CIA venture arm sees post 9/11 surge

Stratify CEO Nimish Mehta was at a cocktail-hour schmooze at PC Forum last year when a couple of guys sidled up and peppered him with questions about his company.

The men said they were from In-Q-Tel, the CIA's venture arm, and might be interested in funding his software company. The proposal seemed so unlikely that he initially thought it was a joke.

"It didn't seem to make sense. The CIA hanging around PC Forum?" Mehta asked with a chuckle. "I concluded that they weren't for real."

Several million dollars in funding later, Mehta has changed his mind about In-Q-Tel. The CIA is using Stratify products to organize and sort through unstructured data, having selected the Mountain View, Calif.-based company as one of the lucky few to receive In-Q-Tel cash.

That's a tough audition these days. Since Sept. 11 and the terrorist attacks, applications for In-Q-Tel funding have skyrocketed from about 700 during the operation's first two-and-a-half years of existence to more than 1,000 in the last six months.

With thousands of companies seeking to position their corporate products as the answer to government security problems, In-Q-Tel's job is to weed out the truly worthy from the just plain wacky.

"Post 9/11, companies have literally come out of the woodwork," In-Q-Tel CEO Gilman Louie said. "There is a huge demand for security products."

Playing Q to the CIA's Bond
Founded in 1999 to help the CIA get better access to new technology, Arlington, Va.-based In-Q-Tel has grown to fund more than 20 companies. The idea is to boost firms developing technology the CIA might be interested in so they can provide the products to the government and become stronger businesses on their own.

Tucked between the big-name venture firms along Menlo Park, Calif.'s famed Sand Hill Road, In-Q-Tel's Silicon Valley digs look just like any other VC office--except for the cameras that track the comings and goings of visitors and the fingerprint scanner employees must use to get into the building.

In-Q-Tel focuses on technology areas that sound mundane, considering the operation is named partly after a fictitious spy novel character and is designed to support a spy agency. The "Q" in In-Q-Tel was inspired by James Bond's Q, who equipped the secret agent with gadgets including a folding helicopter and an exploding pen.

Though he won't rule out funky spy doodads, Louie said In-Q-Tel is more interested in workhorse technology such as Internet search services, data organization software, security and privacy technology, and virtual 3D products. Louie said he's always open to ideas that aren't on the list--provided they have some use for national security.

In-Q-Tel's picks The CIA's venture arm is funding companies developing Internet searching, data management, security and spatial technology products. But executives are on the lookout for new technology, too. Companies landing funding so far include:

Browse3D: browser that gives viewers a 3D picture of their Web surfing habits

Graviton: wireless network allowing companies to remotely track environmental conditions using sensors

Northern Light: customized search software and services

Stratify: software that classifies unstructured data such as that found in e-mails or documents

SafeWeb: security software that lets people surf anonymously and block cookies

Zaplet: e-mail-inspired collaboration software

In fact, Louie, a former Hasbro executive who helped popularize the computer game "Tetris," said his gaming background helps him think creatively about how technology geared toward corporations can be morphed into homeland security products.

For example, Kleiner Perkins Caufield & Byers turned In-Q-Tel on to Graviton, a company that uses wireless networks and tiny sensors to gauge environmental conditions such as the temperature of a refrigeration system. In-Q-Tel executives soon began helping the company pursue security uses for its network, which has the ability to "sniff" for toxic substances.

Though In-Q-Tel's funding efforts are small by Silicon Valley standards--it allocates just $30 million per year to its start-ups--the venture is attracting companies ranging from the ridiculous to the radical partly by providing them easy access to potentially lucrative government contracts.

But working with the super-secret CIA isn't always easy. A Congress-ordered study conducted by an independent panel found the operation had an impressive track record but said In-Q-Tel still needed better access to CIA officials. The study praised the public-private venture as "worth the risk" but wouldn't recommend that other agencies adopt similar projects.

What's more, in the get-rich-now-or-never Silicon Valley, In-Q-Tel still must overcome the perception that companies doing business with government won't see returns for years.

"The government procurement process is so slow," said Barry Hutchinson, a spokesman for VC firm Draper Fisher Jurvetson, which hasn't entered into any joint funding ventures with In-Q-Tel. "Even though there may be a pot at the end of the rainbow, it just takes so long to get there."

Would In-Q-Tel be attracting as much interest if Sept. 11 hadn't happened? It's hard to know, but Louie said the attacks have sparked a sense of urgency and purpose among his executives, who come from companies such as Excite@Home and Walt Disney.

"Every day people are reminded what the potential threats are," Louie said. "Nobody needs convincing that there's a need out there for security products."

Invoking the flag-waving, patriotic, good-for-the-country sentiment that's all the rage these days, Louie said In-Q-Tel is about more than just a return on its investment. "You can say we're really doing something for the public good," Louie said, comparing his position now with his stints in the corporate world. "All you could really say before is we made a lot of money."