For Tech's Sake: Can In-Q-Tel's investment model translate into other agencies?
- By Gary Arlen
- Apr 22, 2004
In-Q-Tel would be the Central Intelligence Agency's worst kept secret if the Agency intended it to be a covert project.
But the 4,100 business plans that the CIA's venture capital arm has reviewed ? mostly from young information technology specialists ? and the 61 companies In-Q-Tel Inc. has funded are not supposed to be invisible. Indeed, the In-Q-Tel investment model itself is vividly proclaimed as an alternative approach to developing and acquiring specialized technology ? far different from conventional procurement processes.
Which raises the question: Could the In-Q-Tel process work elsewhere in government technology acquisition?
The private not-for-profit corporation (www.In-Q-Tel.org) is starting its sixth year as a government-funded venture capital firm. Its mission is to identify and finance specific technologies needed by the CIA and now also by the National Geospatial-Intelligence Agency (formerly National Imagery and Mapping Agency). In-Q-Tel has dispensed nearly $150 million to about 60 companies, 35 of which are still in its "active" portfolio. The resulting projects ? mostly intelligence-related ? are used in about 40 government programs.
OnPoint Technologies (www.onpoint.us), funded by the Army, serves a similar function, and a handful of other agencies are, secretively, believed to be exploring similar programs, if they can obtain congressional funding.
So could it work in other agencies?
"Absolutely yes," said Stephen Mendel, In-Q-Tel's managing partner and executive vice president. "But it has to be carefully and thoughtfully done. On the government side, there has to be a commitment and willingness to work with people who are very different than the kinds of people the government has worked with in the past. That's culturally challenging."
Mendel, a veteran Silicon Valley investor with no government services background prior to In-Q-Tel, runs the unit's Menlo Park , Calif., office. He is referring to the relationships that must be developed with small, young companies, which typically do not have experience in government contracting.
"There has to be a commitment," Mendel said. "You have to be willing to let go of control more than the government typically does." He pointed out that the VC approach is not comparable to "dealing with contractors," but rather a "collaborative" relationship between the funding source and the developer.
Mendel said that "throughout government, there are lots of groups looking to engage with the private sector" but that defense and intelligence agencies have been the first to move. With familiar Silicon Valley bravura, he cited the need to "recognize that there's value among the entrepreneurial class, [which] is not a constituency that the government has traditionally contracted with."
How It Can Work
Presumably health care, transportation, education, social services and a slew of other government programs could develop similar alliances, through investment relationships with companies that are creating innovative technologies for the commercial sector. The trick is to find projects that overlap with agencies' needs for solutions. Indeed, In-Q-Tel's early focus was to find early-stage commercial off-the-shelf products that could be adapted or developed for government applications.
Kim Cook, In-Q-Tel's director of technology assessment, pointed to Tacit Knowledge Systems, a Palo Alto software developer (www.tacit.com) and a 2003 In-Q-Tel investment recipient, as typical of its approach. The CIA's objective was to find a collaboration tool, for use in specific research applications. Tacit had been developing software that automatically discovers expertise and activity across large and complex organizations and connects users from undefined groups. These users could then collaborate, share information, and coordinate their activities.
"Rather than doing the mechanics of collaboration, it [Tacit's tool] finds who you want to collaborate with," Cook said. Tacit was already working with companies such as Kodak and AstraZeneca.
Cook said In-Q-Tel looks for technologies used in the commercial sector that overlap with government needs. In that climate, improvements made for commercial clients will "be useful to customers within government," she said.
The approach encourages upgrades to existing commercial products, which means speedier implementation than creating a new product from scratch. It could also lead to spinoff products that are of even greater use to government customers as well as to the technology firm.
"Our sweet spot is identifying companies that are at an early enough stage that we can influence the development of the technology," Cook said, "but developed enough that we can deliver rapidly to our customers" ? i.e. CIA and NGA at this time.
By buying into such companies, In-Q-Tel gets seats on the boards and other insider positions so that it can guide direction and quickly identify problems in the development process.
"Having an equity relationship is very different than a customer/vendor relationship," Cook said. The conventional contractor deal might be strategic, but "it doesn't give you the same insight into the company or the ability to influence the company as an equity role does."
She cited the potential for a company running into financial problem,
"which happens at the kinds of companies we deal with."
"They won't tell [about such problems] if they're a vendor. But as an insider we can identify when things start going bad because we have a board seat.
"We have time to plan the investment into another company so it can survive," Cook said.
She pointed to such a situation at Graviton, which In-Q-Tel funded for its sensor and self-organizing wireless network platform. (In keeping with the commercial crossover process, Graviton had already developed and sold a similar system for remote monitoring of convenience-store refrigerated units.)
When Graviton stumbled, In-Q-Tel stepped in to negotiate the transition of technology rights to SoftLinks, a separate company that has taken over the government-related applications.
One vital factor in In-Q-Tel's funding process is its alliance with the In-Q-Tel Interface Center (acronymed as "The QIC" and pronounced "The Quick"). The QIC is staffed almost entirely by CIA veterans, who can translate specific agency needs into product evaluations and descriptions.
That "gives us a starting point to go out and look for a company doing innovative work" in specific categories, Cook said.
In-Q-Tel's investments range from a half million dollars to $2 million, with most in the $1 million to $1.5 million range. Currently, the total funding (which comes through the CIA appropriation) is $35 million, with returns on investment rolled back into the investment pool.
As other agencies ? at federal, state and local levels ? examine how or if to replicate the In-Q-Tel model, a variety of factors are evident. Most significantly, the funding process must be established ? a sizeable challenge in today's strapped appropriations environment.
Shaking up the traditional contracting and grants structures will face significant opposition. And the fundamental risk-taking nature of venture capital investment doesn't jibe with government funding.
But as research and development increasingly comes from privately funded projects (rather than government grants or laboratories), the need to rely on commercial tools becomes more valuable. The ability to leverage private-sector projects means faster implementation of technology ? rather than awaiting custom-designed tools.
Both Cook and Mendel said the need for internal expertise (such as "The QIC" provides to In-Q-Tel) and for agencies to adopt a mindset that can "nudge products that are 80 percent there" into full implementation.
The positive results that In-Q-Tel has gleaned so far and the quiet effort by other agencies to set up comparable efforts suggest that government venture capital may become a significant part of the public-private collaboration in IT services.
"There has to be a match between the mission and the market," insists Mendel. The process works when "the market is driving the technology" and government agencies are taking advantage of that movement.
In other words, look for more such arrangements. Soon.
Gary Arlen is president of Arlen Communications Inc., a Bethesda, Md., research firm. His e-mail address is GaryArlen@columnist.com