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The secret behind the CIA's venture capital arm

Gilman Louie runs the CIA's venture capital arm. What's on his agenda? Finding "technologies that can protect lives."

Running the publicly funded arm of the CIA in Silicon Valley for the last six years, Gilman Louie is used to living in a fishbowl of sorts.

As chief executive officer of In-Q-Tel, Louie has the job of operating as a venture capitalist charged with helping to deliver new technologies to the CIA as well as the rest of the U.S. intelligence community.

"At the end of the day the mission is to find technologies that can protect lives," he says.

But In-Q-Tel occupies a unique rung in the federal bureaucracy. As a publicly funded operation, it is bound by the usual requirements governing conflict of interest that are familiar to other government agencies. At the same time, it is forced to keep a lot of information about what it's doing close to the vest because, well, it's the CIA.

Sometimes that's an uncomfortable fit. Earlier this year, for instance, the New York Post raised the specter of a conflict of interest after some employees sold stock in a company In-Q-Tel had invested in. CNET News.com recently sat down with Louie to find out more as well as to learn how he views the evolving role of In-Q-Tel in equipping the government with new technologies in its war on terror.

Q: In-Q-Tel was recently accused by a New York Post columnist of being involved in a "pump and dump" scheme. Is there a conflict of interest between being a government-funded nonprofit and conducting private stock sales?
Louie: I don't think the writer was off base in asking the question. He may not have had all these facts right, but the foundation of the question of whether it's reasonable to have a nonprofit whose principal job it is to make investments is: Have employees benefited?

When we were setting up In-Q-Tel, the CIA said, "Look, we want you to build a model that can analog to the commercial world." In our particular case, we wanted to get people from the industry. You've got to remember it was 1998 and that was in the middle of the bubble.

But how do you square that circle? You've got the mission of a publicly financed company that also has to take into account the realities of the surrounding world.
Louie: Here was the basic premise: How do you get people first to treat the taxpayers' dollars as if it was their own? No. 2 is how do you attract the talent to come on? How do you get people from the best schools or the private sector?

We said we want to have a side-by-side fund, which is pretty universal in venture capital. We designed a compensation scheme that's fair that would get us to the right people--but not overly compensate them. We have an agreement with the government that says after the moment a stock becomes available, you have a short period of time where you're expected to liquidate those resources. We tie the employee funds in the same way. You don't get to choose; we choose for you.

What do you mean?
Louie: Which stocks to play in...You get a percentage to all the deals. But it comes off of your salary. We give you annual compensation pay, and a certain percentage of that is set aside for long-term compensation that is automatically invested. You pay your taxes and then we take a chunk of that to invest in your stocks. And they may do well, and they may not do well.

Is this a unique arrangement when it comes to government-funded agencies?
Louie: Well, there wasn't really a government venture fund until we kind of showed up. Is it unique now among government venture funds? The answer is no, because everybody followed us.

It was claimed that of the insiders who started to sell the stock when it began to go south, nearly all of them were In-Q-Tel employees.
Louie: Here's how that works. In our side-by-side funds, most of the shares that employees are going to get are 144 restrictive stock. When an In-Q-Tel employee sells as part of the normal course of business, employees can choose to do one of two things: They either can receive the stock, or they can sell with the company.

Then the company sells (stock) on their behalf?
Louie: Yeah, but then because of the 144 registration requirement you had to disclose everybody who's selling. Most nonprofits have stern policies on how to distribute because you don't want to be gambling with people's money, and our view is we have a responsibility to the taxpayers...Our primary objective is to pick the right companies. So if there are proceeds, that's an added benefit. But that's not why you're doing this.

If you talked to the people inside the CIA, they will tell you that we have had an impact on the way they think about the problems.

There is one last point which the article failed to mention: There's only a small group of decision makers who actually approve any deal. That's the board of trustees and the CEO. The board of trustees does not get any equity in any of the companies. All of (my equity proceeds) from day one--including the principal and not just the proceeds--is donated immediately to a charity.

