Palantir is at $1 Billion in ARR!! Here's How it Got There.

Okay, next on five interesting learnings in the enterprise. Let's talk about one of the most, at least until recently, mysterious enterprise companies, which is Palantir. Palantir at a billion plus in revenue. What, what did Palantir do? Many of us, many of us were wondering, many of us are still wondering after 17 years, what was this weird Peter Thiel sort of PayPal fraud inspired company with all these forward engineers and these massive contracts leasing up every single building in downtown Palo. What was it doing? Is it a services business? Is it really enterprise software? What is Palantir? We didn't know. There was certainly a period of time when it seemed to suck up every great engineer graduating from Stanford, everyone in CS and they'd overpay and just have them literally walk down University Avenue to join Palantir after graduating. And it was this very mysterious thing for a while and then it got even quieter and then finally it IPO'd. It IPO'd at 1 billion in ARR. And a billion's incredible. But it did take it 17 years to get there, which is a massive success story, but not necessarily an overnight one. So let's talk about it. First of all, is Palantir even a SaaS company? Is it even a software company? Well, it probably is now. By the time it IPO'd, it became a software company with software like margins, which we'll talk into. But certainly historically a lot of it appears to have been one off builds and mass of payments for somewhat customized software. But as it got to ipo, it evolved, it became more like traditional software companies. And our next one we'll look at Snowflake did the same thing. Snowflake had a relatively low margin product pre ipo, but then it got its act together. It got traditional software type margins and so did Palantir. Both of them took a while to have to look like a public company needs to look to go public. And it turned out for that's okay. It turns out take advantage of being private, take advantage of, of having private capital. And if that means maybe you run lower margins for a while like Palantir and Snowflake, maybe that's okay. Maybe you even look like a services business for a while like Palantir. That's okay as long as you sort of transition to a normal looking software company by ipo. So what can we learn about this mysterious company? And I'll highlight the five points that I think we can learn from. The first one, just a good learning for us is that boy a highly concentrated revenue and this is something a lot of us think about in the enterprise at IPO, 66% of Palantir's revenue, 2/3 came from just its top 20 customers. That is crazy. That may be the most concentrated revenue that I'm aware of in our recent batch of cloud and SaaS companies. And it's a risk. Those of you who may remember Twilio, which is obviously one of the Greatest Cloud and SaaS successor of all time, when they IPO'd, Uber was one of their largest customers. And Uber churned. Uber, Uber churned and it was identified as a risk. They're our largest customer and Twilio still is. It's very interesting. It has a handful of very large customers that represent double digits of his revenue. And then it has a super long tail that Palantir certainly does not. But the learning from both Twilio and Palantir is this, that look, no one loves customer concentration. It certainly produces some anxiety, but it's okay. Look, it's okay. Having one customer is clearly a problem. But Uber was a core customer, Twilio. They lost it and became a company that will be worth 100 billion. Palantir 20 customers make up 2/3 revenue and it's worth tens of billions. So yes, it's a worry. But don't let concentrated revenue distract you. If you can close big deals and you can make those customers happy, just close more like that, if that's your superpower point too, interestingly is that even with huge deals, even with these huge deals that palantir signs, these eight figure deals, deal size still increases 30% a year on average. This is crazy. We also saw this when we did a deep dive on UiPath. UiPath is very enterprise as well with 160% NRR. It's crazy. And what UiPath and Palantir show is as almost. It's almost hard to get your arms around this, your brain around this. But you can maybe grow deal sizes infinitely. How could that be possible? You might think, I mean I close 100k deal, a 200k deal, a 300k million dollar deal. Haven't I maxed out this customer account? I mean sometimes you have. If you look at workday, a lot of those deals are fully priced today. Those accounts don't grow, grow often at workday now, now that workday is well north of billions of revenue. But it seems more often the best cloud companies find a way to keep selling more to the same customers. UiPath has and Palantir has. And what that means is fast forward Five, six, seven years. And these initially smaller deals can become massive deals. That's what Palantir and you and I path have seen the compounding power of 