Private equity firm acquires controlling interest of Santa Fe's Descartes Labs

·7 min read

Aug. 4—A New York private equity firm has acquired a controlling interest of Santa Fe's homegrown tech startup Descartes Labs — a move described as "a fire sale" by one company founder.

Antarctica Capital, which has offices in London and Mumbai, India, announced Thursday the takeover of Descartes Labs, with Antarctica's operating partners, Richard Davis and Graeme Shaw, named as the company's CEO and chief operating officer, respectively.

In an interview with The New Mexican Thursday, Shaw did not disclose the terms, price or how much of the company other than "a controlling interest" was acquired. The sale closed at the end of July.

Private equity firms installing their own executives at acquired companies is a common long-term strategy to spin off the company at a higher value, said Chris Erickson, economics professor at New Mexico State University.

"Part of what private equity firms do is provide management expertise," Erickson said. "'We can manage the company a lot better and create value.' They're sacrificing short-term cash for longterm valuation."

The move was slammed by Mark Johnson, a Descartes co-founder and the company's first CEO until January 2020. He wrote a 5,170-word "Requiem for Descartes Labs" upon hearing about the company's sale.

"Even with almost $100m[illion] of invested capital ... [more than] $200m in total going into the company (revenue+investment), ending 2021 with over $17m[illion] in revenue, and multiple 8-figure government contracts, the company was sold in a fire sale," wrote Johnson, who now is CEO of Omaha-based GrainBridge, a joint venture between food processor ADM and agricultural giant Cargill.

"Writing that sentence is absolutely shocking to me," Johnson continued. "How is it possible that a company with an incredible team, so many successes, so much revenue, and so much invested into the underlying technology could possibly be worth close to nothing?"

Shaw declined to speak on the financial state of the company.

"We've been watching the company for quite some time, for the better part of a year," Shaw said. "We really like the company. We like the industry. We want companies that (have) growth opportunity. Overall, the team is very motivated. I've rarely come across a team more motivated."

Descartes was established in 2014 in Los Alamos as a spinoff company from technology developed at Los Alamos National Laboratory. The firm creates technology for satellite imagery analysis and performs scientific analysis of geospatial, remote sensing and diverse complementary data sets.

Since 2019, Descartes has had one the fastest supercomputers in the world, in June listed as No. 52 in rankings by the Top500 Project, which monitors the world's supercomputers.

Descartes has been a company on the move, literally, since Los Alamos scientists set up its initial headquarters in a small office on Central Avenue in Los Alamos before moving to a small adobe on East DeVargas Street in Santa Fe.

Descartes briefly spent time in a space above a gallery in the Santa Fe Railyard before acquiring a 10-year lease and with much publicity moving into 18,000 square feet of the Firestone Building at Alameda and Guadalupe streets in 2018. Renovations at Firestone were funded in part by a $700,000 Local Economic Development Act grant from the state Economic Development Department plus $100,000 from the city of Santa Fe.

But Descartes Labs abandoned the Firestone Building in the early months of the coronavirus pandemic in 2020 and employees worked remotely. Los Alamos National Laboratory took over the Descartes lease and space in February 2021 and now leases 28,000 square feet in the 34,119-square feet-building.

Meanwhile, Descartes Labs regathered in person in Dec. 7, 2021, in a 3,200-square-foot space above Second Street Brewery at the Railyard. At that time, Descartes had 105 employees overall, with 30 in Santa Fe and the remainder working remotely in places in places like Denver, New York City, San Francisco, Austin, Texas, and Minneapolis.

But all was not rosy with Descartes, Johnson claimed.

"Our investors wanted us to be a SaaS (software as a service company) with SaaS metrics and SaaS growth," Johnson wrote. "We simply were not. We should have structured our entire business around being a high-end consulting company."

In 2015 and 2016, Descartes software was developed to build a corn-yield forecast, and it entered into a partnership with major agriculture company Cargill to create better models for that firm's agriculture supply chain business.

"The problem was that we hadn't built any products yet," Johnson said of the state of Descartes in 2017.

Johnson characterized his departure as Descartes CEO in January 2020 as getting "fired." At the time, the move was characterized as Descartes reaching a maturity while Johnson's specialty was startups. He stayed on as executive chairman but was booted from Descartes at the end of 2020.

"I only got a trickle of information from October 2021 until April 1, 2022, when I received a phone call from an angry board member," Johnson wrote in his requiem. "The company was about to run out of cash, hadn't billed a single penny against a massive government contract ($112m!) we had won, had missed numbers every quarter, and was burning an astonishing $2.3m[illion] each month. Even worse, I was informed that the acquisition process had been botched and it seemed like the company didn't have any options."

Descartes now has 90 employees, but only 17 remain in Santa Fe. The company has people in about 16 states, Shaw said.

"We are a 100 percent remote company," said Shaw, who is based in Brooklyn. "Santa Fe is the only office space we have. (But) very few employees use the office on a daily basis."

Shaw said the official Descartes corporate headquarters will remain in Santa Fe.

Private equity firm acquisition of technology companies have seen massive growth in recent years, said Reilly S. White, associate professor of finance at the Anderson School of Management at the University of New Mexico.

"They try to find companies that might be undervalued or were not managed well," White said. "If we're considering this from the position of a fire sale, they could restructure the entire operation of the company to boost the long-term profitability of the company."

Antarctica invests in digital infrastructure, new space, data analytics, transportation and logistics, infrastructure-related business services, energy transition, real estate and insurance.

It also invests in private markets. Descartes Labs has been a privately held company that has not disclosed annual revenue other than once acknowledging it was more than $10 million. Johnson indicated revenue has been as high as $20 million.

"Antarctica Capital has a strong institutional commitment to the geospatial and data analytics sectors and Descartes Labs will be very complementary to our other portfolio companies in these sectors," Chandra Patel, Antarctica's managing director, said in a news release. "We are committed to maintaining Descartes' current business, while also providing the necessary capital and expertise to ensure the company's growth."

Davis and Shaw have operated as a team since 2009. Davis has an MBA from the University of Virginia Darden School of Business and a bachelor's degree in astrophysics from the University of Minnesota. Shaw has doctorates from Massachusetts Institute of Technology.

"This one is one we are particularly interested in," Shaw said about Descartes. "It's mostly a full-time job."

Johnson in his requiem elaborated on Descartes producing products, but struggling to sell them. Shaw zeroed in on increasing sales as a priority in this new era.

"We are executing on the customer product," Shaw said. "We are not trying to restructure the company. They need capital and they need some management to grow. They are very science-based. We need to deliver product we already developed."