In-Q-Tel: How to Keep Your Spies In the Know
Even the CIA needs help with technology. In-Q-Tel is just the solution the spymasters of the world were looking for.
Part 007 gadget master, part nerd, part financier. In-Q-Tel is most commonly known as the venture capital arm of the CIA. Its name comes from a mashup of the word “intelligence” and “Q,” 007’s supplier of gadgets and technology.
In-Q-Tel’s business model is simple: it seeks to help the U.S. intelligence community, through the CIA, keep pace with the private sector in discovering unique technological advancements that serve to find intelligence solutions. More specifically, it looks for enhanced innovation, earlier discovery of relevant technologies, and more direct information on market developments [1]. While In-Q-Tel’s business model shares many similarities with traditional venture capital firms, it differs in important ways. Its primary objective isn’t to maximize return on investment. Rather, it aims to accelerate pseudo-developed technology into businesses that deliver fully useable products to the CIA and, later, the broader market. Consequently, In-Q-Tel rigorously diligences potential portfolio companies to meet CIA objectives, while providing a more in-depth relationship with its portfolio companies through intellectual and financial capital, while also offering the CIA as a beta tester to those companies.[2]
While the original purpose of the firm was to supply the CIA with technological solutions, In-Q-Tel strives to do so with products supported by the competitive marketplace, not government funding. [3] This important distinction ensures that portfolio companies are left to the same commercial pressures as any other Silicon Valley darling, undergoing intense scrutiny and continuous development. Palantir, a Big Data analytics firm, is an example of one such investment. Originally founded in 2004, with the CIA as its first client, Palantir has now expanded its client base to include many notable commercial firms.
In-Q-Tel’s operational structure is key to delivering on its business model:
- Funding: Like all venture capital and investment funds, capital is In-Q-Tel’s lifeblood. While most venture capital firms seek outside investment from limited partners (LPs), In-Q-Tel receives its funding directly from the CIA’s Directorate of Science and Technology, to the tune of approximately $37 million annually.[4] Although relatively small compared to the mega VC funds of Sand Hill Rd, the cash flows are likely to be much more certain each year, and come from one “client”, the CIA, potentially providing more flexibility than a standard VC would see.
- Inherent partnership with the CIA: In-Q-Tel is set up as a distinct corporation and is legally independent of the CIA. Its relationship with the Agency is a contractual one.[5] Having a direct association with the CIA gives In-Q-Tel the guaranteed benefit of having a sophisticated client that dictates what it wants and needs, information In-Q-Tel uses to find solutions to those problems.[6] While other firms in the space spend considerable time and resources anticipating what consumers want, In-Q-Tel has the luxury of dedicating resources to searching for direct solutions.
- Not-for-profit structure: In-Q-Tel is set up as a nonprofit that funnels any profits it makes on its investments back into the organization.[7] The setup allows the firm to concentrate on its primary objective of delivering technological solutions over maximizing profit. Despite the not-for-profit designation, employees are still compensated from their stake in the portfolio company, aligning interests, while keeping pay far above typical government salaries, which helps attract talent.
- Board of Trustees: Guided by the board of trustees, In-Q-Tel creates strategic partnerships with leaders in their respective fields. This includes professors from top engineering schools, partners from top venture capital firms, and lawyers from the best law firms.[8] The confluence of unique perspectives across different, yet relevant, industries, provides insight into different industries and can even lead to potential coinvestments on large deals with other firms.
In-Q-Tel has led to many new solutions. While there remain several questions about the firm’s future viability (e.g., below VC industry average pay, which may lead to a brain drain), the U.S. intelligence community, as well as private corporations and users have continued to praise In-Q-Tel’s role in bridging a gap in technology.
[1] http://www.bens.org/document.doc?id=42 “Report of the Independent Panel on the CIA In-Q-Tel Venture” p. viii
[2] http://www.bens.org/document.doc?id=42 “Report of the Independent Panel on the CIA In-Q-Tel Venture” p. ix
[3] http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1739&context=njilb “In-Q-Tel: The Central Intelligence Agency as Venture Capitalist” p. 696
[4] http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1739&context=njilb “In-Q-Tel: The Central Intelligence Agency as Venture Capitalist” p. 697
[5] http://www.bens.org/document.doc?id=42 “Report of the Independent Panel on the CIA In-Q-Tel Venture” p. xvi
[6] http://www.bens.org/document.doc?id=42 “Report of the Independent Panel on the CIA In-Q-Tel Venture” p. 21
[7] http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1739&context=njilb “In-Q-Tel: The Central Intelligence Agency as Venture Capitalist” p. 698
While In-Q-Tel is interesting and certainly “cool”, the value it provides to target companies comes at a high price to growth.
