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In-Q-Tel, CIA's Venture Arm, Invests in Secrets
Judging In-Q-Tel by the standards of conventional venture capital funds, it's too small to rank among the major players, yet its financial returns have been impressive.
In-Q-Tel has invested a total of $16.3 million in the stock of start-up companies. That's not much in the world of the venture capital firms it usually co-invests with: Even the smallest venture fund is at least $20 million.
Of the $117.8 million in CIA money In-Q-Tel has spent on tech transfer programs since it began, only 14 percent has been spent on direct equity investments. The rest has gone toward contracts with its portfolio companies to buy licenses and develop technology tailored to specific CIA needs.
Typically, In-Q-Tel spends $500,000 to $2 million on a company with technology of interest to the CIA. But only 15 percent of that is in form of an equity investment.
Yet that venture capital component is vital to In-Q-Tel's mission. Venture investing makes In-Q-Tel -- and by extension the CIA -- a player in the early-stage technology world where venture capital is the currency.
Of the 77 companies in which In-Q-Tel has invested directly, 10 have failed. Its internal rate of return -- the standard measurement for VC funds -- on all of its investments is 26 percent, chief executive Gilman Louie said. That's a very high return. Industry research shows that most venture funds founded since 1999 are in negative territory. But most of In-Q-Tel's investments haven't been cashed out yet, so returns could still go south.
In-Q-Tel has invested in and worked with a computer gaming developer, a company that makes software to analyze huge volumes of voice recordings, data security firms, a semiconductor maker, a firm that designed software for Las Vegas casinos to track relationships between casino customers and employees, and a company whose software can tell you, in less than 10 seconds, how many dangling participles are in "Moby Dick."
Exactly how all that stuff is being used by the CIA and other intelligence agencies is less clear -- and mostly secret.
A study of In-Q-Tel that Tenet commissioned in 2001 said the organization was doing good work but that the technologies it discovered weren't being put to good use by the CIA. It said the agency needed "a cultural change that accepts solutions from the 'outside world.' "
Donald M. Kerr , who was named the CIA's deputy director for science and technology that year, said the problem was addressed by his staff of technologists, known inside the agency as the In-Q-Tel Interface Center, or Quick.
"It's the other essential piece of this," said Kerr, who last month left the agency to head the National Reconnaissance Center, a spy-satellite agency. "Absent Quick, it would be like people throwing ideas over the transom with no one there to catch them. . . . Quick breaks down the barriers to people using new technology and new things."
In-Q-Tel has done well as a venture firm in its first five years, chief executive Louie said, and done well at moving technology into the CIA. "The next five years we have to answer the question, 'So what?'"
The only success that matters, Louie said, is if a technology that In-Q-Tel identifies is directly responsible for saving American lives and "prevents something very bad from happening."
Terence O'Hara's e-mail address firstname.lastname@example.org.