how does the cia do venture capital?

Posted by barello at 2020-04-02

When it comes to the U.S. Central Intelligence Agency (CIA), a mysterious department with a heavy veil, it can always bring a lot of spare time and various talks for ordinary people.

It's like anyone can tell a story or two about a CIA agent, or a few capital letters of "CIA" float in their eyes.

In fact, the world's largest intelligence agency, in addition to sparing no effort to carry out intelligence work around the world, has long been famous for venture capital.

Its investment company, in-q-tel, is the most active and mysterious investment organization in the U.S. security and intelligence sector.

So, if the CIA doesn't do a good job of gathering intelligence, why should it set up an investment company?

1. Original intention: keep up with the innovation wave of the private sector

In the 1990s, after decades of development, the Internet finally has a low and arrogant head and strides to the people.

The birth of the world wide web, the first web page, the first content-based search protocol, the first web-based mail service, the first graphical browser for the public As well as the birth of new enterprises such as Yahoo, Amazon, eBay and Google, it indicates the opening of an era destined to change the future of mankind.

This era is called the Internet era, but also a new era of information revolution.

1995 Amazon Homepage

At this time, the CIA felt a little bit worried about the coming rain, because the organization that had successfully spawned the U-2, SR-71 and corona reconnaissance satellite projects found that the balance of scientific and technological innovation was tilting.

These changes include: entrepreneurial companies are ambitious in the development and application of new technologies; technology, capital and talents are inexorably transferred and converged to the business field; venture capital and IPO are accelerating the explosive growth of entrepreneurial companies in Silicon Valley and other regions.

The CIA is aware that these changes may bring about a risk that can not be ignored: on the one hand, intelligence agencies may not keep up with the pace of technology, and face new information challenges;

And startups with ideas in their heads and cutting-edge information technology in their hands may not understand the CIA's technology needs, so they can't use them All in all, an invisible barrier may block the connection between intelligence department, technology and market.

For this reason, the CIA believes that it is time to make some changes, and the original intention of the changes is to "bridge the gap between the technical needs of the US intelligence agencies and the new progress of commercial technology".

At the same time, if the intelligence agencies want to participate in the ever-changing tide of technological innovation, they need to establish a market-oriented investment department, which can operate in the way that "Silicon Valley", that is, technology start-ups understand and welcome.

It is this kind of forward-looking judgment on technology and market that the CIA has achieved the success of IqT.

2. Organization formation: decision making that can stand the test

The establishment of IqT is not a "brain beating" decision-making, but a long process of research and preparation.

When it comes to the birth of IqT, I have to mention Ruth David, then deputy director of science and technology at the CIA.

She and her deputy, Joanne Isham, recognized that the coming information revolution required a new partnership between the CIA and the private sector and presented a proposal for radical change.

By the summer of 1998, the CIA had assembled a group of entrepreneurial senior employees and authorized them to enrich Ruth David's original concept.

With the help of a consulting team and a law firm, they spent four months in Silicon Valley and other places, and actively listened to opinions from venture capitalists, entrepreneurs, chief technology officers (CTOs), and members of Congress. In the heated discussion and even debate, the original concept has been constantly improved.

By the end of 1998, although the revised plan had changed a lot from Ruth David's original proposal, its core principles were still unbreakable. Now, it's time to give this job to the private sector, because they have the experience and passion to start a company.

At this time, Norman Augustine, the former CEO of Lockheed Martin, a military giant, accepted the challenge, worked hard for IqT's team and became one of its founders.

In February 1999, the CIA officially formed the legal entity in-q-it, and won the first contract of the CIA the following month. In 2000, the organization was renamed in-q-tel (hereinafter referred to as IqT).

3. Institutional positioning: all for national security

Different from general investment institutions, IqT is not aimed at maximizing the return on investment, but as a non-profit strategic investor to develop and provide cutting-edge technology and strategic, comprehensive and task-oriented services for U.S. government agencies based on national security needs.

At the same time, IqT also acts as a technical advisor to the national security department to help them obtain timely judgments on technology and market trends.

From the past investment data, in various fields, IqT is still most concerned about the data analysis and network security technology that is most closely related to intelligence work. This is also in line with its "all for national security" special positioning.

Although IqT was originally set up to meet the needs of the CIA, it is clear that today it has expanded its reach.

