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In-Q-Tel, CIA's Venture Arm, Invests in Secrets

By Terence O'Hara
Monday, August 15, 2005

When inventors James MacIntyre and David Scherer founded Visual Sciences Inc. in 2000, doing work for the Central Intelligence Agency was not in their plans.

The two men had developed software that could monitor and graphically display patterns in complex information systems. A bank marketing executive using the software could determine which online customers were clicking on links to information about home equity loans, then display information about those customers.

It takes no great leap of imagination to envision a CIA analyst using the software, connected into the right databases, to track terrorist activities. But it took In-Q-Tel to make that leap.

The nonprofit organization, funded with about $37 million a year from the CIA, last year made a small investment in Visual Sciences and paid the McLean company a fee to license its software to the intelligence agency. For Visual Sciences, which has 50 commercial customers and has been profitable for two years, it was a way into the federal sector without the bureaucratic hassles required to compete for contracts.

"In-Q-Tel provided a buffer from being a real government contractor," MacIntyre said. "I still don't know how our technology will apply to the CIA."

In the five years since it began active operations as the "venture capital arm" of the CIA, In-Q-Tel's reach and activities have become vast for so small an operation. It has invested in more than 75 companies and delivered more than 100 technologies to the CIA, most of which otherwise would never have been considered by the intelligence agency. Virtually any U.S. entrepreneur, inventor or research scientist working on ways to analyze data has probably received a phone call from In-Q-Tel or at least been Googled by its staff of technology-watchers.

Born from the CIA's recognition that it wasn't able to acquire all the technology it needed from its own labs and think tanks, In-Q-Tel was engineered with a bundle of contradictions built in. It is independent of the CIA, yet answers wholly to it. It is a nonprofit, yet its employees can profit, sometimes handsomely, from its work. It functions in public, but its products are strictly secret.

Over the years, some critics have dismissed In-Q-Tel as a government boondoggle. They have described the firms it invests in ominously as "CIA-backed," as if they were phony companies serving as cover for spy capers.

But in interviews with more than a dozen current and former CIA officials, congressional aides, venture capitalists that have worked with it and executives who have benefited from it, no one disputed that what began as an experiment in transferring private-sector technology into the CIA is working as intended. The Army, NASA and other intelligence and defense agencies have, or are planning, their own "venture capital" efforts based on the In-Q-Tel model.

"On a scale from one to 10, I would give it an 11," said A.B. "Buzzy" Krongard , the CIA's former No. 3 official and a former investment banker. "It's done so well even Congress is taking credit for it."

Yet In-Q-Tel remains an experiment that even its most ardent backers say has yet to prove its full potential.

"In my view the organization has been far more successful than I dreamed it would be," said Norman R. Augustine , who was recruited in 1998 by Krongard and George J. Tenet, who then was director of central intelligence, to help set up In-Q-Tel. Augustine, former chief executive of defense giant Lockheed Martin, is an In-Q-Tel trustee. "But my view is also that it's still an unproved experiment."

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 isoharat@washpost.com.

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