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How the CIA Grows Tech

An inside look at In-Q-Tel

Jun. 17, 2013 - 03:45AM   |  
By DEBRA WERNER   |   Comments
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When scientists at Redlen Technologies invented a new manufacturing process for a specialized semiconductor, they knew the medical industry would be intrigued. The semiconductors, made of a cadmium zinc telluride compound that had been considered impossible to manufacture reliably, could improve the equipment used to pinpoint tumors and expose clogged arteries.

What the scientists didn’t anticipate was all the attention they would receive from government agencies eager to use their semiconductors to hunt for dirty bombs and screen airport baggage. The same features that make the technology useful in medical devices also make it a natural choice for compact, lightweight radiation detectors, said Glenn Bindley, Redlen’s president and chief executive.

In April, Redlen announced a strategic partnership with In-Q-Tel, the nonprofit investment arm of the U.S. intelligence community. In-Q-Tel did not disclose the value of its deal with Redlen or what type of product it hopes to buy.

That secrecy is not too surprising. In-Q-Tel was established in 1999 to give the CIA a window on the type of innovative commercial technologies sprouting from Silicon Valley garages. The “Q” in the organization’s name pays homage to the fictional “Q Branch” of the British Secret Service whose agents supplied James Bond with wristwatch laser cutters and explosive key chains.

But though In-Q-Tel keeps a low profile, as an investment firm operating in the unclassified world, it cannot help but leave a fascinating trail. The company does about $60 million in business per year, records show. And an examination of the firm and its investments cracks open a window on the future of cutting-edge intelligence technology.

Unlike most investors, In-Q-Tel is not hunting for large profits. Its investment strategy is centered on one goal: fostering technology that the intelligence community can use quickly. In exchange for capital, any company that accepts In-Q-Tel funds must agree to provide access to the specific technology In-Q-Tel seeks.

NOT-FOR-PROFIT

Shortly after it opened, U.S. intelligence agencies other than the CIA also began contributing to In-Q-Tel’s budget. In-Q-Tel doesn’t comment on exactly which agencies, how much money they kick in or how it supports individual companies. It will say that since its inception, it has invested in 200 companies, and typical investments are in “the $1 million to $3 million range,” said Lisa Bader, In-Q-Tel senior vice president for external affairs.

Even though it is an arm of the CIA, as an independent, not-for-profit organization, In-Q-Tel must disclose financial information. Its nonprofit tax returns, which are publicly available, are revealing. In-Q-Tel had revenue of nearly $58 million and expenses of about $46 million in 2010. Government agencies contributed $56.5 million to In-Q-Tel’s 2010 budget. Royalties and investment income brought in another $1.3 million. That 2010 return is the most recent available. Due to an extension, it was filed in February 2012. The return states that In-Q-Tel’s U.S. government partners include the Defense Intelligence Agency, the Department of Homeland Security’s Science and Technology Directorate and the National Geospatial Intelligence Agency.

To attract talent, In-Q-Tel offers salaries far higher than traditional government pay. In 2010, Chris Darby, In-Q-Tel’s president and chief executive, earned nearly $943,527 in salary and bonuses. Steve Bowsher, In-Q-Tel managing partner, took home $848,598, according to the 2010 tax return.

It operates under a charter agreement with the CIA that is renewed with annual contracts, but as it notes in its tax filings, “In-Q-Tel is not part of the CIA and is not a government agency.” Unlike government agencies, In-Q-Tel’s charter gives it great flexibility to award grants, sponsor competitions, hand out sole-source contracts and establish joint ventures.

STAMP OF APPROVAL

In-Q-Tel publishes a list of the companies it backs on its website. Even though In-Q-Tel won’t disclose its precise plans for each partner, some of the potential intelligence applications of the commercial technology might raise eyebrows. Sonitus Medical Inc., for example, makes a commercial hearing aid that hides in a person’s mouth and transmits sound through teeth. Bio-NEMS Corp. is working on a battery-powered device to analyze DNA on the surface of semiconductor devices. And 908 Devices manufactures rugged, handheld mass spectrometers to detect and analyze hazardous chemicals down to the parts-per-billion level.

If those companies are hardly household names, other In-Q-Tel partners are better known. In-Q-Tel was an early investor in Keyhole, a company that turned aerial and satellite imagery into visually appealing products. Google bought Keyhole in 2004 and used the company’s products to create Google Earth.

Palantir Technologies is another success story. When former PayPal employees wanted to establish a data-analysis company using their expertise in fraud detection, In-Q-Tel stepped forward.

“In-Q-Tel introduced the early team at Palantir to the intelligence community, which helped us a great deal in understanding their technical needs,” Alex Karp, Palantir co-founder and chief executive, said via email.

For little startups, In-Q-Tel backing often attracts other investors.

“It’s like a Good Housekeeping Seal of Approval,” said Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington, D.C., think tank. “It makes it easier for startups to get follow-on financing and customers.”

For every dollar In-Q-Tel puts into its partners, venture capitalists add more than $9, former CIA Director David Petraeus said in March 2012 at an In-Q-Tel summit for chief executives.

