"The Company's Company"

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Posted by Lilly from ? ( on Wednesday, October 02, 2002 at 7:33PM :

In Reply to: Supplement #1 posted by andreas from p3EE3C235.dip.t-dialin.net ( on Wednesday, October 02, 2002 at 1:10PM :

I may have posted this before a while ago... I can't remember. Anyway, I read this last year when it 1st came out, before Sept. 11, & it still stuck in my brain.

Scientific American
August 2001

The Company's Company
Venture capitalism becomes a new mission for the nation's spymasters.

In 1998 Ruth A. David, then the Central Intelligence Agency's top science and technology official, came away impressed from a trip to the Massachusetts Institute of Technology's Media Lab. On the flight back to Washington, she remarked to her deputy, Joanne Isham, that the agency could benefit from a high-powered, in-house technology incubator.

The CIA was having a rough time tapping into the information technology revolution, yet it had a pressing need to implement more advanced software tools for tasks such as Internet security to prevent hacker incursions. The agency could no longer rely solely on its traditional contractor base and government labs for the cutting-edge information technologies that would allow it to keep spying on the world. It had unsuccessfully tried a number of internal efforts to take advantage of new technologies. But it often had trouble reaching out beyond the confines of the agency. Security concerns frequently hindered it from detailing its needs to outside suppliers.

George J. Tenet, the agency's director, convinced of the importance of adopting new information technology, gave the green light to David and other agency employees who wanted to try a wholly new approach. Using outside consultants and legal experts, the team began putting together an infrastructure for linking the CIA with the network of investment bankers, venture capitalists and information technology entrepreneurs who turn new ideas into useful products. After much refinement, the CIA created In-Q-Tel, a private not-for-profit venture-capital firm whose funding comes from taxpayer dollars.

The CIA has set up companies before, but they have been primarily undisclosed fronts for secret agency operations, such as Air America, the airline the CIA ran for many years in Southeast Asia. In-Q-Tel is different: the agency acknowledges and promotes its relationship with In-Q-Tel. Company officials like to call the publicly funded CIA creation a “venture catalyst” because it does more than seed start-ups and new technologies. It does, of course, shell out much needed funding. “No one comes to us not looking for our money,” says Christopher Tucker, the company’s chief strategist. But In-Q-Tel also acts as a buffer between the agency and the information technology community. It offers the expertise of a group of people who have spent a great deal of time thinking through the particular problems the agency confronts.

The CIA requires a series of target technologies: software for Internet security – threat detection and eradication of hackers who pry into its databases – as well as information management, network security access, and the searching and indexing of open-source documents, just to name a few. But the agency’s insular culture keeps it from acknowledging that existing systems may be deficient. And security is always paramount. Just getting a list of technology-related needs on paper was difficult. Doing so, Tucker says, “was a real watershed event, and then having it articulated at a level of abstraction that allowed for making it unclassified was another watershed event, because all of a sudden you can actually talk to industry.”

The CIA has In-Q-Tel working largely in the public realm, a strategy that has kept security issues to a minimum; very few of its 36 employees have security clearance. An in-house CIA office called the In-Q-Tel Interface Center provides guidance on agency needs and candidate technologies. “Without the interface center,” Tucker notes, “it’s hard to imagine that we’d be able to know anything about [the CIA’s] real needs unless we essentially turned ourselves into an element of the agency.”

To find new ideas and technologies that might be quickly developed and adapted for agency use, In-Q-Tel, with offices in the Washington, D.C., area and Silicon Valley, spends a lot of time doing “terrain mapping” – reviewing open-source information on the Internet or in trade literature. “It’s amazing what you can learn by just doing that,” Tucker says. “It’s also amazing what you don’t get.” In-Q-Tel fills the gap by tracking less visible technologies, doing for the CIA what the agency can’t do for itself. It monitors what it calls “deal flow.” “There are huge amounts of ingenuity out there in that section of the economy.”

For this reason, In-Q-Tel keeps close tabs on a network of other venture capitalists and investment bankers. It supports an outreach program involving traditional investors as well as universities and commercial laboratories. When it comes across a technology that shows promise, it makes sure the company has solid credentials before agreeing to invest. Then, once it signs up a new company, it serves as a conduit between the agency and the technology developers, providing direction but, in many cases, shielding the agency’s plans. As a result, no one talks much about the applications themselves. Tucker says three In-Q-Tel projects have gone into the agency so far, meaning they have been implemented inside the wall of secrecy.

Projects in early stages of development are more aboveboard. A company called SafeWeb is adapting its product, PrivacyMatrix, a 128-bit Internet encryption system, for the agency’s use. SafeWeb entered into a licensing and venture arrangement with In-Q-Tel last year. In exchange for financing, SafeWeb gives the CIA warrants that it can convert into equity later. In the meantime, In-Q-Tel will evaluate PrivacyMatrix, provide the company with advice, and hope that the support will lead to a system that can benefit the CIA.

No one at SafeWeb has security clearance. In fact, says Stephen Hsu, the company’s co-founder and chief executive, the CIA would prefer that SafeWeb know “as little as possible” about how it uses PrivacyMatrix. So far, Tucker says, this kind of arrangement has not caused a problem. Although In-Q-Tel has provided funds to major government contractors, including SAIC, officials have focused from the beginning on technologies and ideas promoted by smaller companies that, like SafeWeb, usually would not do business with a government entity such as the CIA.

Most small entrepreneurial companies, which are not part of the traditional government contractor base, don’t want security clearance or the headaches associated with government accounting and acquisition regulations. With In-Q-Tel, they avoid the red tape that they would otherwise face if they dealt directly with the agency. “We provide them an opportunity to come and play without having to be a government contractor,” Tucker notes.

While Congress keeps its eye on In-Q-Tel, receiving periodic progress reports, the few critics of the company are outnumbered by the many supporters that have emerged. Other government agencies are paying close attention, and some frequently ask for information and advice. NASA, Tucker says, “has been all over us,” probing how a similar arrangement might work for the space agency. The army has gone further than that: in January the service asked its Science Board, a group of outside experts, to look into prospects for venture-capital firm of its own.

In-Q-Tel isn’t having any difficulty finding companies to work with either. According to Tucker, it has evaluated more than 750 companies, about 600 of which have contacted the agency through an Internet Web site. “You’ve got to out the cattle ranchers and the people trying to sell you nuclear bombs and things like that,” he adds. “But then, you get a nontrivial amount of stuff. Some of our more interesting things have just kind of wandered through the door.”

Daniel G. Dupont works edits InsideDefense.com, an independent online news service.

-- Lilly
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