Tech

The CIA-backed start-up that's taking over Palo Alto

Palantir invades Palo Alto
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Palantir invades Palo Alto

Downtown Palo Alto, the heart and soul of Silicon Valley and former home to Google, Facebook and PayPal, is slowly turning into a scene out of "Lord of the Rings."

Palantir Technologies, a highly secretive software developer whose name is derived from a magical crystal ball in J.R.R. Tolkien's fantasy novel, has been gobbling up real estate in the upscale home of Stanford University, and — according to critics — uprooting a vibrant start-up ecosystem in the process.

Unlike its start-up predecessors, which outgrew the cramped streets of Palo Alto and moved to more traditional corporate campuses in nearby Menlo Park and Mountain View, Palantir is intent on staying put and expanding. The company controls about 250,000 square feet of office space, or 10 to 15 percent of the commercial inventory, spread over 23 or so buildings. Some of its leases are for a decade or longer.

Alexander Karp, co-founder and CEO of Palantir Technologies
7. Palantir Technologies

Palantir's logo featuring a circle above a wide lower-case v is everywhere. T-shirts sporting the company's motto "Save the Shire" (referring to the home of the hobbits in Tolkien's Middle-earth) can be seen in coffee shops, at parks and on treadmills.

"There's more Palantir paraphernalia in downtown Palo Alto than there is Patagonia," said Peter Hebert, co-founder of venture firm Lux Capital, which left for Menlo Park late last year because there was nothing available in Palo Alto. "There's such scarcity that it's pushing everyone else out."

Asking rents for commercial space are $121 per square foot annually, more than triple the national average, according to commercial real estate firm Jones Lang LaSalle. Prices have about doubled in the past five years, and according to Jones Lang the vacancy rate sits at 1.5 percent.

Palantir's rates vary because many of its leases were signed when prices were substantially lower. Not that it's strapped for cash — the company has raised close to $2 billion and is valued at $20 billion. It also subleases some of the space to smaller start-ups.

`Save the Shire'

Palantir t-shirt.
CNBC

The Palo Alto residential market is equally tight, with the average four-bedroom, two-bath house listing for $2.1 million, making it the second most expensive city in the U.S., according to Coldwell Banker. Palantir CEO Alex Karp lives in the neighborhood.

Meanwhile, fast-growing start-ups are leaving town and younger companies are choosing to set up shop elsewhere. Online financial services provider Wealthfront, unable to find suitable space to grow in Palo Alto, moved five miles north to Redwood City, as did smartwatch maker Pebble.

"Spaces becoming available were requiring 10- to 15-year leases, which for a start-up is a tough nut to swallow," said Ashley Fieglein Johnson, Wealthfront's finance chief. In moving to Redwood City, Wealthfront upgraded from a 9,500 square foot office to one more than twice that size.

While emerging companies bid adieu, Amazon.com, through its A9 search division, has become Palantir's principal competitor for space. The company recently won the bid for SurveyMonkey's 50,000-square-foot office, about the same size as A9's headquarters across the street. SurveyMonkey is relocating to a bigger facility in San Mateo.

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Jeff Clavier, a prominent venture investor in early-stage start-ups, moved his main office from Palo Alto to San Francisco because of a lack of investment opportunities. His last Palo Alto-based start-up, marketing software developer Kahuna, left Palo Alto in late 2015 for a 42,000-square-foot space in Redwood City.

"Start-ups cannot compete against Palantir and sign super long leases at top dollar," said Clavier, founder of SoftTech VC. "Now, you just have a bunch of Palantirians hanging out in P.A. There's nothing wrong with that except it once had a vibrant start-up community and that's gone."

A Palantir spokesperson declined to comment for this story.

Everything about Palantir is unique. Founded in 2004 by a group of ex-Stanford students including Karp, Joe Lonsdale and PayPal co-founder Peter Thiel, it's the most valuable venture-backed start-up focused on selling to enterprises.

Inside Palantir

Palantir is notorious for its secrecy, and for good reason. Its software allows customers to make sense of massive amounts of sensitive data to enable fraud detection, data security, rapid health care delivery and catastrophe response.

Government agencies are big buyers of the technology. The FBI, CIA, Department of Defense and IRS have all been customers. Between 30 and 50 percent of Palantir's business is tied to the public sector, according to people familiar with its finances. In-Q-Tel, the CIA's venture arm, was an early investor.

Annual revenue topped $1.5 billion in 2015, sources say, meaning Palantir is bigger than top publicly traded cloud software companies like Workday and ServiceNow. It has about 1,800 employees and is growing headcount 30 percent annually, said the sources, who asked not to be named because the numbers are private.


Small homes sell for big bucks in Palo Alto

Still, Palantir has no interest in opening a conventional campus. In late 2015, it signed a more than 10-year lease for about 37,000 square feet at 261 Hamilton, an 89-year old edifice that's listed in the National Register of Historical Buildings. Two blocks away is Palantir's headquarters at 100 Hamilton, where it moved in 2007.

The company is also in Facebook's old principal office on University Avenue. And slightly offset from the center of downtown it has the lease on a 4,370-square-foot historical building known as the "jewel box" because of its fancy interior finishes.

"They're a great company and we think they'll be here for a long time," said Chase Rapp of Rapp Development, which owns over two dozen Palo Alto properties, including 261 Hamilton and 167 Hamilton, another Palantir building.

Rapp, who