At the end of the day, In-Q-Tel’s reason for existing is to provide the CIA (and other unnamed U.S. intelligence agencies) with tech so they can ensure all of us are safe. Awesome sauce. But put yourself in the shoes of the company. You’re developing, more than likely, some IT product (although IQT has been doing more and more non-IT investments over the last 30 months or so) and have some early customers – small potatoes but potatoes nonetheless. Your excited about an investment from IQT and having a potential massive future customer with a large checkbook (again, the CIA and other unnamed U.S. intelligence agencies). You’re excited too about the help they’ll give on driving product iterations and maturation. Sounds like a dream come true. So you take the investment. Over time, the customer gives you more and more input – you make strategic trade-offs on how the product evolves so you keep IQT happy and the “suitor” (the CIA and other unnamed U.S. intelligence agencies). Your other investors also are pressuring you to focus on the “suitor” because of the massive payday potential. And the “suitor” often times for IQT companies is by the way hardly ever the CIA (think other intel agencies that have a real need for “IT” stuff) – these people have specific needs.
Fast forward two years. You’ve alienated your original customers-base for a single customer who more than likely is either no longer interested or becoming impatient. As context, most tech projects within the “suitor”‘s purview typically have a couple month expiration date and near infinite budgets – got to keep people safe and money is of minimal importance. Your revenue is drying up from those original customers you lost while you’ve been chasing the government carrot. At best, you got to go raise more money just to keep chasing the “suitor” – who is going to invest in a company with a single customer? Worst case, IQT walks (along with the “suitor” more often than not) and you’re left worse off than when you started.
As a former manager of a government R&D investment initiative, the companies I made investments in and worked with made this same mistake over and over again. They got an awesome idea or product – heck, they might already have some cheddar coming in. But they get overly excited about the investment I’m making in them and convince themselves to focus 99% of their effort on scoring my organizations business. While these are poor business decisions on their part, they’re equally poor precedents set implicitly by said programs like mine and organizations like IQT. Fundamentally, I think government investment in R&D is critical. But I think early investments, pre-revenue, is where the role is best served. Funding to take the idea into and out of a prototype phase, then let traditional funders take over. Otherwise you start skewing the innovation, product development, and go-to-market efforts towards a single customer with a high hurdle to acquisition.
IQT is cool. Simple put. They’re trying to keep us safe. And Norm Augustine, their founder, had only the best intentions in mind when we create IQT. But my thesis is that, on average, IQT will do more to set these companies into a cannibalization process rather than help them grow.
Very interesting post. Given that In-Q-Tel’s business model is accelerating the development of technologies rather than maximizing return on investment, how well have they actually done at delivering on their mission? Does or can the government even track the counterfactual scenario of how fast the technology would have been developed without IQT’s support? For all we know, IQT could be a waste of money.
It also sounds like the interests of the employees are not aligned with the interests of the organization. If the employees earn money based on a traditional VC model, but the company doesn’t operate on one, then it would seem that their is a misalignment in interests. The only factor that could subsequently drive alignment would be the mission or purpose of the organization driving the interests of the employees. But which is a stronger driver: money or mission?
Meant to say in the beginning of my original post that this article was excellent – sorry DG.
I think the IQT model with tweaks could be very powerful. There are other models in play too that I think could be Frankensteined with IQT to actually do some incredible justice to tax payers. But I do also think that the nature of the “suitor” requires solutions that probably only weakly benefit from IQT investments (which are slow compared their timetables typically).
I can’t speak to the employee alignment at IQT, but they face the same challenges every government organization does: is the mission compelling enough to persuade top talent to give up higher pay? My prior organization struggled with the same issue – only it’s getting exponentially harder and harder for that organization. People arguably still resonate with the mission, but they like the mission at other places too, and more and more it seems (e.g. SpaceX, Google[x], etc.)
Great post. While the usefulness of this company to the intelligence community is clear, I think that the operational model is not sustainable in that they operate as a not-for-profit and simultaneously expect that the market will fund their initiatives.
I really enjoyed reading this post and the comments that followed. I would like to know how many of their products have actually gone into production for the agencies. Furthermore, what the impact and degree of success such products showed. It is difficult to assess given the nature of the community, as the most successful products should never be heard about. I guess time will be the real test of the efficiency of IQT to bring new and useful technologies to the intel world.
I wonder if In-Q-Tel, eventhough structured to be a not for profit organization and with the main purpose of ensuring the development of new and innovative products for the CIA, would be more effective to get funding from other sources?
I understand that the 37 million dollars that In-Q-Tel gets from the CIA on a yearly basis is a reliable income and allows the company to be flexible in its choice of investment but it also limits the number of initiatives that it can fund. Wouldn’t be more efficient for In-Q-Tel to open up to the idea of getting funding from other investors? and If this is to happen would investors be willing to give funding to this VC?
Great post. It was well “thought out of”.
I echo Anas’ comments and say that the not-for-profit model is not sustainable for the long run. Why can’t the CIA just acquire Q-tel and merge the two organizations? What value does it have to have Q-tel running as a stand-alone company?