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CIA's assistance to startups lauded by venture capitalists By Matt Marshall Knight Ridder News Service Monday, August 13, 2001 What business, you may ask, does the Central Intelligence Agency have getting into the venture capital industry? Congress asked the same question, and last week got an answer: So far, it's been a fairly promising business. The venture fund started by the CIA two years ago in Silicon Valley has made solid progress but needs work to realize its full potential, according to a report by the nonpartisan Business Executives for National Security (BENS). BENS's conclusion is much more favorable than the view held by many of its committee members -- well-regarded venture capitalists, executives, lawyers -- just a few months ago. "I thought I was going to be the guy to come in and can the whole thing," said Howard Cox, a veteran venture capitalist at Greylock Capital, an East Coast firm. Two rosy years ago, at the height of the Internet mania, the CIA opened an office at plush 2440 Sand Hill Road, next to the valley's elite venture capital firms, and began investing in 13 companies. As of June 6, In-Q-Tel, the CIA's independent, nonprofit venture arm, had obtained $80.97 million in funding. In-Q-Tel has invested $38 million in acquiring technology, but only $8 million of that was in equity to startups. Most venture firms are judged by return on investment. However, the panel recognized that the CIA is in it not for the money, but for the gadgets. In-Q-Tel's goal is to get from startups the cutting-edge technology the CIA would not otherwise have, because of regulations and a rigid hierarchy. So the report didn't address market conditions or the major losses venture capital firms are incurring. One panelist, Lawrence Meador, expressed concerns about market conditions, but said he was convinced by In-Q-Tel's model. As a customer of its startups, the CIA can validate security technology and help sort out good ideas from bad. Venture capitalist Cox said he was at first perplexed about In-Q-Tel, thinking that a slow-moving government firm in the venture capital world would be a "total waste of taxpayers' money." But as a member of the BENS panel, Cox said he changed his mind: "I turned around completely on it." He said he recognized the need for the technology, as the best and brightest scientists have abandoned the agency for the lure of stock options at venture-backed startups. Partly responsible for In-Q-Tel's initial success is chief executive Gilman Louie, otherwise known as Q, a reference to the technologist Q in James Bond movies who shows 007 the latest gadgets. ("In" and "Tel" refer to intelligence.) He seems to have impressed the fund's startups. Executives at Mohomine, a security software startup, said In-Q-Tel gave them a particularly tough, deep due diligence process. And Kathy DeMartini, CEO of San Jose's MediaSnap, said Louie has valuable connections and the CIA gives her good feedback as a customer. "It doesn't matter if my phones are tapped," she said. Louie's team has reviewed 750 business plans, and three of its projects have already reached pilot stage within the CIA. "That's solid evidence of success," said Deborah Lee James, chief operating officer of BENS, who previously worked at the Pentagon. However, James also said it's too early to tell whether In-Q-Tel's technologies will prove successful. In one investment, In-Q-Tel has linked up with Silicon Valley's top firm, Kleiner Perkins Caufield & Byers, no easy feat. The company, Graviton, based in La Jolla, Calif., is developing high-tech sensor equipment, including one for an electronic nose on a chip. In-Q-Tel's Louie said he initially met "great pockets of resistance" from within the CIA. But In-Q-Tel gained a few converts after one of its technologies was accepted by the CIA for use during a briefing of President-elect George W. Bush on security issues. Still, Louie is the first to admit that startups want the CIA as a customer, not just for the money. "Government money is the most expensive money you can ever take. There are all these regulations and rules that go with it," he said. The panel's recommendations appeared motivated by a desire to see In-Q-Tel spur reform within the CIA. It called for the CIA to make it easier to implement new technology -- a six-board, 130-step review is now required. It also called for In-Q-Tel to get more access to CIA experts and technology needs. Further, the panel found cultural resistance to In-Q-Tel from within the CIA. The In-Q-Tel budget is viewed "as a burden across the entire agency," the report added. BENS did not examine In-Q-Tel's financial controls, instead relying on an in-house CIA audit and another one done by PricewaterhouseCoopers. Any profits would be shared by In-Q-Tel and the CIA. |
