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FEATURE
SILICON SPOOKS - How the CIA turned venture capitalism into a high-tech intelligence tool. + By Art Pine + Illustration By Yajaira Lockhart

The Central Intelligence Agency knew it faced a problem. The institution that had sent cameras into orbit in 1960 and in the 1970s developed an early insect-size drone was, by the mid-1990s, losing its grip on advancing technology. Overwhelmed with documents and data from an exploding Internet, the agency watched as adversaries eroded America’s edge in innovation and as venture capital lured bright graduates toward Silicon Valley start-ups and away from government research labs.

The CIA needed to tap emerging talent and spur development of useful technology, but it risked turning young entrepreneurs off with contracting rules and security clearance procedures. Its solution: Join the VC world. The agency would set up a private, nonprofit corporation — CIA-financed, but not officially part of the U.S. government — to serve as a middleman (and, in some cases, a matchmaker) between Langley’s spooks and Silicon Valley. Staffed with former high-level CIA technology officers who knew what the agency needed, it would provide capital needed to get promising startups off the ground. The name chosen had an Ian Fleming touch – a combination of Intelligence and Q, the fictional technology chief responsible for 007’s flashy gadgetry. In 1999, In-Q-Tel was born.

Over the past 13 years, IQT, as it styles itself informally, has spent tens of millions of dollars spotting and acquiring promising cutting-edge technologies. It seeks first to tap technology that already has proven commercial uses. “Why start from scratch if there’s already a commercial solution that gets you there?” an IQT official says. In those cases, IQT simply pays the firm a fee to license its software to the CIA or another intelligence agency. But often, it’s looking for fellow investors to join in technology development, and in guiding both existing firms and small start-up ventures toward potentially lucrative contracts with the U.S. goverment intelligence-gathering agencies.


Seal Of Approval

From its headquarters in Arlington, Va., and offices in the high-tech enclaves outside Boston and in Menlo Park, Calif., In-Q-Tel both invests in companies directly and tries to leverage its money by persuading private venture-capital funds and large corporations to become the principal backers. Its support for an innovation acts like a Good Housekeeping Seal — an inviting sign that an entrepreneur is likely eventually to win a CIA contract. Venture-capital firms consider In-Q-Tel a partner rather than a competitor, says Mark Heesen, president of the National Venture Capital Association, the industry’s Washington-based trade group. “Actually, they help cut through some red tape that otherwise might be a problem.”

In-Q-Tel prefers to keeps quiet about specific technologies it snags, even though most early-stage development is unclassified. But it’s known to have invested early in Keyhole Inc., whose software for combining satellite images and maps eventually led to the development of Google Earth. It also funded Perceptive Pixel Inc., creator of touch-screen technology; ThingMagic, producer of radio tracking chips; Sonitus Medical Inc., which converted a hearing aid into a two-way radio that can send and receive voice traffic through a tooth; and Analytic Solutions, which designs software to help pinpoint potential criminals online. Other funded technology can enable people to use lasers to manipulate holograms on a computer monitor.

In-Q-Tel also won’t discuss its budget and finances, but the federal tax return that it must file each year as a nonprofit suggests that it receives more than $56 million a year in federal funds — almost all of it from the CIA. This money goes toward operating expenses and a $180 million fund from which In-Q-Tel draws about $35 million a year for investments and fees. In a typical year, the firm will work with 75 to 80 companies.


The company has reviewed 10,000 proposals and funded 180 startups.

In-Q-Tel staffers scout promising technology by staying in constant touch with start-ups, universities, and others in the high-tech community. Over the years, they have reviewed some 10,000 business proposals, which can be sent to the firm’s website (www.iqt.org), and put together hundreds of investment plans involving private venture-capital funds, start-up companies, and, of course, intelligence agencies. In all, In-Q-Tel has brokered deals involving more than 180 start-up companies, usually capping its own stake in each at $1 million to $3 million.

