An unlikely venture capitalist: the Central Intelligence Agency

A decade after the end of the Cold War, the Central Intelligence Agency faces challenges that are no longer as easy to identify or target as combating the spread of Communism. Today, the nation's spy headquarters faces a growing and diverse array of new adversaries-and coping with the benefits and the problems presented by advances in information technology.

But perhaps the most unlikely outcome of the CIA's post-Cold War mission shift was its announcement last month of a private, non-profit venture capital firm underwritten by the agency. Dedicated to funding the development of innovative solutions to let it stay ahead of technology and the unforeseen threats it may pose, the investment arm of the CIA quickly drew both praise and bewilderment.

Former Director of Central Intelligence James Woolsey, who served during the first two years of the Clinton administration, praised the move, saying "I think the agency gets a tip of the hat for being willing to try something new."

House Intelligence Committee Chairman Porter Goss, R-Fla., and other lawmakers involved with shaping intelligence policy say they are supportive of the concept and have encouraged its development. Congress included $28 million in the agency's budget for the creation and initial operation of the firm, called In-Q-It, which is currently based in Washington but expected to open a second office in Silicon Valley next month.

"We've got a technological revolution" going on, Goss said. "The intelligence community needs to be in the forefront of the wave…The easiest way is through a government-industry partnership."

But even supporters of the concept say they are unsure what it will produce, while critics say they see several obstacles to the firm's success, most notably suspicions about its true intentions.

"How are you going to get others to invest in companies that have the appearance of being a front for spies?" said John Pike, director of intelligence analysis at the Federation of American Scientists.

Looking to the future

The idea for In-Q-It, which has been in operation since April, stems from a study aimed at assessing the agency's need in the years to come, according to Gary Smith, the CIA's deputy director for science and technology.

"It was recognized that we needed to be considering departures beyond the usual boundaries in order to be positioned to deal with problems and anticipating them," Smith said. "(CIA Director George) Tenet came up with this idea of setting up a non-profit corporation that could be a bridge to the private sector."

The aim of In-Q-It is to work and form partnerships with information technology leaders in industry and academia on projects that can be of use to the CIA but that also will have commercial applications. The projects will be unclassified and not focused on "spy gadgets," said Jody Westby, In-Q-It's chief administrative officer and counsel.

"The CIA realizes if it is to remain the best intelligence agency in the world it has to have 21st Century technology," said Westby, a former director of information technology studies at the Progress & Freedom Foundation, a conservative think tank in Washington.

She added that the project marks a dramatic shift from the current IT procurement model, allowing the agency to articulate its problems and have In-Q-IT seek solutions to them.

Mining the Internet

The firm's initial focus will be on such areas as use of the Internet, information security and finding better ways of extracting useful information from the mounds of data the agency collects.

For example, the agency wants to take better advantage of the Internet but it needs to ensure that a CIA officer's moves are not tracked while surfing the Internet and to be able to control distribution of information on the Internet, Smith and Westby said.

But the creation of In-Q-It also reflects the evolution of technology development.

In the past, many of the nation's most important advances in technology were developed by or for the federal government-the most notable example at the moment being the Internet. Now, many of the hottest innovations are coming from small Internet startups being funded by venture capital firms with the aim of scoring a big payoff in the stock market.

"At one point, Uncle Sam was the top technology consumer and producer," said Frank Cilluffo, a senior policy analyst at the Center for Strategic and International Studies. "By and large, we've seen a change in that the private sector is driving the train here. I think this (In-Q-It) is an attempt to tap into innovation that they at one time had a monopoly on."

One observer familiar with the process that led to In-Q-It's creation said the agency wasn't necessarily falling behind the technological curve but was instead looking to recapture the "spark of creativity" it once had.

In addition, Smith and others say that it allows the agency quicker way to access new technology than is currently possible under traditional government acquisition methods.

"Some companies would prefer not to develop all the mechanisms that are required to contract for the government" such as the paper work, oversight, auditing and reporting requirements, Smith said. "When you compound that with the security concerns, it can be very different and difficult to work on both sides."

But Smith said the project also is designed to ensure the agency has continued access to talented information technology workers. While it has yet to experience a significant problem, the CIA, like other government agencies, is having a more difficult time retaining and recruiting information technology workers, who are in high demand by private companies that offer better pay and benefits such as stock options.

"There's always been something of an issue in attracting and retaining the talent we need…(In) information technology, the problem has been getting increasingly acute," Smith said. In-Q-It was an attempt "to get ahead of the problem before we found ourselves in a crisis."

Reaction from Capitol Hill has generally been positive, but lawmakers are not yet willing to give their full endorsement. If it works, it could be model for other agencies, Smith and others said.

"Anything we can do to get the intelligence community to be more proactive" is important, said Rep. Curt Weldon, R-Pa., and chairman of the House Armed Services Committee's military research and development subcommittee.

Weldon said he has been unhappy with the both the CIA's and FBI's ability to utilize such tools as data mining, which involves the practice of identifying patterns, changes or anomalies in sets of data. He said he is hopeful the CIA's new venture will address such problems.

"All of us in government will be behind the curve," said Sen. Bob Kerrey of Nebraska, the top Democrat on the Senate Intelligence Committee.

He noted that the threats the United States are evolving and increasingly not coming from "nation states" but from individuals, such as alleged Islamic terrorist Osama Bin Laden.

"Because of the way the CIA operates, it has to be entrepreneurial," Kerrey said.

Potential problems

Despite the initial praise, the Federation of American Scientists' Pike and others see some potential problems with the CIA's approach, such as dispelling the perception that it may be a front for other CIA operations and overcoming the difficulty of trying to compete with other venture capital firms that may have much more capital to invest.

Pike says while he can see why the CIA wants to ensure it does not become a "Mac in a Windows world," he and others argue that the CIA should have taken a different approach to address its need to access innovation more quickly. He suggested creating a CIA version of the Defense Advanced Research Agency, the Defense Department's research and development arm famous for creating what is now the Internet, might be a better approach.

"If I was running it, I would say look, …all the commercial information technology companies are going to spend more," Pike said. "Let's just go out and be a smart shopper and be the first kid on the block and figure out how we can accelerate the infusion of new information technology quicker than anyone else."

Jon Bayless, a general partner with the venture capital firm Sevin Rosen Funds, agrees that the CIA might be better served by coming up with new ways of purchasing technology and contracting with firms to develop solutions for specific problems, than with trying to actually invest in companies.

"What entrepreneurs are interested in doing is building companies that have public value. Having a contract from the CIA might be of more value than having an investment from the CIA," said Bayless, who agreed with Pike that some firms might have a difficult time overcoming initial concerns about the agency's true motives.

He said other companies that have set up venture capital firms in order to get a "window on technology" have encountered problems. Those investment firms inevitably suffer from having divided interests, Bayless said, adding that their true loyalty is to the parent company and not always to the companies in which those firms are investing.

Bayless and Tom McConnell, general partner for the venture capital firm New Enterprise Associates, see another potential problem in that In-Q-It will have to compete with a growing number of other venture capitalists who also are in search of the most innovative and potentially profitable new projects.

McConnell, however, disagrees that In-Q-It's link to the CIA will be a major impediment to attracting partners or entrepreneurs willing to work with the firm. He said In-Q-It would be able to attract interested parties as long as its investments are clearly defined and do not "hamper the company's commercial interest."