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Meet The CIA's Venture Capitalist

In 1999, Gilman Louie had what he thought was his dream job. He was the chief creative officer at Hasbro Toys. Remember the job Tom Hanks's character had in the movie Big? That was Louie. "I didn't think it could get more exciting," he says.

Then the Central Intelligence Agency came calling. The mission Louie eventually chose to accept was to head the agency's venture-capital arm, dubbed In-Q-Tel.

The enterprise was started in 1999 as a way for the government to tap into Silicon Valley's tech boom. At the time, businesses were spending millions on new technologies, and startups neither knew how nor particularly cared to deal with the Defense Dept. or intelligence agencies.

BUSY MIDDLEMAN. The CIA wanted to change this and get a window into what engineers were doing. The agency figured the best way to do that was by flashing a little cash. Then the terrorist attacks of Sept. 11, 2001, put In-Q-Tel's mission on the front burner for folks both in the Valley and Washington, D.C. The outfit was flooded with business plans, and its budget and staff increased dramatically -- a necessary step.

On the government side, the lack of communication among various intelligence divisions was painfully obvious, and new technology was needed to solve that. On the startup side, few knew how to deal with the feds. In-Q-Tel was the middleman. "Our deal flow went up by a factor of five," Louie says.

In just six years, the Arlington (Va.) venture, which also has offices in Menlo Park, Calif., has invested in 77 transactions. Last year, it completed a deal about every other week, each ranging in size from $500,000 to $3 million. By comparison, a typical venture-capital firm does about a dozen deals a year.

Many of the startups credit In-Q-Tel for helping them get a foothold in the federal world. "It's hard to be an 18-person organization and have government entities see you as useful," says Jeff Jonas, chief scientist at Analytic Solutions, which IBM (IBM) acquired in January, 2005.

CLOSER SCRUTINY. Jonas' company makes software that helps organizations ferret out corrupt people -- a natural fit for the government, Jonas thought. But he wasn't able to get any traction until In-Q-Tel decided to invest in Analytic Solutions five years ago. After the deal, some 70% of his business was in government contracts -- which helped attract Big Blue's eye.

As In-Q-Tel's investments grow, so does public scrutiny. The venture is always walking a fine line between the public and private sector. Set up as a nonprofit, it invests taxpayer money with all decisions about where to reinvest being made by an independent board of trustees. All of the proceeds go back to In-Q-Tel to fund new companies, but not a dollar moves before copious reports are filed.

Compensating the CIA's dealmakers is a trickier issue. Typically venture capitalists get a salary and a hefty stake in the returns from companies they fund. To be competitive, In-Q-Tel had to do something similar. And, Louie says, having some skin in the game keeps staffers motivated to do the best deals. So from 20% to 40% of an employee's salary goes into a mandatory fund. For every $3 invested in a company, $1 from an employee fund is also invested.

CONTINUED MOMENTUM. The New York Post published a story on May 2 criticizing In-Q-Tel for apparent conflicts of interest resulting from this structure. Louie takes it in stride, though, saying close scrutiny is right when taxpayer money is in question. And he notes that he donates all proceeds from his portion of the employee fund to charity, just to avoid any appearance of a conflict at the top.

Such criticisms haven't been enough to slow In-Q-Tel's momentum as its influence continues to grow within both Silicon Valley and Washington. When Louie started in 1999, he had nine employees and three consultants. Today the firm employs 50.

In-Q-Tel now gets funds from other government agencies, such as the National Geospatial Intelligence Agency, a branch of the Defense Dept. that studies data from satellites. In-Q-Tel's annual budget has increased from roughly $27 million to $60 million. Louie can't give exact numbers because, well, that's classified information.

"LIVES ARE AT RISK."Indeed, now that In-Q-Tel is six years into its venture history, it has seen more of its companies get acquired, while only 10 of its investments have gone under - a pretty good rate for a VC firm. Digital mapping company Keyhole Corp., for example, was bought by Google (GOOG) in October, 2004.

But success is really measured by whether the government adopts the technology. Only a handful of its staffers are actually involved in the dealmaking, while the rest work on vetting the technology and finding areas within the government where it'll fit. "I take this mission personally," Louie says. "Lives are at risk on whether intelligence succeeds or fails."

He's probably one of the few venture capitalists who can say that without hyperbole. By Sarah Lacy in Silicon Valley

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