At present, about 75% of IqT's investment transactions serve multiple agencies in the U.S. intelligence community, including the CIA, such as the national security agency, the National Geospatial Intelligence Agency, the office of the Secretary of defense / Joint Chiefs of staff, the Defense Intelligence Agency, the FBI, the National Reconnaissance Office, and the Department of homeland security.

4. Focus of work: connecting government, investment institutions and start-up companies

IqT believes that its work is mainly to build a bridge between the challenging technology needs of national security institutions, start-ups and their promotion of innovation, and investment institutions that fund these start-ups.

In short, IqT aims to build a bridge between government customers, venture capital and start-up companies, and become a unique and important intersection of the three. The first mock exam is to solve the problem of disconnection between government customers, intelligence departments, start-up companies and capital markets.

As a government organization, it is not easy to be close to capital, market and start-up companies. And the CIA has done that in terms of institutional arrangements.

According to Rick E. Yannuzzi, IqT's first director of market operation, IqT has made it clear at the beginning of its establishment that its operation must keep pace with the speed and agility required by the business and it market.

At the same time, the CIA has given IqT maximum freedom of decision-making, and its investment and business decisions do not need to be approved by the CIA. In other words, the CIA does not evaluate IqT's decision-making process, but rather the results of its decisions (such as intelligence solutions from foreign investment).

It can be said that at the beginning of IqT, it was far away from the more traditional government project office model based on the US government management, which represented a new way of government research and development.

Today, IqT's team is a unique combination of entrepreneurs, investors and technical experts. Its board members are celebrities from national security, finance, technology, academic and other departments.

With such a cross domain expert team, IqT is able to keep sensitive to cutting-edge technology at all times and effectively mobilize resources from all sides, so as to find the required technology, products and target companies for government customers.

IqT president and CEO Chris Darby are the epitome of such a special team. He has been in his present position since 2005.

Chris Darby was vice president of Intel and CEO of three startups (acquired by US internet, Symantec and Intel). Rich experience in Entrepreneurship and large companies enables him to flexibly change his identity and effectively promote cooperation between large institutions and start-up companies.

5. Direction focus: 9 major areas of concern

IqT has established a technical framework system and matched its own capabilities according to this system to find appropriate projects for investment. Under this system, IqT focuses on 9 major areas.

Generally speaking, in-q-tel's layout of technology field is mostly based on the market demand forecast of more than five years, which provides an effective guide for it to find the investment target more acutely and accurately.

Biotechnology: for the past 50 years, every real pandemic has come from a wildlife species or contains genes from a wildlife virus.

Commercial Aerospace: from 2017 to 2023, nearly 2400 nanosatellites / microsatellites are expected to launch.

Communication: mobile applications account for 52% of digital media usage time.

Cybersecurity: cybercrime will more than double the number of cybersecurity jobs and is expected to reach 3.5 million by 2021.

Data analysis: it is estimated that 180 gigabytes of data will be generated globally by 2025, "data monetization" will become a major source of income.

Network infrastructure: Gartner forecasts that the global public cloud service market will grow by 18% to US $246.8 billion in 2017, up from US $209.2 billion in 2016.

Internet of things: it is predicted that 75% of new cars will have built-in Internet of things connections by 2020.

Materials and Electronics: in 2021, the sales volume of smart clothing is expected to reach US $24.75 billion, with a compound annual growth rate of 71.6%.

Power and energy: by 2020, the global lithium-ion battery market is expected to reach 30 billion US dollars.

It can be said that software robots that can master small objects, computer algorithms that are used to detect "internal threats", and artificial intelligence technology that can screen large data sets These are the technologies that IqT pursues and finds.

However, despite the layout of IqT in many fields, its investment focuses on two areas: information and communication technology, and physical and biological technology.

The first area includes advanced analytics tools for handling big data, next-generation infrastructure and computing platforms, mobile and wireless technologies (such as security platforms), geospatial tools, and digital identity analysis (such as biometric tools).

That is to say, the CIA may be using the data tools of the invested company to constantly monitor, capture and analyze the massive data you have on social media such as twitter, Facebook, instagram, and all the places you can monitor, so as to find clues of cyber attacks, terrorism, financial fraud, etc.

In the field of physics and biotechnology, IqT has a strong interest in material science, advanced gene analysis, biotechnology for detection and diagnosis, as well as optical and nuclear detection technologies.

If IqT invests in a skin care company, it's not surprising. In an article on intercept, the author analyzes why skincare research and development company skincare science will obtain IqT investment. He believes that the company's patents could help the CIA better collect and process biological samples and conduct DNA analysis.

