What Matters the Most in VC: Information
“The truth is incontrovertible. Malice may attack it and ignorance may deride it, but in the end, there it is.” — Winston Churchill
Palantir, founded in May 2003 by Alexander Karp (CEO), Peter Thiel and others, is a technology company that offers software applications designed to integrate, visualize and analyze data and combat fraud. Palantir’s story is a typical startup fairy tale.
The company has raised over USD$2.6 billion in funding in 32 rounds of capitalization (Crunchbase). In September 2020 it held its IPO, registered under the NYSE ticker: PLTR. Today its market capitalization value is about USD$43bn.
Although its early years were difficult, after 2010 its expansion began. After having discovered two Chinese espionage networks, they proved that their technology was capable and very different from anything on the market up to that point.
In July 2006, Palantir raised its Series A for USD$7.5mm through Oakhouse Partners. At that time the company was at an early stage, the product was in a development process and they did not have significant traction yet, so the VCs’ investment decision was based not only on the opportunity, but mainly on the team.
At the end of 2006 the company raised its Series B for USD$10.5mm and in February 2008 a Series C for USD$37mm.
Within its expansion period, it began to have significant clients such as the US government, who was invoiced in 2011 close to USD$250mm. This allowed Palantir to access the Series D in July 2010, raising USD$90mm and having Founders Fund as a leader. Palantir’s latest round of capitalization was in July 2020, raising USD$550mm from corporate investors.
Palantir’s story shows us the life cycle of a startup and the importance of accessing different types of information when making investment decisions.
a. Entrepreneurs (Pre-seed and Seed)
In pre-seed and seed stages, knowing the founding team and their motivations is fundamental. For example, Palantir is a company that was born with the mission of reducing terrorism while preserving civil liberties. Its founder took the previous experience in PayPal and its antifraud technology as a basis to start this new company.
b. Financial Metrics (Projections and Actual Metrics)
Once the company develops the MVP, it goes to market to win customers with the goal of establishing a use case by generating traction. This can be measured through the number of customers, sales, transactions, among others. In the case of Palantir, its technology is focused on governments, financial institutions and large corporations, so its growth was slow. However, gaining traction was fundamental to continue its development.
c. Business Model (Visionary and Competitive)
At the beginning, entrepreneurs face the challenge of raising capital, as investors sometimes have a hard time understanding the business model, the disruptive dynamics and the vision of the market in the medium/long term. While, at more advanced stages, investors have more comparables in the market that can complement the market vision and give more reference on what the entrepreneur wants to achieve. However, having more comparables will require better differentiators between similar startups to access capital.
d. Competitors (Differentiators and Barriers to Entry)
In earlier stages it is usually more complicated to identify a startup’s competitors. However, as the startup advances, new competitors emerge against which it can be measured. This is where the entrepreneur must highlight its competitive advantage and barriers to entry when attracting investors.
e. Market/Industry (Large, underserved and growing)
One of the elements that every investor should have in mind is the market and industry sector. Usually the market is large, underserved and with great growth potential. It must be remembered that sometimes startups create new markets that do not exist, that is where the investor requires a great vision to figure that future market. In the case of Palantir, some Venture Capital funds let the transaction pass without investing, since in the early stages of investment it was more difficult to see the degree of development of the market in response to the startup’s proposal.
f. Deal (Valuation from less to more relevant)
As a start-up progresses, valuation becomes more realistic. At the beginning, valuation is very subjective and depends on external factors such as the industry, the market, technological progress, in short, on elements that entrepreneurs do not control. However, in more advanced stages, this valuation is more and more dependent on the company’s own performance, and therefore reflects its value more objectively.
“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” — Isaac Newton
Why does each element matter more or less per stage?
As an entrepreneur, in the beginning, you will realize that there are many elements to cover when raising capital. By considering how an investor processes information, you will be able to invest more time in the preparation and detail of the information presented according to what is most relevant for each stage.
As an investor it is important that you explain in detail what you are looking for in each investment opportunity so that you attract only those projects that truly align with your investment thesis.
Information is the most valuable element in decision making.
“There is nothing so powerful as truth — and often nothing so strange”. — Daniel Webster
Hector Shibata Salazar, adjunct Professor at EGADE Business School and Director of Investments and Portfolio at AC Ventures Fund
Ana Maury Aguilar, VC Investor at AC Ventures
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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