9 September 2016

THE CIA’S VENTURE-CAPITAL FIRM, LIKE ITS SPONSOR, OPERATES IN THE SHADOWS

By DAMIAN SCOOP
August 31, 2016 

The CIA’s Venture-Capital Firm, Like Its Sponsor, Operates In The Shadows
In-Q-Tel provides only limited information about its investments, and some of its trustees have ties to funded companies

The idea for a CIA-funded venture-capital firm came from former CIA director George Tenet, shown above in 2015, in the late 1990s.

Forterra Systems Inc., a California startup focused on virtual reality, was in need of money and its products didn’t have much commercial appeal. Then funds came in from a source based far from Silicon Valley: In-Q-Tel Inc., a venture-capital firm in Virginia funded by the Central Intelligence Agency.

One catalyst for the 2007 infusion, according to a former Forterra executive and others familiar with it, was a recommendation by a man who sat on the board of the venture-capital firm-and also on the board of Forterra.

In-Q-Tel pumped in cash, Forterra developed some tools useful to the military, and government contracts started coming in.

Like the agency that founded it, the CIA-funded venture-capital firm operates largely in the shadows. In-Q-Tel officials regard the firm as independent, yet it has extremely close ties to the CIA and runs almost all investment decisions by the spy agency. The firm discloses little about how it picks companies to invest in, never says how much, and sometimes doesn’t reveal the investments at all.

Even less well-known are potential conflicts of interest the arrangement entails, as seen in this Forterra example and others continuing to the present. Nearly half of In-Q-Tel’s trustees have a financial connection of one kind or another with a company In-Q-Tel has funded, a Wall Street Journal examination of its investments found.

In-Q-Tel’s hunt for promising technology has led the firm, on at least 17 occasions, to fund businesses that had a financial link of some sort to an In-Q-Tel trustee. In three instances a trustee sat on the board of a company that had an In-Q-Tel investment, as in the Forterra case, according to the Journal’s examination, which was based on a review of investment records and interviews with venture-capital and In-Q-Tel officials, past and present.

In-Q-Tel differs from other venture-capital firms in an important way: It is a nonprofit. Instead of trying to make money, it seeks to spur the development of technology useful to the CIA mission of intelligence gathering.


Tangled connections are endemic in the venture-capital business, where intimate industry knowledge is essential to success. Other venture-capital firms, however, are playing with their own money, or that of private investors.

In-Q-Tel uses public money, to which strict conflict-of-interest rules apply-at least $120 million a year, say people familiar with the firm’s financials. It sometimes deploys this capital in ways that, even if not by intent, have the potential to benefit the firm’s own trustees by virtue of other roles they have in the tech industry.

In-Q-Tel investments often attract other funding. Each dollar In-Q-Tel invests in a small business typically is matched by $15 from elsewhere, the firm has found. That makes the small business likelier to succeed and makes its stock options more valuable for whoever has some.

In-Q-Tel said it needs to work with people who have industry connections if it hopes to find promising technology. Some of its trustees, it said, are so enmeshed in the tech world it would be hard to avoid any ties that might be interpreted as conflicting. Besides technology, trustees come from a variety of backgrounds including academia, national security and venture capital.

“In-Q-Tel put in place rigorous policies to safeguard taxpayer funds, prevent possible conflicts-of-interest and stay focused on developing technology to meet mission requirements,” said a CIA spokesman, Ryan Trapani. “We are pleased that both the In-Q-Tel model and the safeguards put in place have worked so well.”

The firm permits its trustees to recommend investing in businesses to which they have ties, so long as they disclose these internally and to the CIA. Trustees are required to recuse themselves from reviews and votes after such recommendations.

To succeed, “you want a board who knows what the hell they are doing,” said Jeffrey Smith, who helped design In-Q-Tel when he was CIA general counsel and is now its outside counsel, as well as a senior counsel at law firm Arnold & Porter. “This is to some extent a balance, and we know that,” he said.