6. Close to Silicon Valley

Whether it's the Department of defense or the CIA, the U.S. defense and intelligence agencies have been moving closer to Silicon Valley. Because they know that the most advanced and cutting-edge technology is in Silicon Valley. Of course, the abundant funds also make them look confident when looking for investment objects.

"If you want to keep up with Silicon Valley, you need to be part of it," said Jim Rickards, an American intelligence consultant familiar with IqT. The best way to do this is to have a budget, because when you have a checkbook, everyone will come to you. ''

At present, IqT is mainly funded by the CIA's annual funding. But how much money is there every year is still a secret. However, according to a 2016 report by Damian Paletta, the Wall Street Journal, the agency's annual budget will not be less than $120 million.

Although IqT has invested nearly 400 times, according to mattermark, as of the end of November 2016, IqT website only disclosed 163 companies it invested.

From the data of IqT's new investment in each year, it can be seen that the overall investment of IqT in 2008-2012 is on the rise. From 2012 to 2016, the rate of new investment slowed down relatively.

The reasons may be: compared with the previous years, the global venture capital has been in a gentle downward trend from 2015 to 2016; IqT's early investment companies may have entered the medium-term development stage and carried out subsequent rounds of financing, so they did not show the growth of the first investment data.

Of course, another possible reason is that IqT makes less disclosure about its investment. For such a mysterious institution, everything is possible.

7. Investment method: give money back to the market

In general, IqT invests primarily in start-ups that have developed commercial technologies that can quickly provide "near-term benefits" to intelligence.

As for IqT's investment direction and the way to find its investment goal, a paragraph in the Washington Post can be used as a vivid annotation: "any American entrepreneur, inventor, research scientist who is engaged in the research of data analysis method may receive a call from IqT, or at least be searched by the technical observer of this organization with Google."

In the past 10 years, IqT has established a database of more than 400000 companies, and evaluated about 1000 companies every year to find and invest in start-ups that meet the national security needs, with the investment amount generally ranging from $500000 to $3 million.

According to relevant data, as of the beginning of 2014, IqT has evaluated 135 thousand business plans. At present, IqT makes an investment about once a week on average. Of course, a considerable part of the investment information will not be released.

Compared with general investment institutions, IqT's investment also has a significant difference worthy of attention: it may require startups to agree to provide their products and services specifically to the intelligence community for a period of time, and sign development contracts with invested companies according to the clear needs of government customers. If the development goes well, government customers will purchase products directly from start-ups.

In other words, IqT not only provides funds to start-ups, but also supports technology and product development, as well as real government procurement contracts. From this point of view, IqT is a real technology business incubator, and it is also a non replicable incubator.

For early start-ups, the appeal of being able to get funding from IqT and target a large customer (the world's most powerful intelligence agency) is self-evident.

In addition, for every $1 million invested by IqT, it usually helps startups match another $15 million in external venture capital. This kind of "leading big brother" like pride is mainly due to IqT's many "iron brothers" accumulated in the venture capital industry, that is, those investment partners who hold a lot of money.

According to IqT, the company has made 380 outbound investments and more than 1500 joint investment partners. Among them, the most frequent partners include arch venture partners, accel partners, lux capital, battery ventures and other top venture capital, as well as the venture capital of Intel, Google, Cisco and other technology giants.

8. Task oriented investment process

On the one hand, IqT's investment has a very strong "pragmatism" philosophy, which is to quickly identify the needs of customers such as intelligence departments, and quickly meet these needs through external investment.

On the other hand, IqT has established a rigorous and mature investment process to ensure that its invested start-ups and related technologies can truly bring optimal solutions to customers.

The investment process of IqT includes the following 7 steps:

Strategic needs assessment: sort out mission needs and existing technology gaps with intelligence partners.

Solution & market analysis: design solutions and analyze the business market to find innovative technologies.

Due diligence: complete rigorous business and technical reviews to best match national security needs.

Analysis & Evaluation: find the best trading (investment) mode for customers.

Set up working groups: set up working processes to help startups adjust their technology to better meet customer needs.

Strategic Investment: support startups to optimize and adjust technology while making equity investment.

Solution submission: evaluate the optimized technology and promote the technology submission to customers.

In general, IqT investment is a task oriented or demand oriented investment. This kind of investment idea avoids the inefficiency of spreading the net all over the place, and can bring the targeted effect, and improve the investment efficiency at the same time.

