Spy Tech
Gilman Louie is Recruiting Local Companies to Build Technology with the Cloak-and-Dagger Set at the CIA. Now All He Has to Do is Please the Agency, Congress, the Venture Capital Community and Private Sector Entrepreneurs. No Sweat.
by Eamon Javers - PHOTOGRAPHS BY WELTON DOBY III
Approaching the headquarters of In-Q-Tel on 12th Street downtown, there's no sense that you're entering the shadowy netherworld of spies and soldiers.
The building has a shiny, brand-new feel, and houses one of Washington's most prestigious law firms: Arnold & Porter. But one floor above the firm's law library is a paper sign taped to the wall leading visitors to In-Q-Tel, a new Washington venture capital fund.
It's an office like any other, but with one difference: this fund is backed by the Central Intelligence Agency and financed by the United States Congress.
Very few concessions to security have been made here, although visitors have to ring a doorbell to be admitted to an anteroom, and must be escorted into the inner offices by an In-Q-Tel staffer past a punch-code pad and thumb-print reader.
Otherwise, the guy waiting in the anteroom, with his shaved head and ultra-hip California style, could be any twenty-something technology CEO waiting for a meeting with venture capitalists. But ask him who he is, and he demurs. What does he do for a living? "Computer security." Who has he been meeting with since he's been in town? "Well, I was at a meeting. . .um, somewhere else," he says noncommittally. This guy is friendly, but vague. Later, a receptionist comes to escort him to his meeting, saying, "The guys from the Agency are here now."
That's a typical slice of life for the staff at In-Q-Tel, where the high stakes world of venture capital meets the super secretive world of global intelligence gathering. The office looks innocuous enough. In the kitchenette, dishes are drying in the sink, and newspaper clips hang on the bulletin board: bombings in Belgrade dominate the stories of the day.
This 12th Street office is the epicenter of a bold new experiment in government-private sector relations: a venture fund connected to the CIA with the express goal of investing in technologies that the beleaguered Agency can use to catch up in the technology race. In September, the Agency announced that it was throwing up its hands in trying to keep up with the pace of technology change coming out of Silicon Valley. The once-dominant intelligence agency was now seeing top-of-the-line technology in video games before it was used in spy planes.
The Agency called on an old Valley hand, Gilman Louie, to bring some of the region's flair to Washington, and to lead the investment arm into profitable partnerships with up-and-coming tech firms. It was Louie who came up with the unique name for the fund: The "Q" refers to James Bond's gadget master at the British spy agency, also named "Q."
Louie is perhaps an unlikely choice for an unlikely job: he founded his first company, Nexa, while he was in college at San Francisco State in 1982 and sold it in 1998, and he has since worked for gaming giant Hasbro in bringing their extensive library of game properties into the computer era. Now Louie, a short, bushy-haired Asian American of 39, spends half of his time in Silicon Valley, supervising the opening of In-Q-Tel's Sand Hill Road office, and the other half in DC. And despite the Silicon Valley attitude and emphasis, many of the initial investments made by In-Q-Tel, which has a $28 million budget, are in companies based in Greater Washington.
That's telling, and there are a number of reasons why. First, In-Q-Tel's DC office has simply gotten a head start on its California counterpart. Of the fund's 17 employees, only six are based in Silicon Valley. The list of investments includes big-name companies like Science Applications International Corporation [SAIC], the systems integrator, Lockheed Martin, the defense contractor, and BoozAllen & Hamilton, the consulting firm. These are all companies with a track record of working with the government. There's plenty of opportunity. The fund has been inundated with 205 different requests for funding from 31 different states, Louie says.
In Louie's first meeting with CIA Director George Tenet and the CIA's key private sector liaison, Counselor to the Director A. B. "Buzzy" Krongard, the message was loud and clear. This is a great new experiment, they told him. The CIA is fully behind this. But for this to work, you must go for early wins and show quick results.
Louie has taken that advice to heart.
Look at the roster of eight companies In-Q-Tel has contracted with so far. Louie's outfit is working with SAIC's Technology Research Group to develop a program called Neteraser, which makes it difficult for users to be tracked on the Internet. SAIC is a Fortune 500 company with a large local presence, and it is the largest employee-owned research and engineering company in the nation.
"It's a double-edged sword for the entrepreneur.
