CIA Stealth Venture Fund Focuses on Spy Gadgets Even `Q’ Adores
CIA Stealth Venture Fund Focuses on Spy Gadgets Even `Q’ Adores
By Kambiz Foroohar
Oct. 24 (Bloomberg) — MotionDSP Inc. co-founder Sean Varah was in his office in San Mateo, California, in October 2006 when he got an e-mail from a potential investor. The sender had been cruising technology blog “TechCrunch” and read a posting about MotionDSP’s software, which enhances images from videos and mobile phones. Two weeks later, four engineers flew in to test the program. In April, the startup landed an undisclosed sum.
There’s a twist to this tale: MotionDSP’s investor isn’t a neighboring venture capital firm or an acquisitive company such as Microsoft Corp. or Yahoo! Inc. The money came from In-Q-Tel, the Arlington, Virginia-based VC business of the Central Intelligence Agency, the U.S. spying organization.
“In-Q-Tel allows the CIA a foothold in the Silicon Valley,” says Gregory Treverton, senior policy analyst at Rand Corp., a Santa Monica, California-based public policy institute.
Since In-Q-Tel was founded in 1999, the firm has reviewed more than 6,300 business plans for everything from identity recognition software to nano-sized electronic circuits. Many proposals come in via its Web site. In-Q-Tel has put about $200 million into more than 100 companies, beating traditional VC investors to technologies such as the mapping software that’s become Google Earth.
“One of the most important things about In-Q-Tel is that they’re out there proactively looking for companies,” Varah says. “They have a customer with a high technical standard.”
CIA Gaffes
That customer, the CIA, has had its share of gaffes. The agency failed to predict Iraq’s invasion of Kuwait in 1990, events leading to the collapse of the Soviet Union in 1991 and nuclear arms tests by India and Pakistan in 1998. Recently, the CIA overestimated Iraq’s capabilities in building weapons of mass destruction, according to a July 2004 report by the U.S. Senate Select Committee on Intelligence.
“A series of failures, particularly in analytic tradecraft, led to the mischaracterization of the intelligence,” the committee concluded.
The panel also found the White House had overstated its case in going to war with Iraq in 2003. That war has dented the CIA’s reputation, says Steven Aftergood, a senior research analyst at the Federation of American Scientists in Washington.
“The failures of Iraq have left a lasting cloud over the administration and, by extension, over the intelligence community,” Aftergood says.
Tech Focus
In-Q-Tel itself hasn’t escaped controversy in its eight years as the CIA’s venture arm. Until June, its 55 employees were required to put 10 percent of their compensation into a fund that invested in the same startups In-Q-Tel was backing. The profits became part of their bonuses as In-Q-Tel generated hefty returns.
In 2005, In-Q-Tel sold for $12 million investments that had cost it $1.96 million, according to the latest available tax filings. That raised concern on In-Q-Tel’s board about the fund’s mission.
“This is not about making money,” says Peter Barris, managing general partner at VC firm New Enterprise Associates in Reston, Virginia, and an In-Q-Tel director. “The focus should be on getting technology into the hands of the right people.”
In-Q-Tel has faced turnover among senior managers. It’s on its fourth chief executive officer, Christopher Darby, 48, who joined from Intel Corp. in September 2006. Its first CEO, Gilman Louie, was a video game designer. His background in Cold War diplomacy consisted of importing Tetris, a video game in which players manipulate falling blocks, from the Soviet Union in the 1980s.
Video Games
Louie, who was based in San Francisco during the dot-com heyday, went on to build the flight-simulation game F-16 Fighting Falcon. In-Q-Tel tapped him in 1999 when he was head of toymaker Hasbro Inc.’s interactive unit. Louie quit in December 2005. He says he had started to sound more like a federal employee than a techie. The CIA awarded him the Seal Medallion, an award that recognizes the contributions of nonagency personnel, the next year.
In a world rocked by the Sept. 11 attacks and the U.S. invasion of Iraq, In-Q-Tel’s board sought a leader with better counterterrorism credentials. It hired Amit Yoran, 37, former director of the Department of Homeland Security’s national cybersecurity division, which is charged with protecting the U.S. from Internet-based threats.
