As a side note, back in the early years of this century, especially immediately after the mass murders of 9/11, it was thought that investing alongside In-Q-Tel was the cool thing to do.
It took a while for the realization to sink in that they weren't necessarily in it for the money return to the VC's.
From the Wall Street Journal:
In-Q-Tel provides only limited information about its investments, and some of its trustees have ties to funded companies
Forterra Systems Inc., a California startup focused on virtual reality, was in need of money and its products didn’t have much commercial appeal. Then funds came in from a source based far from Silicon Valley: In-Q-Tel Inc., a venture-capital firm in Virginia funded by the Central Intelligence Agency.
One catalyst for the 2007 infusion, according to a former Forterra executive and others familiar with it, was a recommendation by a man who sat on the board of the venture-capital firm—and also on the board of Forterra.
In-Q-Tel pumped in cash, Forterra developed some tools useful to the military, and government contracts started coming in.
Like the agency that founded it, the CIA-funded venture-capital firm operates largely in the shadows. In-Q-Tel officials regard the firm as independent, yet it has extremely close ties to the CIA and runs almost all investment decisions by the spy agency. The firm discloses little about how it picks companies to invest in, never says how much, and sometimes doesn’t reveal the investments at all.
Even less well-known are potential conflicts of interest the arrangement entails, as seen in this Forterra example and others continuing to the present. Nearly half of In-Q-Tel’s trustees have a financial connection of one kind or another with a company In-Q-Tel has funded, a Wall Street Journal examination of its investments found.
In-Q-Tel’s hunt for promising technology has led the firm, on at least 17 occasions, to fund businesses that had a financial link of some sort to an In-Q-Tel trustee. In three instances a trustee sat on the board of a company that had an In-Q-Tel investment, as in the Forterra case, according to the Journal’s examination, which was based on a review of investment records and interviews with venture-capital and In-Q-Tel officials, past and present.
In-Q-Tel differs from other venture-capital firms in an important way: It is a nonprofit. Instead of trying to make money, it seeks to spur the development of technology useful to the CIA mission of intelligence gathering.
Tangled connections are endemic in the venture-capital business, where intimate industry knowledge is essential to success. Other venture-capital firms, however, are playing with their own money, or that of private investors.
In-Q-Tel uses public money, to which strict conflict-of-interest rules apply—at least $120 million a year, say people familiar with the firm’s financials. It sometimes deploys this capital in ways that, even if not by intent, have the potential to benefit the firm’s own trustees by virtue of other roles they have in the tech industry.
In-Q-Tel investments often attract other funding. Each dollar In-Q-Tel invests in a small business typically is matched by $15 from elsewhere, the firm has found. That makes the small business likelier to succeed and makes its stock options more valuable for whoever has some.
In-Q-Tel said it needs to work with people who have industry connections if it hopes to find promising technology. Some of its trustees, it said, are so enmeshed in the tech world it would be hard to avoid any ties that might be interpreted as conflicting. Besides technology, trustees come from a variety of backgrounds including academia, national security and venture capital.
“In-Q-Tel put in place rigorous policies to safeguard taxpayer funds, prevent possible conflicts-of-interest and stay focused on developing technology to meet mission requirements,” said a CIA spokesman, Ryan Trapani. “We are pleased that both the In-Q-Tel model and the safeguards put in place have worked so well.”
The firm permits its trustees to recommend investing in businesses to which they have ties, so long as they disclose these internally and to the CIA. Trustees are required to recuse themselves from reviews and votes after such recommendations.
To succeed, “you want a board who knows what the hell they are doing,” said Jeffrey Smith, who helped design In-Q-Tel when he was CIA general counsel and is now its outside counsel, as well as a senior counsel at law firm Arnold & Porter. “This is to some extent a balance, and we know that,” he said.
In the Forterra case, Charles Boyd, a retired Air Force four-star general, joined the boards of both Forterra and In-Q-Tel in 2006. The following year, In-Q-Tel sank money into Forterra, according to an In-Q-Tel news release at the time. The amount couldn’t be determined.
Gen. Boyd said he made an initial recommendation for In-Q-Tel to invest but didn’t take part in its decision to do so. He said he received no compensation from Forterra for recommending to In-Q-Tel that it invest in the startup.
“It definitely was a win-win from our perspective to have Charles on the board and open those doors for us,” said Chris Badger, who was Forterra’s vice president of marketing. He said there was discussion within Forterra about whether “In-Q-Tel’s funding model was really generating a good benefit for the taxpayer.”
The money from In-Q-Tel and subsequent federal contracts proved insufficient. Forterra failed to attract commercial interest and closed in 2010 after selling off pieces of itself.
The purchaser was another company where an In-Q-Tel trustee served on the board of directors.
Investors in Forterra, including In-Q-Tel, took heavy losses, according to people involved in the unwinding. Gen. Boyd had no personal investment in Forterra, In-Q-Tel said.HT: naked capitalism who should also have gotten the tip of the old chapeau for the Ambrose Evans-Pritchard piece below.
He did have nonqualified stock options, according to In-Q-Tel, which said holders of such options didn’t receive anything for them when Forterra stopped operating. Gen. Boyd said the only compensation he received from the small business was $5,000 as it was closing down. He left In-Q-Tel’s board of trustees in 2013.
For the CIA, a captive venture-capital firm is a way to encourage and shape technology development without getting bogged down in bureaucracy.
In-Q-Tel’s beginnings trace to a plan hatched in the late 1990s by George Tenet, then the CIA director, who expressed frustration that access to pioneering technology was held back by byzantine government procurement rules.
Congress approved the creation of In-Q-Tel by agreeing to direct money to the organization, and its funding levels increased markedly in later years....MORE