Since it was created, In-Q-Tel has “leveraged more than $3.5 billion in private-sector funds to support technology for the CIA and the intelligence community,” In-Q-Tel said in a statement attached to its tax returns that explains why it should retain its nonprofit status.

Investors find solace in the fact that a startup can pass In-Q-Tel’s due diligence review.

“As you can imagine, the intelligence community does a very good job of checking people’s backgrounds,” said Kim Taipale, founder and executive director of the Stillwell Center for Advanced Studies in Science and Technology Policy.

In addition, In-Q-Tel support signals to the world that there is a government market for a company’s products. To be considered for In-Q-Tel funding, a company has to be focused primarily on serving commercial markets. Even though In-Q-Tel was established by a government agency, it is seeking technology developed for commercial markets that could be modified quickly to meet the needs of intelligence agencies. For those commercial firms, “In-Q-Tel offers entrée to the government market, which improves their chances of selling products and generating revenue,” Taipale said.

FAST-PACED INVESTMENTS

To apply for In-Q-Tel funding, companies don’t have to submit voluminous proposals or compete against longtime government suppliers. Instead, anyone with “cutting-edge technology” and a “top-flight team” is invited to submit a business plan and technology white paper, according to In-Q-Tel’s website.

If that technology offers a solution to an intelligence community problem, In-Q-Tel sets up a meeting. When an agreement is reached, money can begin flowing to In-Q-Tel partners in as little as two to three months, although it usually takes a little longer, an industry official said.

In return, In-Q-Tel gains access to new technology. In-Q-Tel’s industry partners sign contracts to perform specific services. Often, those contracts call on the company to modify one of its existing products and give In-Q-Tel a royalty-free, noncommercial license to test, demonstrate and use that technology.

That speed is intentional. In-Q-Tel was established because intelligence agency leaders realized in the late 1990s that their needs were beginning to merge with those of the private sector. Expanding use of the Internet was forcing banks and corporations to grapple with many of the same problems the government faced, including computer security, encryption and data analysis.

With that growing commercial market, entrepreneurs were coming up with creative ways to help companies manage the flow of information. Government officials recognized that timely solutions to intelligenceproblems were more likely to come from Silicon Valley startups than major defense contractors.

In-Q-Tel is well known in Silicon Valley. Although it’s based in Arlington, Va., it opened a second office in Menlo Park, Calif., within a year of its formation.

“It is important for us to have a presence there because we recognize that our government customers need to be aware of the innovation taking place in Silicon Valley,” Bader said in a written response to questions. “Beyond the technology investments we’ve made in the area, it is important for us to maintain relationships in the startup and investment communities to understand future trends and help keep our partners informed about what’s on the horizon.”

In 2007, In-Q-Tel opened a third office in Waltham, Mass.

CONTROL

Fourteen years after it was founded, In-Q-Tel’s mission is as important as ever because innovation continues to emerge from entrepreneurs and startups, said Gregory Pepus, former In-Q-Tel senior director and now the managing partner of Flex Analytics LLC. One current area Pepus cites: analytical efforts to understand social media. Startups are finding ways to tie what a person “likes” on Facebook to his or her identifying information. Commercial firms use that data for marketing, but it has obvious intelligence applications. (One example, a company called Attensity, which received In-Q-Tel funding, sells analyses of social media like Twitter.)

In-Q-Tel and venture-capital firms often pour money into the same companies, but their goals are strikingly different. Venture-capital firms are looking for impressive financial gains. In-Q-Tel, on the other hand, strives “to further the missions of our customer agencies in the U.S. intelligence community by getting technology in the hands of end users,” Bader said. “In-Q-Tel focuses on ready-soon innovation — technologies that can be delivered in 12-36 months.”

Once In-Q-Tel makes an investment, it works with each new partner and the intelligence agency seeking that type of technology on a plan to adapt the firm’s commercial products to the intelligence customer’s needs.

In-Q-Tel shies away from taking a controlling stake in its partners, preferring instead to pay for product development or a small equity position, industry officials said. Bader declined to comment on In-Q-Tel’s investment approach but said it doesn’t take a voting position on company boards. Instead, In-Q-Tel “will take a board observer role because we strive to act as a partner to our portfolio companies, and it is helpful to be aware of decisions that have the potential to affect our work programs,” she said.

By having a seat on the board, In-Q-Tel gets in on the planning process.

“They don’t come in, take control and tell you what you should develop, but they do show companies the business needs of the intelligence community,” Taipale said.

APPLYING TECHNOLOGY

The process is not necessarily seamless, once In-Q-Tell finds a useful technology. By definition, there’s a risk in all of In-Q-Tel’s investments. If, for example, NGA gives In-Q-Tel $3 million to find solutions to a specific data analysis problem, mid-level and senior-level NGA officials need to take a close look at the technology In-Q-Tel finds and, when warranted, apply it in current and future programs.

“In-Q-Tel can bring in technology and brief the agency, but unless someone is willing to babysit it, things have a tendency to die on the vine,” Pepus said.

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