Yoran left four months later, in April 2006. He joined Herndon, Virginia-based NetWitness Corp., an Internet security startup, that November. In-Q-Tel then approached Mark Frantz, one of its managing general partners, who’d joined from buyout firm Carlyle Group. He declined and quit two months after Yoran, leaving the spy fund to Interim Chief Financial Officer Scott Yancey until Darby took over.
Entrepreneur/Executive
Darby brings a blend of entrepreneurialism and executive experience. Born in Canada, he became a naturalized U.S. citizen in 2004. He started his career at Northern Telecom Ltd., now Nortel Networks Corp., and moved to Maynard, Massachusetts, as a manager for former computer giant Digital Equipment Corp.’s telecommunications division. In December 1997, he joined Interpath Communications Inc., an Internet consulting firm in Research Triangle Park, North Carolina.
In his two years as CEO, Darby increased Interpath’s revenue to $78 million from $3 million. In 2000, he became CEO of @Stake, an Internet security startup in Cambridge, Massachusetts. When that company was bought by Symantec Corp. in 2003, Darby joined another startup, Sarvega Inc. He moved to Intel after the chipmaker bought Oakbrook Terrace, Illinois- based Sarvega in 2005.
`Problem Set’
“Darby has skill in the corporate area,” says Michael Crow, In-Q-Tel’s nonexecutive chairman, who’s also president of Arizona State University. “He brings an understanding of the relationship between small companies and large corporations.”
At In-Q-Tel, Darby eliminated the controversial employee investment fund. And he switched In-Q-Tel’s focus from taking equity stakes in startups to acquiring technologies to meet the goals the CIA outlines in its annual directive called the “problem set.” The top objectives are fighting terrorism and countering nuclear, biological and chemical weapons, Darby says.
In-Q-Tel is exploring holography and virtual reality in addition to the more mundane practices of searching text and video and translating languages faster and more accurately.
“The virtual world will make it to the intelligence world,” Darby says, seated in a swivel chair in a demonstration lab on the top floor of an 11-story redbrick and glass office building, where he’s surrounded by black Dell laptops and four 6-foot-tall (2-meter-tall) screens.
Spy Chief
In September, In-Q-Tel made an undisclosed investment in Forterra Systems Inc., whose software simulates situations like urban warfare and lets participants place themselves in the action. Darby won’t say what the CIA will use it for.
Silver-haired Darby, dressed in a black pinstriped suit and dark-blue tie, looks the part of a spy chief. He guards his comments during his first interview after taking over In-Q-Tel, occasionally stopping in midsentence. He never says the word CIA; he calls the agency “the customer.”
“The raison d’etre for us is to get the right technology to the community,” Darby says, referring to the CIA and its analysts. “It’s important to look at the customer’s problem set.”
Traditional venture capitalists say they prize a relationship with In-Q-Tel for the firm’s connections to the federal government.
“If In-Q-Tel’s in a deal, it’s like having the seal of Good Housekeeping,” says Ted Schlein, a partner at Kleiner Perkins Caufield & Byers, the Menlo Park, California-based VC firm that backed Amazon.com Inc. and Google Inc.
Opening Doors
Kleiner Perkins and In-Q-Tel got together in 2006 to invest $10 million in San Francisco-based 3VR Security Inc. The company’s software compiles videos from different cameras and produces a timeline of events, allowing a viewer to follow a person as he moves through a building or parts of a city, 3VR CEO Stephen Russell says.
“In-Q-Tel took us around to various government agencies,” says John Herring, CEO of Portland, Oregon-based iMove Inc., another In-Q-Tel investment. IMove’s product combines six cameras into a sphere that monitors in all directions at the same time. “They made introductions and opened doors,” he says. IMove won contracts from the Department of Defense, and its cameras are now used in Iraq.
Hooking up with In-Q-Tel gives VC firms access to its 30 engineers, who have pedigrees from International Business Machines Corp., Intel and other tech giants. And the fact that In-Q-Tel isn’t competing with VC firms to buy young startups that could become the next Facebook Inc. or Google helps ease potential rivalries.