Having [the CIA] as an investor may make other people,
especially outside the country, reticent." -Greg Keough
In-Q-Tel is also working with BoozAllen to probe existing vulnerabilities on the Internet, and it is developing advanced search engine tools with Lockheed Martin. The fund is working with the Open GIS Consortium, a group of companies developing a standard for 3-D spatial data. The 3-D data program could enable GPS devices to talk to computers, and input NASA data in the future, for example.
In-Q-Tel has also signed contracts with SRA International, an information technology firm that provides systems integration, consulting, and electronic commerce services; the wireless data company Graviton, and the XML-based business-to-business Web standards company, Excelon.
Most observers are taking a wait-and-see approach on the new concept. James Woolsey, a Washington lawyer and director of the CIA from 1993 to 1995, says, "I think it's a creative idea worth a try, I don't know if it will work." The problem that worries Woolsey is the government's inability to pay its people competitive salaries in the venture capital industry, "not to mention what they could make with stock options." Nonetheless, he's a supporter: "The government needs a close working relationship with people in the technology sector. This seems to be a creative effort, I'm glad to see it."
Of course, there are those startup CEOs who just aren't interested in working with the CIA. Greg Keough should be a big fan of In-Q-Tel. He's a dot-com startup CEO working on a financial site for Latin America called Zona Financiera. And he's a veteran CIA agent who recently raised a new round of $30 million in VC money for his company. But Keough, who's seen both the CIA and the venture capital community up close, is a skeptic. "It's an interesting idea, but whether or not it works is another story," Keough says. "It's a double-edged sword for the entrepreneur. Having [the CIA] as an investor may make other people, especially outside the country, reticent." Plus, he adds, "You can't be a successful VC and be operating like the U.S. Government operates."
Columbia Capital's Harry Hopper is also wary about the idea: "We would not be good at garnering counter intelligence in some hot spot around the globe," he says. "I would imagine that in order for the government to execute this well, they would need to bring on experienced people. . .it is a specialized set of skills to do this successfully."
Louie says he expects such wariness about the new venture. "This has everyone's heads spinning," he says. "There are a lot of people who are a little confused." And it's not just the entrepreneurs who are asking the questions. Louie says that the House Appropriations Committee staffers who are ultimately responsible for the firm's funding are paying frequent visits to In-Q-Tel, to see how the money's being spent. And the private sector has taken notice: the fund was originally named In-Q-It, until protests from Intuit, the personal finance software company, called for a change of plans. Intel, the chipmaker, doesn't have a problem with the name's similar sound, Louie says.
In-Q-Tel's Private Sector Board of Trustees
Lee Ault, Chairman
Former chairman and CEO of Telecredit
Norman Augustine
Former chairman and CEO of Lockheed Martin
John Seely Brown
President, XEROX PARC Research Center
Michael Crow
Executive vice provost of Columbia University
Stephen Friedman
Senior principal of Marsh McLennan Capital and former chairman of Goldman Sachs
Paul Kaminski
President and CEO of Technovations, senior partner, Global Technology Partners, and former undersecretary of defense for acquisition and technology
Jeong Kim
President of Carrier Networks Group, part of Lucent Technologies, and founder of Yurie Systems
John McMahon
Former president and CEO of Lockheed Missile and Space Company and former deputy director of the Central Intelligence Agency
Alex Mandl
Chairman and CEO of Teligent, former president and COO of AT&T
William Perry
Former secretary of defense
The CIA, for its part, is taking a hands-off approach. "They want a little bit of separation, they don't want to pollute us too much," Louie says. To that end, the employees at In-Q-Tel are kept separate from the Agency folks. Most don't even have security clearances, and only a few top people from In-Q-Tel make the regular visits to CIA headquarters in Langley. "We have to get clearances for that," Louie says, "You have to have a security clearance just to walk into the building." In-Q-Tel is incorporated as a 501(C)3 non-profit, and will disclose its financials to the IRS like any other nonprofit. In-Q-Tel will only work on public projects, it will not have classified technology under its purview.
The In-Q-Tel team has a mirror group that works within the CIA, called the QIC Team [a rough acronym for "The In-Q-Tel Interface Center"], with between 11 and 15 security-cleared employees who offer In-Q-Tel staffers the laundry list of technologies the CIA would like develop. It's In-Q-Tel's mission to tailor its investment strategy to meet those needs. The QIC Team also is in charge of converting the publicly available commercial products that In-Q-Tel will help develop, and turn them into usable intelligence assets for the CIA. Louie says he's in touch with the Agency's QIC Team daily.