The company typically doesn’t insist on blanket rights to the intellectual property that entrepreneurs create. More often, the investment involves dual-use technology — for commercial users and for the CIA — with separate licensing for each version. In exchange for guaranteeing a government market for new technology, In-Q-Tel demands a seat as an observer on the board of directors of the companies it supports, giving it some influence over products and how a firm conducts business. And it oversees any technological changes that the CIA wants.

IQT loses money on some investments, but reaps a tidy return when a startup succeeds commercially or attracts a deep-pocketed purchaser. Its investments include a credible list of financial successes. Perceptive Pixel has provided the lucrative basis for touch-screen technology for tablets and smart-phones, while Keyhole, Inc., was acquired by Google.

While enabling start-ups to avoid the usual federal contracting hurdles, I-Q-Tel itself is exempt from federal personnel and salary regulations, which proponents say is necessary to attract managers from the high-tech world. President and CEO Christopher Darby, who was an executive of Intel Corp. and several other high-tech firms before joining In-Q-Tel in 2006, gets about $1 million a year in salary and benefits. He leads a corporate management team, and a strategic investment team comprising investors, business executives, financial analysts, and business leaders with experience working for — and dealing with — high-tech companies.

As a nonprofit, In-Q-Tel has an independent board of trustees. They include high-tech executives and academics, among them Anita K. Jones, professor emeritus of computer science at the University of Virginia; Elisabeth Paté-Cornell, chair of the department of management science and engineering at Stanford University; and Charles M. Vest, president of the National Academy of Engineering and president emeritus of MIT.


Persuading Skeptics

By now, In-Q-Tel’s client base reaches well beyond the CIA to include the National Geospatial-Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, and the Department of Homeland Security, which in turn help fund IQT. It has also provided a model for NASA and the Army, which have set up similar programs.

So far, In-Q-Tel has encountered relatively little criticism, partly because its secrecy shields it from public scrutiny and partly because it has avoided scandals. When a newspaper article lambasted its lucrative investment program for staff a few years ago, it scrapped the plan and substituted a less generous system.

And the organization has weathered an initial round of congressional skepticism. An assessment of its business model by Business Executives for National Security, an association of defense contractors, gave it high marks. So did a detailed 2005 case study by Josh Lerner, a professor at the Harvard Business School. The notion of creating a private corporation to bring cutting-edge ideas to the attention of the intelligence community was a “very powerful idea” that has worked well, Lerner says.

A continuing IQT quest is for new ways to manage the immense data stream from the Internet and wireless communications. Intelligence agencies not only collect information but also pick out what matters, analyze it, and share it with those having a need to know. The community’s failure to “connect the dots” is widely seen as a key reason why the United States was caught unprepared by the Sept. 11, 2001, terror attacks. “We sympathize with the working-level officers, drowning in information and trying to decide what is important or what needs to be done when no particular action has been requested of them,” wrote the bipartisan commission that probed the attacks. The explosion of social media adds to information overload. The Arab Spring, for example, generated some 190 million tweets each day.

Looking ahead at the exponential growth of communication, CIA Director David H. Petraeus points to the need for “transformational” devices and software that can be interconnected across the electromagnetic software and sense and respond to what they collect. This means a focus on radiofrequency identification, sensor networks, tiny embedded servers, and energy harvesters—using next-generation cloud-computing and supercomputers that can integrate data from closed societies and provide continuous, persistent monitoring of any place on the globe.

Intelligence agencies will also need more sophisticated cloud-computing technology to handle the fast-increasing volume of incoming open-source data — known as Big Data — and enable the intelligence community to store, process, and later access massive amounts of disparate data using parallel IT systems wherever they’re needed. Finally, all the data will have to be processed faster.

Together, these challenges mean In-Q-Tel’s role has probably never been more important. Addressing entrepreneurs, investors, and technologists brought together for an In-Q-Tel “summit” last spring, Petraeus noted, “Industry’s ability to rapidly prototype new products and get them to market...is a skill that government simply cannot match.”

Message to Q: Find yourself a start-up.

 

Art Pine, a Washington, D.C. writer, covered national security affairs for several major newspapers.

 

Illustration By Yajaira Lockhart



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