New Mission
“We’ve had lots of meetings with VCs to define the new position,” says Steve Bowsher, whom Darby hired to head In-Q- Tel’s office in Menlo Park, where it shares the Sand Hill Road neighborhood with Benchmark Capital, Sequoia Capital Ltd. and Kleiner Perkins.
“Chris Darby made it clear that we were a strategic investor and not a venture capital group.”
The CIA didn’t always need its own VC firm to stay ahead of the technology curve. During the Cold War, the period from 1945 to ‘91 when the Soviet Union and the U.S. competed for political and economic dominance, the government funded about two-thirds of American research, says Ruth David, who joined the CIA in 1995 as head of the Directorate of Science and Technology.
If the CIA wanted something, it tried to build it in-house or contracted with one of the big aerospace/defense companies such as Boeing Co. or Grumman Corp. The CIA led the development of the U-2 spy plane, which let agents monitor Soviet military and nuclear developments, and the SR-71 Blackbird high-altitude reconnaissance plane, David says.
CIA Cuts Back
After the fall of the Soviet Union, the CIA cut back on spending. President Bill Clinton reduced the agency’s workforce by 25 percent from its 1990 level, former Director of Central Intelligence George Tenet says in his autobiography, “At the Center of the Storm” (HarperCollins, 2007). The agency didn’t have the resources to compete with VC funding for promising technologies. By the mid-1990s, the CIA was drowning in information gathered from the Internet and mobile phones.
The CIA itself was a technological dinosaur in some areas, David says.
“I had to ask for Internet access on my desktop, and it was enormously frustrating,” she says. “Some of the communities hadn’t realized the value of being connected to the rest of the world.”
The West Coast, in comparison, was enjoying a technology boom. VC funding hit $55 billion in 1999 and peaked the following year, at $105 billion, according to the National Venture Capital Association.
Nod to 007
“The agency didn’t know about the developments in Silicon Valley, and tech companies didn’t know what the CIA needed,” says A.B. “Buzzy” Krongard, former CEO of Alex. Brown Inc., who became the CIA’s executive director in 2001. “The CIA is in the information business and needed the latest technology.”
Tenet and Krongard recruited Norman Augustine, then chairman of Lockheed Martin Corp., to create a nonprofit corporation to entice entrepreneurs.
“Bright young people would go to Silicon Valley and get a whole load of stock options,” Augustine, 72, says. “The CIA doesn’t give stock options.”
They called the new venture arm In-Q-Tel, with a nod to weapons designer Q in Ian Fleming’s James Bond stories, says Jeffrey Smith, a partner at Washington law firm Arnold & Porter LLP and In-Q-Tel’s legal counsel. With In-Q-Tel, the CIA got a middleman to meet with startups, especially on the West Coast.
Earrings and Ponytail
“George Tenet said, in effect, I want someone from the Valley, and if he has a ponytail and earrings, so much the better,” Smith recalls.
The board chose Louie, an entrepreneur who was far from the bureaucracy 3,000 miles (4,800 kilometers) to the east. Louie made quick investments into areas In-Q-Tel determined would help the spy agency.
In December 2001, it contacted software company Attensity Corp. just as the Salt Lake City startup was running out of cash. Co-founder Todd Wakefield says he got a call so early he was still in his bathrobe.
“Is Attensity still around?” an In-Q-Tel associate asked. “Yes, but talk fast,” Wakefield said.
Within a week, Wakefield and co-founder David Bean held a conference call with In-Q-Tel engineers to explain their product. Attensity’s text-analyzing software maps every sentence by identifying the subject, verb, object and so on. It can extract common threads in documents, giving the text definable structures that can help analysts detect patterns. After a live demo, In-Q-Tel led a $3.5 million round of funding, Wakefield says.
Data Flood
“Without In-Q-Tel, we would never have approached the federal government,” he says. “Getting the OK from In-Q-Tel helped with commercial clients as well.”
In 2004, appliance maker Whirlpool Corp. signed a contract with Attensity to use its software to parse notes from customer service reps. By looking at words such as leaks, loose, arcing or smoke, Whirlpool can narrow down complaints to determine whether the fault requires a design change or a recall.
