In-Q-Tell, the CIA’s venture capital firm. They would get them all the meetings they needed. If they didn’t have this they would have no ability to sell.

It took them a long time to get things right, they almost faced bankruptcy many times and everyone was frantically working to make the product work. Even with Peter’s $30 million investment, they were in the trenches working.

Unique Opportunity

There are two questions that they would ask.

1. What valuable company is no one building?

2. What’s an important truth do very few people agree with you on?

Peter’s response: 

1. Anti-terrorism

2. Combining human intelligence with machine learning to analyze and interpret large datasets is the best way to analyze complex data.

He didn’t want to just create a valuable company that couldn’t benefit him financially. You see this all the time, a great idea to change the world but there’s no way to make money on it.

These two questions are incredibly difficult to answer because they force you to dig deeper than anyone else is digging, be able to identify patterns that no one else sees, and also identify how you could make money.

Lasting 10 to 20 Years

There’s nothing worse than winning then coming in second place and never returning to coming first. 

No, you can’t plan for how the world will change 10 to 20 years from now but you can control how you will prepare for it.

Palantir’s plan had a 5 step plan:

1. Incredible technology: Ensure that they have technology that no one else has and they can continue to make transformative improvements.

2. Network effect: Having a product that makes users invite other people to use it.

3. Economies of Scale: Getting stronger the bigger you get.

4. Branding: Having a brand that reinforces what you stand for and how good you are. 

5. Monopoly: Dominating a small market that has few or no competitors.

They didn’t want to fight fairly, they knew that competing would just eat into their profits. They set themselves to dominate a market and leave their customers reliant on them. 

The only way they could do that would be to consistently innovate so a new startup doesn't come and eat their supper.

Breakthrough Technology

We’ve touched on this all throughout this case study but let me drive it home. Breakthrough is 10x better than what is currently there. They didn’t want to create something that was 20% better because the effort required to show that it’s 20% is high and most people won’t believe you. 

Think about when Oatmilk first came out, was it really much better than regular cow’s milk? Maybe, it was an incremental difference. 

Now think about ChatGPT. When it first came out it was 10 to 20 times better than Google, Yahoo, Bing, and any other chatbot. It was the undisputed champion

Palantir did the same thing, it analyzed data like no other company and could find patterns like no other. This led to solving more fraud and finding more criminals than any other company.

Recap

Palantir did a lot of things right and a lot of things wrong. If you are evaluating ideas or startups to invest in, looking at them through this lens could bring you more success than through a smaller lens.

Ask these 7 questions:

1. Do you have the right team?

2. Are you starting with a big share of a small market?

3. Is now the right time to start your particular business?

4. Do you have a way to not just create but deliver your product?

5. Have you identified a unique opportunity that others don’t see?

6. Will your market position be defensible 10 and 20 years into the future?

7. Can you create breakthrough technology instead of incremental improvements?

I wish you the best and thank you for reading!