In 1999, something quite extraordinary happened: the Central Intelligence Agency (CIA) went into the venture capital (VC) business by founding In-Q-Tel, a Silicon Valley VC firm that invested CIA money in tech start-ups with promising solutions to the CIA’s technical problems and needs. That a government organization was going out on a limb by investing tax dollars in venture capital, the most volatile of investment classes, marked a unique chapter in security financing and R&D.
Unlike other forms of investment classes like mutual funds or private equity, venture capital invests in nascent start-ups whose only asset is the potential marketability of their business proposition. Assessing this marketability can be quite difficult. Many of these propositions are so innovative and disruptive by nature that they have very little equivalents in the marketplace to base estimates on. Accordingly, most venture capital investments end up as losses for investors.
However, the CIA’s VC firm seems to be an exception to this observation. After fifteen years of operating from its headquarters in Arlington, Virginia, In-Q-Tel seems to be a success for those who first proposed melding the technical wizardry of Silicon Valley with the CIA’s mandate to defend American interests. Opening a conduit for tax dollars to be invested into new technologies, the benefits will eventually have a positive impact on the average American. An example of this can be seen in Keyhole, a start-up focused on developing 3-D mapping visualization software, which was bought by Google in 2004 to be the cornerstone of their popular online Google Earth application. What many may not know is that Keyhole got much of its seed capital from In-Q-Tel, which consequently earned a hefty return from Google’s acquisition.
Just like Keyhole, In-Q-Tel’s string of successful investments can be explained by its unique nature as an investment firm that straddles the line between the civic concerns of government and the intensely profit driven environment of venture capital. Such a unique nature drives In-Q-Tel towards an investment philosophy that not only emphasizes the potential profitability of a start-up’s product in the consumer market, but also the product’s suitability in meeting the technical needs of the CIA. Thus, this philosophy informs In-Q-Tel’s investment process by including a strategic needs assessment of the CIA’s technical capabilities, in addition to the traditional due diligence and market surveying that private venture capital firms exercise with investment decisions. This process in turn ensures that the start-ups that are lucky enough to receive investment funds from In-Q-Tel will generally have a higher rate of success because of the fact that they will have a ready customer in the CIA.
Such start-ups will not only earn sufficient cash flow to further expand their business, but will also have a selling point to attract other investors who may be attracted to the start-up’s steady cash flow from government procurement. As noted in a 2012 statement by the former CIA director David Petraeus, for every dollar that In-Q-Tel invests in a particular start-up, on average, an additional nine dollars will be invested by partnering private sector venture capitalists. Even with limited amounts of tax dollars, In-Q-Tel has the means to effectively lower the risk for other private venture capital firms to invest in start-ups.
Defence planners at the Pentagon, are actively working to create their own version of In-Q-Tel. However, government agencies tasked with more specific responsibilities, like healthcare or education, have, to their detriment, refused to consider the establishment of their own venture capital arms. Initiatives like In-Q-Tel for the CIA could help in solving policy problems in the public sector. A grave concern for policymakers and the public alike is climate change, with frequent criticism directed to the private sector for its seeming indifference. Traditional methods in getting the private sector to do its part in the global fight against climate change often leads to heavy-handed restrictions and regulations that only create an incentive for business to relocate to offshore operations.
Rather than turning the issue of climate change into a zero sum game between economic growth and environmental sustainability, government could replicate the success of In-Q-Tel by creating a venture capital firm that would search and connect promising green tech focused start-ups to government funds and contracts. Such a policy shift may not only reduce the risk for private VC firms to invest in such start-ups, but may also provide the green tech sector a greater amount monetary and knowledge capital to invest in further development of cheaper green technology for the average consumer.
With the accelerating pace of innovation and information, the means of governing must adapt. The last century of large bureaucratic entities tasked with serving the needs of the people and the economy is increasingly becoming obsolete in the face of a new 21st century environment that demands a greater level of decentralization and specialization. What the example of In-Q-Tel shows is a new way for government to tap the insights of the most innovative places in the national economy, ultimately stoking the fires of economic growth for all.