Today, the data flood confounding Darby comes in many forms and from innumerable sources. Every three hours, U.S. intelligence gathers enough information to fill the Library of Congress, according to a 2004 report in “Technology Review,” a journal published by Massachusetts Institute of Technology.
One set of information may be in a foreign language that needs to be translated or searched; another may be video that’s grainy and jittery. No single product will meet U.S. intelligence needs, Darby says.
Jigsaw Puzzle
“You invest in all pieces of the jigsaw till you solve the puzzle,” he says. “The customer has a great ability to ingest data, and the problem is to extract value from that data.”
In-Q-Tel’s investment in MotionDSP is one part of its strategy to analyze video. The technology relies on algorithms to capture objects in multiple frames and then replaces lost pixels to reconstruct the original picture in high resolution. In-Q-Tel is looking at video capture, such as the technology offered by Mountain View, California-based Pixim Inc. This software can handle extreme backlight and glare as well as low light conditions, enabling images captured under adverse conditions to be viewable.
In-Q-Tel is also investing in software that enables images to be searched, much like Google sorts through text. In-Q-Tel has invested in Los Altos, California’s PiXlogic, whose software uses visual pattern recognition to look for shapes and angles or facial features. If PiXlogic spots an orange ball on a surveillance tape, a person can program the software to identify orange balls on other tapes.
London Bombings
“It’s important we don’t confuse an orange ball, with, say, someone’s face,” Darby says.
Another part of In-Q-Tel’s video strategy is the 3VR investment with Kleiner Perkins. After the London subway bombings on July 7, 2005, about 1,000 British police spent six weeks sifting through video from 6,000 surveillance cameras, says Russell, who founded the company in his basement in 2003. “With our technology, it’d have taken a dozen guys over a weekend,” he says.
“Our technology would enable a bank to interdict fraudsters as they walked through a bank.”
The new technologies make it easier for the CIA to eavesdrop on phone calls or read e-mails without court approval, says Jim Harper, director of information policy studies at the Cato Institute, a Washington research institute that advocates limiting government. That can send the wrong message about government power, he says.
On Camera
With 3VR, every time someone passes in front of a camera, the software assigns an identification number and establishes a profile based on the geometry of the person’s face. When the face is captured from a different angle or in different light, the software creates another mathematical model. The system can be programmed to recognize faces and to issue alerts once a suspect is spotted.
Darby and Troy Pearsall, In-Q-Tel’s vice president of technology initiatives, are also excited about software from Streambase Systems Inc. of Lexington, Massachusetts. The program lets people review information in real time.
“For organizations that have huge volumes of data, being able to process on the fly is critical,” Pearsall says.
Unlike traditional database programs, Streambase’s reviews data without storing it to a computer disk. “The old school was to capture data for a month, store it and then run a report,” he says.
“The new school is to track it on the wire as it comes across.”
Expansion Plans
Darby plans to expand In-Q-Tel beyond Washington and Silicon Valley with an office in Boston to tap technology startups in nearby Cambridge. He’s also rearranged his technical team to closely follow CIA guidelines. Before, the teams were organized along industry segments. Now, engineers are organized according to the issues they deal with in the CIA’s problem set, which can cross industry areas.
Darby’s efforts are necessary for In-Q-Tel to respond to what the CIA requires and act as its eyes and ears in ferreting out promising technologies, says Stephanie O’Sullivan, the CIA’s director of science and technology. “Darby realizes that we are the primary customer, and he’s making changes to meet our needs,” she says.
Entrepreneurs and venture capitalists see another benefit in dealing with Darby’s crew. MotionDSP’s Varah says In-Q-Tel is a year ahead of other VC firms because its main client has a good grasp of its needs. “They see market opportunities ahead of other VCs,” Varah says.
While that may benefit the companies whose technologies In- Q-Tel is pursuing, Darby will have to ensure the pieces he assembles deliver comprehensive and accurate intelligence. Such a result has eluded the spy agency in the past.
To contact the reporter on this story: Kambiz Foroohar in New York at kforoohar@bloomberg.net .
Last Updated: October 24, 2007 00:08 EDT
http://www.bloomberg.com/apps/news?pid
=20601109&sid=a3MZU8QbAxFQ&refer=exclusive