When you received the charge to start In-Q-Tel, it was supposed to be an experiment for five years or six years.
Louie: And it was to demonstrate whether or not this model could actually yield technologies that would be useful for national intelligence. We're now in year six. We have put a little over 100 technologies into the intelligence community that are actively being used. Some of them you know, while other technologies we don't broadly advertise.

Will In-Q-Tel be around for much longer? Is this going to be a renewable contract, or has that decision not been made?
Louie: It goes on for an annual renewal. You live at the whim of Congress.

When it was first funded, In-Q-Tel received strong support from (Director of Central Intelligence) George Tenet. He has now gone on to do whatever he's going to do, and you have a new DCI--Porter Goss. What's his thinking about the idea of a publicly funded private research venture capital firm?
Louie: Well, I can't speak for Porter, because that wouldn't be fair. When In-Q-Tel got started, people asked whether this model could work. It's a pretty risky model, particularly because of how public it is. It's like living in a fish tank. 9/11 was a big turning point. People said, "We don't have time to experiment. This stuff really matters now."

How has that translated into practice?
Louie: If you take a look at the Inspector General report, or the 9/11 Commission report, there's a common theme: We don't have the best stuff being put to use, and we seem to be not able to figure out how to manage these big kinds of information systems and technology in a way that gets data into the hands of people who really need it, when they need it. The cycle times are way too long in government.

Like photo recognition?
Louie: I'm talking about simple things--like how to get an e-mail from one person to another person securely. We're talking about agencies spending hundreds of millions of dollars on very basic information systems. The CIA, quite frankly, is better off than a lot of other agencies because this has always been a part of their culture. But they, too, recognize the fact that it takes them a long time to integrate somebody else's technology in because they have security requirements.

So if Goss was sitting here and asked you for your frank appraisal, would you tell him, "Mr. Goss, I think that In-Q-Tel has been a successful venture"?
Louie: Have we been able to identify new technology? Absolutely. Have we taken the money and put it to good use? I think we've done pretty well. I think if you talked to the people inside the CIA, they will tell you that we have had an impact on the way they think about the problems.

Basically, these are guys with very high clearance levels, and why would they trust a bunch of guys coming from Silicon Valley?
The jury, though, is still out on the long-term strategic value of In-Q-Tel. Can In-Q-Tel be a critical component of the requirement for the intelligence community to make the necessary changes to deal with the new world threats? While In-Q-Tel can point to a lot of things in terms of technology, it really is about how that technology gets deployed in changing the culture in the new threat environment. The answer to that is, I don't know.

What percentage of the technology you have found or promoted has actually been adopted internally in the agency?
Louie: We have like 80 companies who put in about 100 technologies because some companies have more than one. As a percentage, about 50 percent are in, 40 percent are still being baked, and 10 percent have been duds...so we're pretty successful. But the flipside of that is we're so public. Sometimes you've got to say that unless there's a high payoff on the other side, you don't want to be accused of doing Frisbees.

Have you had to learn some new bureaucratic skills to get the folks in Langley to give you sufficient amounts of love?
Louie: No. That kind of comes with any large enterprise. I think about the bureaucracy of government everybody complains about. But if you go try to sell into Wal-Mart or FedEx, I don't think this is that different.

Was it difficult to gain their trust as an outsider?
Louie: Basically, these are guys with very high clearance levels, and why would they trust a bunch of guys coming from Silicon Valley? We haven't paid our dues. You know, we never walked the point, and most of the guys have never been in the military. We had no idea of what those guys do. What they told us very early in the ballgame was, "Why should we trust you? If we use one of your pieces of technologies and it fails, one of us can get killed. You have never walked a mile in our shoes."

Of course, like I said, 9/11 changed a lot of that because it was like, "You know what? Trying something that may not work is better than knowing that you don't have anything, which would definitely not work." That was the mindset. Prior to 9/11, it was like, "Well we got 15 years before the next great threat shows up, so we can take our time."

Are you satisfied with the way things are going?
Louie: We've still got a long way to go.

How much longer do you plan to stick around?
Louie: Anybody sticking around for too long is not a good idea, because the whole idea is to get people from Silicon Valley to come on in.

Is it a question of burnout?
Louie: There's burnout, but there's also the issue of going native. Bringing in fresh blood to take a slightly different approach--I think that's just good.