http://www.herring.com/vc/2002/0118/908.html By Justin Hibbard January 18, 2002 It took just 90 minutes from the moment the first jetliner ripped through the north tower of the World Trade Center on September 11 before a TV anchorperson uttered the words "failure of intelligence." In the hours that followed, the phrase shot through the media, eventually finding its target: the U.S. intelligence community and its lack of technological prowess. "For many years, our intelligence technical capabilities were the standard of the world," U.S. Senator Bob Graham (D: Florida), chairman of the Senate Select Committee on Intelligence, told reporters on the day of the attacks. "We have fallen behind, and we need to close the gap and reassert our leadership." The sound bite had a familiar ring to anyone who had hung around the Central Intelligence Agency in 1999. That year, nearly the same words were spoken by supporters of a plan to start a CIA-funded systems-integration firm called Peleus. Proponents argued that the agency was failing to keep up with new technologies like sophisticated Internet search tools being developed by small, innovative companies. In February 1999, Peleus was founded, given an annual budget of $30 million, and ordered to seek risky startups that could keep the agency stocked with futuristic, James Bond-like gear. The following year, Peleus evolved into a nonprofit technology-procurement shop--one that not only hired contractors, but also made equity investments in small companies, much like a venture capital firm. Moreover, it changed its name to In-Q-Tel in homage to Mr. Bond's gadget-happy colleague, Q. To date, the experiment has received high marks from its overseers in Congress. In just two and a half years, In-Q-Tel has reviewed over 900 business plans, funded 23 companies and research and development projects, and introduced five technologies into the CIA for testing. In a report presented to Congress on September 14, Mr. Graham singled out the firm for praise. But since September 11, even In-Q-Tel has had to field the question that has pestered the entire U.S. intelligence community: why didn't we know? After all, if this taxpayer-funded venture firm provides the CIA with such powerful technologies, shouldn't the agency have been equipped to anticipate the attacks? Probably not. By traditional VC standards, two years isn't long enough for In-Q-Tel's portfolio companies to perfect their products, much less transform the CIA's information systems. Even more important, it's uncertain if any technology could have helped predict the hijackings anyway. September 11 was a failure of "human intelligence," counterintelligence, and analysis. Still, the tragedies underscored the need for the CIA to act on the recommendations made by an independent panel just weeks before--in particular, to speed the pace at which the agency integrates the products of In-Q-Tel companies into its operations. The CIA's adoption of advanced technologies isn't only necessary to stay ahead of new enemies, it's also vital to In-Q-Tel's success, which will be measured by the CIA's technological supremacy, not by IPOs. Panel Discussion For Gilman Louie, In-Q-Tel's 40-year-old president and CEO, any doubts about the firm's viability disappeared on September 11. Before the attacks, he had endured debates with members of the CIA about the importance of technology and trade-offs the agency would have to make to adopt new tools immediately. "There's no more question," he says. "Today, everyone's saying, 'We have to have it.' Speed is everything now." Speed was a major theme of a 78-page report on In-Q-Tel released by Congress just five weeks before the attacks. Lawmakers had requested the study from a panel led by Business Executives for National Security (BENS), a nonprofit, nonpartisan research group. A 30-person team of private-sector VCs, lawyers, bankers, and executives studied the firm from January to June and came away applauding its progress in funding new technologies--and booing the CIA's sluggishness in adopting them. "The CIA's technology-introduction process is way too bureaucratic and complicated," says C. Lawrence Meador, a technology executive who chaired the panel. For instance, at the time, new hardware or software required a 136-step review process by six different boards before it could be installed on the agency's networks, the panel found. The panel recommended that In-Q-Tel measure its performance by the speed with which it inserts new technologies into the CIA. But it added that responsibility for inserting the technologies should be shared by In-Q-Tel, the CIA, and a liaison between the two, the In-Q-Tel Interface Center (QIC), which is a department within the CIA. Some of the panel's harshest criticism was aimed at QIC. "QIC had focused too much on overseeing the functions of In-Q-Tel when its better role would have been the intermediary for getting technology into the CIA," says Paul Taibl, a BENS analyst who contributed to the report. After searching six months for a description of the CIA's technology strategy, the panel came up empty-handed. "We were unable to find any alignment of the agency's technology and business strategies," Mr. Meador says. That misalignment could make it hard for In-Q-Tel to match its companies' products with the agency's needs, the reviewers concluded. By the time the panel completed its study in late spring, the CIA had addressed many criticisms through a reorganization led by its newly appointed executive director, A.B. "Buzzy" Krongard. The agency filled the vacant post of chief information officer, named a new director of QIC, and streamlined the process by which technologies are added to its information systems. "The report's recommendations have been fully implemented," says Mr. Louie. "[Director of central intelligence] George Tenet and Buzzy Krongard said information technology is a priority for this agency." Spy Culture But permanent improvements may require more than a management shake-up. Resistance to ventures like In-Q-Tel is ingrained in the CIA's culture. Though the agency has a history of embracing innovative technologies, its secretive ways lead some employees to reflexively distrust ideas from outside. "The agency has an established culture that has grown up around a security model and a way of doing business that are less appropriate to some of the threats we face today," says Ruth David, former deputy director of science and technology at the CIA. While developing the original concept for In-Q-Tel in the late '90s, Ms. David struggled to win acceptance for working with nontraditional intelligence contractors. "I ran up against a lot of brick walls and had limited success," she says. Her sentiments echo a now-infamous farewell