CIA into venture capital
September 28, 1999
BY JOHN MARKOFF
© Copyright New York Times
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The CIA, hoping to ensure that the nation's spies have the latest
information technology in the rapidly changing Internet age, has established
a venture-capital company to nurture high-technology companies, company
executives and former CIA officials said. The CIA has chosen a veteran
Silicon Valley software executive to head the effort, which has an office in
Washington with eight employees and will have a second office in Silicon
Valley.
With a nod to nostalgia for the mythic gadget-laden spycraft of the James
Bond era, the agency has named its new non-profit venture In-Q-It, in a
reference to Major Boothroyd, a.k.a. Q, the master technologist whose
basement laboratory develops advanced gadgets for the fictional British
super-agent. It will be headed by Gilman Louie, an executive in the Hasbro
toy company's online business group. The decision by the nation's spy agency
to turn to Silicon Valley for technology assistance underscores the growing
diversity of high-tech companies and the accelerated development of computer
technologies. Unlike the Cold War period, when the most advanced
technologies trickled down from a handful of supercomputer companies,
increasingly the most powerful technologies are being developed first by
consumer electronics companies that now have vast markets to finance the
developments of powerful systems and applications. In-Q-It is being financed
with $28 million appropriated last year by Congress as part of the CIA's
budget, which is classified. The new company will seek out joint projects
and investments in key technology areas the agency is interested in. ``There
is a tremendous information explosion today,'' said John McMahon, former
deputy director of the CIA and an In-Q-It board member. ``As a result, the
agency was always one step behind. The agency got the idea that maybe what
it needed was something that would not only appreciate its needs but be an
umbilical cord that was plugged in to the brightest minds in the valley.''
Louie said Tuesday that the purpose of the new company would be to move
information technology to the agency more quickly than traditional
government procurement processes allow. He said the agency was struggling
with many of the same aspects of the Internet that are vexing to other Web
surfers, including privacy and security.``The current model isn't working,''
Louie said. ``The technology world has totally changed, and one day the CIA
woke up and realized they needed to go through the same change.''
Areas of concentration
The new company will supply venture capital in some cases, and in others it
will hire contractors or partner with entrepreneurs in four areas:
integrating Internet technology and applications into the CIA's work;
developing new security and privacy technologies; nurturing data mining
technologies to take better advantage of the agency's vast storehouses of
records; and modernizing the agency's now-dated computer systems.
Louie said that none of In-Q-It's work would be classified and that the
organization would not be limited to the four major areas he outlined. He
added that in contrast to many of its other activities, the agency was
taking pains to make the activities of In-Q-It highly visible and public.
That stands in striking contrast to the agency's approach to high-technology
projects in the past. For many years there have been reports that the U.S.
intelligence community created shell companies when it had a particular
high-technology problem to solve. The CIA worked secretly with Howard Hughes
during the 1970s when it needed to develop specialized salvage technology to
retrieve a sunken Soviet nuclear submarine in the Pacific Ocean. While
In-Q-It will operate on a non-profit basis, Louie said his intention was to
invest in such a way as to make the organization ultimately self-sustaining.
``Hopefully we'll knock the cover off the ball,'' he said. ``That's exactly
what we want.''
Jeffrey H. Smith, the new company's legal counsel and former general counsel
to the CIA, said, ``The government will have the opportunity to use the
intellectual property developed by In-Q-It for governmental purposes, but
In-Q-It will own and have the ability to use the technology it develops for
commercial purposes.'' Louie said that while this was not the first effort
to find innovative ways to move new technologies quickly to the government's
needs, he believed it was the first time a government agency had adopted a
venture financing effort that mimicked a private sector model.
Venture capitalists said Tuesday that the problem the CIA faces is a
challenge faced every day by large organizations generally: attempting to
keep up with the nimble pace of the valley's technology start-up companies.
A number of large multinational companies have in recent years set up
investment funds in the valley in an effort to tap into the entrepreneurial
spirit of the region. ``There are a number of models on which the jury is
still out,'' said James Breyer, managing partner of Accel Partners, a Palo
Alto-based venture firm. Companies like Lucent Technologies Inc. and AT&T
Corp. have become venture investors in the valley in recent years, he noted,
and SRI Research International had less success in attempting to spin out
its research projects with an internal venture arm. ``The most important
aspect is to have an outstanding outside management effort overseeing the
process,'' he said. ``It appears in this effort the CIA has chosen well.''
Earlier efforts
Previous government efforts at financing technology have been highly focused
efforts to promote the development of specific technologies either needed to
keep the nation competitive or to meet national security needs. For example,
during the 1970s through 1990s various military research agencies like the
Defense Advanced Research Projects agency and the Office of Naval Research
financed academic and corporate projects not as investments but as contract
research. In the early 1990s the government financed the Sematech computer
consortium in an effort to maintain an independent semiconductor equipment
industry in the United States, which was being threatened by Japanese and
European competitors. Louie, 39, said Tuesday that he would work on both
coasts and was now looking for an office in Silicon Valley. He said that he
had become involved in the new company accidentally after meeting a
headhunter from Heidrick & Struggles at a mock-aerial dogfighting contest
earlier this year. Louie is a lifelong computer gaming aficionado who a year
ago sold Microprose, his Alameda-based computer gaming company, to Hasbro.
He has been a well-known figure in the Silicon Valley software world since
creating his first computer gaming company while he was a student at San
Francisco State University in the early 1980s. Among the new company's board
members are John Seeley Brown, director of Xerox Corp.'s Palo Alto Research
Center; Lee Ault, director of Equifax Alex Brown; Stephen Friedman of
Goldman Sachs; Norm Augustine, chairman of Lockheed Martin Corp., and
William Perry, the former secretary of defense.