9. Typical investment cases

When it comes to IqT investment, perhaps the most famous is keyhole, the predecessor of Google Earth, a map data service provider. In 2005, IqT sold 5636 Google shares, worth $2.2 million, from Google's acquisition of keyhole, an early investor in keyhole.

Keyhole is just a microcosm. Among the companies cultivated and supported by IqT, Oracle, IBM, HP and Lockheed Martin, the world's largest military industrial giant, are all the big "gold masters" on the list of acquirers, except for being acquired by Google.

In addition to keyhole, IqT also invests in many well-known companies. For example:

Palantir, a big data analysis and intelligence platform. As the most mysterious big data company in Silicon Valley, Palantir has raised a total of US $2.1 billion, with a current valuation of US $20 billion, making it the highest unlisted big data company in the world.

Fireeye, once the world's largest Internet security company, went public on NASDAQ in September 2013, raising $303.5 million.

Arcsight, a security software manufacturer founded in 2000, was acquired by HP for us $1.5 billion in 2010.

Founded in 2008, cloudera is a big data processing and service provider based on Apache Hadoop. The company was listed on the New York Stock Exchange in 2017 with a valuation of US $1.9 billion and raised US $225 million.

Dataminr, founded in 2009, focuses on the automatic analysis of high impact events and emergency news, so as to help government agencies put forward response strategies. The company has raised a total of $183 million.

According to the information of IqT website, since 2015, up to now, there have been only 23 cases in which IqT has published its investment newsletter. To understand its overall investment, it can only be said that IqT is in a fog.

However, even from these rare investment cases, it can be found that IqT's investment focus in the past three years is still big data and network security.

In addition, although IqT is positioned as a non-profit investment institution, from the case of its investment companies in subsequent rounds of financing, listing, acquisition and other aspects, I'm afraid it's difficult to make money.

IqT laboratory: observation station of cutting-edge technology

As a mission oriented investment organization, IqT will quickly find the target technology and start-up companies needed according to the latest demand of the intelligence department and the latest trend of the market.

For this reason, IqT has established the quick response ability to identify and adjust "ready soon" technology, which can be modified, tested and delivered within 6 to 36 months according to the difficulty of the problem.

In order to enhance its research, tracking, identification and "capture" capabilities in the field of cutting-edge technology, IqT has also set up IqT labs, including advanced analysis lab lab41, Biotechnology Lab, commercial aerospace lab cosmoq works, and cyber reboot, the Network Security Lab.

Through years of research and investment practice, the CIA, including IqT, has strong confidence in its forward-looking research and incubation results in cutting-edge technology.

As former CIA director David Petraeus said in his speech at the IqT CEO Summit in March 2012, "I find that our technical capabilities are often far beyond what you see in Tom Cruise's films But in the movie, he can accomplish some feats that we can't do, or we haven't figured out yet. For example, we haven't figured out how to change a person's fingerprints or eyeballs - but give us time. "

11. National defense innovation and investment system behind IqT

As the investment department of the CIA, IqT is like a miniature, reflecting the unique support of the US defense and security departments for entrepreneurship and innovation, as well as the action strength in technology foresight, technology transfer, military civilian integration, etc.

In addition to in-q-tel, DARPA, the Department of Defense's advanced research projects agency, is probably the most familiar organization of its kind. It is not only a global leader in defense technology research and development, but also has spawned many civil technology achievements that have changed the world, such as the Internet, semiconductor, GPS and so on.

In addition, we can see that the US's arsenal venture partners (renamed as Arsenal) manage a fund that invests in the US military; the defense innovation unit experimental (diux) invests in commercial companies that are suitable for solving defense problems.

According to CB insights statistics, since 2011, in-q-tel, DARPA and Arsenal three major defense investment institutions have disclosed a total of 137 investments, with the disclosed investment amount of US $1.3 billion.

These investments mainly focus on the early (round a) and medium-term (round B and round C) start-ups, and the proportion of early and medium-term investment amounts to 62%. From the perspective of the industry, the three institutions mainly invest in the field of Internet software and services.

It can be said that based on the above-mentioned institutions, the U.S. Defense Department has established a relatively complete innovation and investment system. This system not only provides a large number of new technology transfer achievements and new market opportunities for the defense sector, commercial market and civil sector, but also effectively promotes the innovation and development of American frontier technology.

|Reference information sources: CIA, in-q-tel, National Academies, the intercept, foxbusiness, matermark, federalnewsradio