30% deal size growth in seven figure deals is. It's just truly epic. Okay, point number three is about tam. Palantir was an early example of something now we've seen a lot post Covid, which is people are growing even faster after a billion in revenue. HubSpot's growing even faster. Salesforce is having to blow out quarter. It's growing even faster. And Palantir accelerated to 49% growth after a billion in AR on its IPO. It accelerated and its government contracts were even faster to 74% year over year. And it just shows. Look, for almost all of us, our very first market, our truly initial TAM is often small, right? That's how we wedge in. That's how we get in. But if we build a brand, if we provide value to our customers and we have a great management team, we keep growing that tam. Sometimes we add extra products like we just talked about with ServiceNow and others. Sometimes we expand into other verticals. Like government was always important to Palantir, but now it's its key growth vector. But great teams find a way to keep growing their TAMP and not only do it. The incredible thing is that and this surprised again a lot of us veterans, you can grow even faster after a billion in ARR. It seems hard to get your mind around how big cloud is. But if Palantir and HubSpot and Salesforce can grow faster at billions in revenue, there's probably nothing really stopping you at 5 million, 10 million, 20, 50 million in revenue. There probably isn't anything stopping you other than being obsessive about finding more ways to add value to your customers. Okay, point four. And this is sort of a tweak of what we talked about before, but we've seen this a lot, which is that existing customers fuel the bulk of the growth. And why is that? Because this compounding number, its largest customers have grown 5x since 2012. And this is the awe inspiring power of NRR once you get bigger. Palantir grew 49% after its IPO at a billion in ARR, but it grew its existing accounts as a whole 36%. So the majority of its growth comes from its existing account. We've seen this with Salesforce at Salesforce, even though it's now growing 30% again, which is incredible for a company at well north of 10 billion, actually 20 billion in AR now 70% of Salesforce's growth comes from its existing customers. And so that's what we've seen. And interestingly, and just let this sink in for a minute, its largest accounts, Palantir's largest accounts in 2012 about 10 years ago were 5 million. That's a big deal. But today those same customers have grown to 25 million, trending to 30 million. That's the incredible power of net retention. A huge customer, a $5 million customer of Palantir, granted a decade ago, today is coming up on 30 million. Think about that. That means you really can go forever if you provide insane value to your customers. And. And point five, this going back to the initial point we talked about. Is Palantir a software company? Well, it took a while. Even in 2019, even its gross margins were only 14%. Their numbers are a little bit murky. They talk about contribution margins versus gross margins. I'm not sure I can get my arms around it, but it was in the teens that it's a services business. That's what a company that sends a lot of. That's what an Accenture looks like or folks like that that are services. That's what law firms look like and accounting firms. So pal volunteer clearly as late as 2019. Right. Well over 15 years after founding was deep down a services firm in many ways that building software. But customs are for services. But then they switched that. They switched that switch and going into the beginning of 20 they went up to 40% gross margins. Then as they hit just before IPO, they're at 55, 55% gross margins is. That's where Twilio is. So that's kind of the low end of what we call software. At some point, gross margin should be high because you just ship more and more bits. But 55% is good enough. 55% gross margin says you're a software company, not a services business. But it wasn't until 2020 that Palantir really became a software company. So maybe be who you are. If you want to do a lot, don't be scared of services. A lot of startups run away. They want to be all software. Or on a related point, until recently, a lot of software companies wanted to sign annual contracts and not have consumption based contracts. But be who you are. Be who you are. Snowflake, which we'll talk about next and last, is almost all consumption based. MongoDB found that even in its enterprise company customers, it was easier to start monthly than with annual contracts. Twilio has done a great job starting off on consumption based contracts for many of its customers, even as larger ones. So be who you are, and then just as you grow, you can converge on a traditional software company if you need to. And that's what Palantir did. It took its time. It took about 16 years to become a 55% gross margin software company, but it pulled it off. And it's a company worth about $40 billion today.