memo circulated inside the CIA in January by the agency's outgoing inspector general, L. Britt Snider. "The world of information technology does not relate very well to the world of intelligence," he wrote. "It thrives on transparency; we thrive on secrecy. It does not want to be tied up by government contracts and classification stamps; we know nothing else." The memo went on to implore support for In-Q-Tel: "Agency managers and overseers must find a way to make it work." The U.S. intelligence community's culture is still based largely on the cold war-era notion of "stovepipes," in which each organization shares information internally but not with the others. Connecting organizations is risky, since an intruder might glean secrets from multiple spy outfits by penetrating just one of them. But the technology revolution of the past decade has demanded that intelligence agencies and foreign governments increasingly co÷perate, since no single entity can process the world's daily output of data. In the weeks leading up to September 11, the U.S. intelligence community's 14 organizations--which span the departments of defense, energy, justice, transportation, and treasury, as well as the CIA--may have gathered fragmented clues that together might have hinted at what was to come. Though it's unlikely any combination would have suggested the exact plan of attack, the need for increased communication and data analysis is clear. "One of the post-September 11 themes is collaboration and information sharing," says Alan Wade, the CIA's chief information officer. "We're looking at tools that facilitate communication in ways that we don't have today." The CIA and In-Q-Tel were already looking at those tools; the attacks haven't drastically altered their interests. "If you compare what we were looking at before September 11 and what we're looking at now, they're identical," Mr. Louie says. Along with collaboration, In-Q-Tel has consistently invested in companies like Intelliseek, MediaSnap, Mohomine, and SafeWeb, whose security software and search applications are capable of analyzing data from a wide variety of sources. The firm's other investment themes have included mapping, visualization, and sensors. Deployment Agency The ultimate goal of In-Q-Tel's investments is that its ventures introduce valuable technologies into the CIA, not return cash or high-priced stock. Along with every investment it makes, the firm requires a portfolio company to sign a contract promising delivery of a product to the agency. For startups, working with In-Q-Tel is like working with a corporate customer that is also an investor. During product development, In-Q-Tel portfolio companies work closely with CIA employees to learn the agency's requirements. "It pays off because you build what people need and want," says Kathy DeMartini, president and CEO of MediaSnap, a security software company that took a $1.3 million investment from In-Q-Tel in June 2000. But In-Q-Tel's pre-investment screening process (also known as due diligence) is more rigorous than that of most corporate customers, which some companies appreciate. "In-Q-Tel's core value is due diligence on the technology," says Mahendra Vora, chairman and CEO of Intelliseek, an advanced search-engine developer that took a $1.4 million investment from In-Q-Tel in May. "They're not just doing it for government purposes. They want to make sure it works for corporate customers, too." Another benefit of In-Q-Tel's demanding technical testing is the potential for additional sales. If the CIA buys a product, agencies like the Federal Bureau of Investigation and the National Security Agency may follow suit. "Naturally, there's an appeal to other government agencies if one agency is already using the technology," says Ms. DeMartini. Some startups might be wary about taking an investment from a firm that could pressure it to develop technology that is useful to only one customer--the CIA. But In-Q-Tel insists it has an incentive to help its portfolio companies widely commercialize their products because commercial products are cheaper to upgrade and support than custom ones. To find deals, In-Q-Tel informally shares leads with about 80 VC firms, as well as investment banks, universities, and research labs. Some VCs have asked what business the government has competing with private-sector investors for deals. "With a $30-million-a-year budget, you're not in competition with anything in venture capital," says Mr. Louie. In-Q-Tel tends to invest much smaller amounts than its private-sector co-investors, some of which like investing with In-Q-Tel because of its thorough due diligence. The U.S. government has a history of so-called public VC programs dating back to the Small Business Investment Company program started in 1958. The results have been mixed. The programs often fail when they try to stimulate growth in geographic regions where there is little private-sector investment. But they sometimes succeed when they focus on an under-funded industry that is independent of a region. "In-Q-Tel is quite different from typical public venture capital programs," says Josh Lerner, a professor at Harvard Business School. "It's largely stimulating technologies in industries where it feels there is insufficient private development taking place." The In-Q-Tel model could eventually be extended to other U.S. defense and intelligence agencies. The BENS panel recommended that In-Q-Tel remain focused on the CIA until it has had time to mature. But Mr. Meador envisions the firm eventually spawning 14 divisions, each supporting an intelligence agency. That vision isn't likely to come true on an annual budget of only $30 million. But substantial budget increases are on the way for U.S. defense and intelligence agencies, including the Department of Defense's R&D budget (total expenditures are classified), which is likely to gain $20 billion over the next five years. In addition, the Senate Select Committee on Intelligence has called for revitalizing the NSA's technology and rebuilding a strong R&D program for the entire intelligence community. An organization like In-Q-Tel could channel a portion of these funds to innovative startups. But first, In-Q-Tel must master the CIA--a mission that has become imperative since September 11. "From that point on, there was no question why we're here and what our role is," says Mr. Louie. From his office window in Arlington, Virginia, he can see the hole in the Pentagon left by the hijacked airplane. "If I ever forget what's important, I just look out the window," he says. - ISN is currently hosted by Attrition.org To unsubscribe email majordomoat_private with 'unsubscribe isn' in the BODY of the mail.
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