While serving as an In-Q-Tel trustee, retired Air Force Gen. Charles Boyd, shown above in the early 1990s, suggested it invest in a virtual-reality startup on whose board he sat. Gen. Boyd said he received no compensation from the startup for recommending the investment.PHOTO: UNITED STATES AIR FORCE

In the Forterra case, Charles Boyd, a retired Air Force four-star general, joined the boards of both Forterra and In-Q-Tel in 2006. The following year, In-Q-Tel sank money into Forterra, according to an In-Q-Tel news release at the time. The amount couldn’t be determined.

Gen. Boyd said he made an initial recommendation for In-Q-Tel to invest but didn’t take part in its decision to do so. He said he received no compensation from Forterra for recommending to In-Q-Tel that it invest in the startup.

“It definitely was a win-win from our perspective to have Charles on the board and open those doors for us,” said Chris Badger, who was Forterra’s vice president of marketing. He said there was discussion within Forterra about whether “In-Q-Tel’s funding model was really generating a good benefit for the taxpayer.”

The money from In-Q-Tel and subsequent federal contracts proved insufficient. Forterra failed to attract commercial interest and closed in 2010 after selling off pieces of itself.

The purchaser was another company where an In-Q-Tel trustee served on the board of directors.

Investors in Forterra, including In-Q-Tel, took heavy losses, according to people involved in the unwinding. Gen. Boyd had no personal investment in Forterra, In-Q-Tel said.

He did have nonqualified stock options, according to In-Q-Tel, which said holders of such options didn’t receive anything for them when Forterra stopped operating. Gen. Boyd said the only compensation he received from the small business was $5,000 as it was closing down. He left In-Q-Tel’s board of trustees in 2013.

For the CIA, a captive venture-capital firm is a way to encourage and shape technology development without getting bogged down in bureaucracy.

In-Q-Tel’s beginnings trace to a plan hatched in the late 1990s by George Tenet, then the CIA director, who expressed frustration that access to pioneering technology was held back by byzantine government procurement rules.

Congress approved the creation of In-Q-Tel by agreeing to direct money to the organization, and its funding levels increased markedly in later years.

The venture-capital firm started investing in 2000, in businesses that made satellites, analyzed data, translated languages and stored data, gaining a chance to shape the technology.

In-Q-Tel has at times received funds to invest from other agencies, among them the National Security Agency, the Federal Bureau of Investigation and the Defense Department, but the CIA remains the main source of its funding.

In one case, In-Q-Tel invested in a business that analyzed chemical compounds in carpets, resulting in a method to detect deadly chemicals in Afghanistan and Iraq, said the venture-capital firm’s chief executive, Christopher Darby.

Another time, it put money into a satellite antenna maker, leading eventually to the development of portable satellite antennas that can help troops or intelligence agents communicate in remote locations, Mr. Darby added.

“I’ve been told by our customers that the technology that we’ve delivered has saved countless lives,” he said.

In an example of the financial links some trustees have within the technology world, Mr. Darby also serves on the board of a for-profit tech company.

In-Q-Tel doesn’t invest in that company, which is called Endgame Inc. But the company competes with other firms in its field-cybersecurity-that sometimes seek In-Q-Tel cash. If that happens, Mr. Darby doesn’t take part in reviewing the funding requests, he said.

On the Endgame board, Mr. Darby serves as nonexecutive chairman. He said stock options he receives are “de minimis” next to the roughly $2 million a year he earns as In-Q-Tel’s CEO.

The CIA has reviewed his role at Endgame and signed off on his work there, people familiar with the arrangement said.

Of about 325 investments In-Q-Tel says it has made since its founding, more than 100 weren’t announced, although the identities of some of those companies have leaked out. The absence of disclosure can be due to national-security concerns or simply because a startup company doesn’t want its financial ties to intelligence publicized, people familiar with the arrangements said.

While moneymaking isn’t In-Q-Tel’s goal, when that happens, such as when a startup it funded goes public, In-Q-Tel can keep the profit and roll it into new projects. It doesn’t obtain rights to technology or inventions.