The pressures on Louie are unique. He reports to a board of directors, which includes ex-Lockheed Martin CEO Norm Augustine, Teligent CEO Alex Mandl, and Lucent's Jeong Kim from Greater Washington. He has to keep the CIA happy with his progress. But he's also got to satisfy Congress, which has oversight responsibility, and add value for the entrepreneurs In-Q-Tel works with. Beyond that, there's a whole cadre of venture capitalists and former private sector colleagues in Silicon Valley keeping an eye on Louie's unique experiment.
Born the son of a government employee in San Francisco, Louie says he grew up with the belief that the government could do some good. His father, an Army Air Corps veteran, worked as a staffer at the department of public works on San Francisco's Treasure Island. Louie graduated from San Francisco State in 1983, with a bachelor's degree in business administration and information systems, and a fast-growing new company, called Nexa, already up and running.
"The thing I understood was that the CIA wanted change,
and it was mission critical." - Gilman Louie
With a little help from Robert Maxwell, the late British media tycoon, Louie bought a competitor, merged the two companies and ran them until Maxwell died in 1991 and his empire collapsed amid allegations of fraud and mismanagement. According to a 1996 retrospective in the London Telegraph, the end of the Maxwell empire did not come quietly: "Maxwell's creation of two public corporations and a labyrinthine 400-company 'private side' controlled by secretive trusts was portrayed by his auditors, Coopers and Lybrand, as 'a motley bunch representing bright new ideas and the detritus of deals concluded long ago.'" Maxwell died angry: two months before his death, the Telegraph reports him banging on a conference room table and cursing his own board of directors: "Not in 40 years of business have I seen such a craven bunch of disloyal bastards."
After his death, Maxwell's relentless, debt-financed business unraveled, and Gilman Louie was looking for new benefactors.
Louie met another well-heeled future investor at the Silicon Valley venture capital powerhouse Kleiner Perkins Caufield & Byers: Vinod Khosla, a billionaire partner there, and a former founder of the technology behemoth Cisco, Khosla gave Louie the money he needed to buy a Hunt Valley, MD-based gaming company, MicroProse, and combine it with his own company, now called Spectrum HoloByte. Louie oversaw the operation, taking the combined valuation of the PC gaming company as high as $400 million, before the PC market crashed as the market headed toward console systems.
Louie sold the company to Hasbro in 1998 for $70 million. In the same time frame, Louie served on the board of another company, Wizards of the Coast, which was sold to Hasbro for $350 million. Louie's role as chief creative officer at Hasbro was to mastermind the company's strategy for converting its enormous library of famous game titles into computer-age hits as general manager for an internal project called Games.com. Today, he calls Hasbro, "the best of everything a family business should be."
But it was while he was at Hasbro that Louie met Randy Jayne, a recruiter from Heidrick and Struggles, at a dog-fighting seminar arranged by a national business magazine that he declines to name. The idea for the event was to pit business leaders against each other in mock aerial combat. Louie, who had designed flight simulator computer games but never earned a pilot's license, was blown away by Vietnam-veteran CEOs. Randy Jayne was one of the execs who "killed" Louie. "Randy ate my lunch in 15 seconds and again in 45 seconds," Louie says, grinning.
But later Jayne approached Louie with a proposition: Take a look at a business plan for something called simply, "The Enterprise."
"I thought, what is this, a space ship?" Louie recalls. "I have no intelligence background, and this plan is talking about threats to the nation and the intelligence community," he says. "The thing I understood was that the CIA wanted change, and it was mission critical. This was the first time where the government raised its hand and said, 'we need help, can you folks from the Valley come down here and help us?'"
They came, but at a price. The In-Q-Tel team can't do the one thing that traditional VCs can: reap the financial rewards of their investments. Any In-Q-Tel profits must be returned to the federal Treasury. And with only $28 million to invest, the fund is limited to very small and side-by-side deals with other private funds. That's where Louie's connections come in. "[Other VCs] like me because they know I'm not gonna get greedy," Louie says. "They know I'm trying to spread my money out." What In-Q-Tel demands is the rights to technology developed by its portfolio companies, and in exchange, the companies get to own the commercial patents from their technologies, as well as copyrights and trademarks. And, of course, the money.
Now all Louie has to do is make it work. If it does, expect to see a wide array of government agencies begin to dabble in venture capital. It's a model that could work for, say, NASA or the Department of Defense just as easily as it works for the CIA. If it works at all.