CyPhy Works, led by CEO Helen Greiner, above, developed a surveillance drone useful to the government after In-Q-Tel provided capital to the company. One of In-Q-Tel trustees also sits on CyPhy’s board. PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS

At In-Q-Tel’s headquarters tucked in the back of an office park in Arlington, Va., the lobby is sparse, with three blank digital screens on the wall and an American flag in a stand. Some executives wear jeans, reflecting a Silicon Valley ethos. Its spy-world ties also are evident, in frosted windows and fingerprint scans required to enter certain rooms.

In-Q-Tel’s investments include one made last year in CyPhy Works, a Massachusetts company that produces small surveillance drones.

CyPhy’s board includes Anita Jones, a computer scientist and former Defense Department official. She is also a trustee of In-Q-Tel, appointed in 2002.

Ms. Jones didn’t connect CyPhy with In-Q-Tel, said CyPhy’s chief executive, Helen Greiner. The suggestion to seek In-Q-Tel funding came from another investor. At In-Q-Tel, Ms. Jones stayed out of discussions of whether to invest, the firm said.

After In-Q-Tel put money in, it suggested certain modifications to one of CyPhy’s surveillance drones, a model that can stay aloft for hundreds of hours because it is powered through a microfiber tether. The resulting new drone, called the Persistent Aerial Reconnaissance and Communications, or PARC, is used by the U.S. government and is available for commercial purchase.

In-Q-Tel “could see the military opportunity,” Ms. Greiner said. “They work with their customer base to say, ‘This is what these guys are doing now, but what would be the most useful?’ “

Asked if In-Q-Tel’s investment boosted the value of any stock options held by Ms. Jones, she and CyPhy said in a written statement that “the transaction may or may not have had an effect on the value of options held” by her.

Forterra’s case was the only time In-Q-Tel funded a business that had been recommended by a trustee who was on that business’s board, according to the venture-capital firm. It said that other times when it funded businesses where a trustee was a director, the trustee wasn’t the one proposing the investment.

Connections between trustees and funded companies often are indirect, such as parallel investments by In-Q-Tel and by the primary employer of an In-Q-Tel trustee.

Three of In-Q-Tel’s 12 trustees work for other, larger venture-capital firms. In-Q-Tel has invested in at least 13 businesses in which those other firms already held stakes.

In-Q-Tel trustee Peter Barris is a co-managing general partner at New Enterprise Associates, one of the largest venture-capital firms.

Mr. Barris joined In-Q-Tel’s board in 2006. Four years later, In-Q-Tel invested in a data-storage startup at which New Enterprise already held a stake, a company called Cleversafe.

Mr. Barris didn’t recommend the investment or vote on it, according to him and other In-Q-Tel officials.

A few years later, New Enterprise Associates increased its stake in Cleversafe to 25%, and Mr. Barris joined Cleversafe’s board.

Later still, he was involved in a restructuring at Cleversafe that polished up the data-storage business for a $1.3 billion sale. At the time of the sale in 2015, Mr. Barris was on the board of Cleversafe as well as the boards of two of its investors: In-Q-Tel and Northwestern University.


The idea for a CIA-funded venture-capital firm came from former CIA director George Tenet in the late 1990s.PHOTO: RICHARD ELLIS/ZUMA PRESS

Mr. Barris said that this triple connection was unusual, but that all of the investors’ interests were aligned. “I could argue that In-Q-Tel benefited from [New Enterprise] rather than the other way around,” he said.

Mr. Barris added that on at least three occasions, he has recommended In-Q-Tel look into investing in companies to which New Enterprise Associates had a connection, but In-Q-Tel didn’t invest.

Ronald Gilson, a Columbia Law School professor who has written about governance and venture capital, said In-Q-Tel’s unique semigovernmental model puts it in the situation of needing expert advice while trying to avoid overly cozy financial relationships.

“On the one hand, if you wanted really pristine independence, it means you are going to need people who don’t have commercial ties to the industry,” Mr. Gilson said. “On the other hand, if you have people without any commercial ties to the industry, they are not much use.” 

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