CIA in-Q-TEL Applicability

Acquisition Review Quarterly — Winter 2003

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The CIA’s In-Q-Tel Model

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OPINION

THE CIA’S IN-Q-TEL MODELITS APPLICABILITY

Wendy Molzahn

In July 1999, the Central Intelligence Agency (CIA) chartered and funded anewly established corporation, In-Q-Tel, Inc., to search the private sector forpromising commercial technologies and to invest in the development of newtechnologies to support the Agency’s critical intelligence missions. Overviewsare provided of the structure, processes, and problems associated with the In-Q-Tel model; the Department of Defense’s (DoD) current ability, throughinnovative programs and flexible contracting authorities, to attract cutting-edgetechnologies; and the potential costs and benefits of establishing a “venturecatalyst” firm similar to In-Q-Tel for DoD. Finally, it is recommended that DoDestablish a “venture catalyst” firm as a tool to attract new technologies in additionto — rather than as a replacement for — existing programs and authorities.Success will depend on DoD’s ability to transform its culture to accommodateinnovation, risk, and flexibility.

DISCLAIMER

The views represented in this article are those of the author and do not reflect the official policy orposition of the Department of the Navy, the Department of Defense, or the Federal Government.

The military’s new dependence on information systems was drivenhome Thursday by Defense Secretary Donald H. Rumsfeld in a speechaimed at refocusing the Pentagon’s efforts to change the military tobetter counter the threats of the 21st century. In robust defense ofPresident Bush’s proposed $48 billion increase in military spendingnext year, Rumsfeld called for more funding for intelligence and moreattention to unpiloted aircraft and other sophisticated reconnaissancesystems. “We need to find new ways to deter new adversaries,”Rumsfeld said. “We need to make the leap into the information age,which is the critical foundation of our transformation efforts.”

“War Success Propels Shift to Digits,”The Washington Post, February 2, 2002


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I n 1998, senior officials in the CentralIntelligence Agency (CIA) began torealize that there was a significant in-

formation technology (IT) gap betweenthe Agency, which continued to leverageoff of past accomplishments, and the privatesector, which was transforming its enter-prises through the use of cutting-edgetechnologies. The CIA leadership deter-mined that in order to regain the lead intechnology the Agency experienced in the1950s and 1960s during the developmentof the U-2, SR-71, and CORONA recon-naissance programs, it would need to esta-blish a vehicle to tap into private sectoradvances in information technology(Yannuzzi, 2000). In May 1998, GeorgeTenet, the Director of Central Intelligence(DCI), announced in his “Strategic Direc-tion” initiative:

Beginning with the critical fieldof IT, we will pursue this [new]approach through the creation ofan external nonprofit enterprisedesigned to be electronically con-nected to leading researchthroughout the country. This newentity will speed insertion of ma-ture technologies, support rapiddevelopment of mission-criticalapplications, and enhance ourability to attract the skills andexpertise vital to our success.(Business Executives for NationalSecurity [BENS], 2001, p. 5)1

A working group of senior CIA offi-cials was chartered to develop and executethe DCI’s concept. With the assistance ofa consulting firm and a law firm, the work-ing group analyzed several federal gov-ernment models before deciding on a

hybrid model that incorporated aspectsof private sector venture capital firmsand government technology procure-ment models. The purely governmentmodels were rejected for several rea-sons — the most significant reason be-ing that the working group was not con-vinced that a government organizationcould react with lightning speed tochanges in the dynamic commercial ITenvironment (BENS, 2001).

At the request of the CIA, NormanAugustine, former CEO of Lockheed-Martin, founded In-Q-Tel (originallynamed Peleus, Inc. and then In-Q-It) as aprivate sector corporation in February1999. It remains a nonprofit, non-stockcorporation, incorporated in the state ofDelaware and exempt from federal incometaxation under section 501(c)(3) of theInternal Revenue Code. In-Q-Tel’s Certi-ficate of Incorporation dated 16 February1999, states that its purpose is to:

• Perform and promote research andrelated scientific endeavors in the fieldof IT;

• Foster collaborative arrangements thatmake private sector IT expertise morereadily accessible to agencies of theUnited States; and

• Foster the development of IT that willbenefit the public, private, and aca-demic sectors of the United States(BENS, 2001).

In-Q-Tel was designed to be flexibleenough to allow for interface with all ele-ments of the IT community, the technol-ogy industry, and academia. Its mission,as originally stated, was “to exploit and


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develop new and emerging informationtechnologies and pursue R&D that pro-duce innovative solutions to the most dif-ficult problems facing the CIA and theIntelligence Community” (BENS, 2001,p. 6).2 The organization’s vision, accord-ing to its July 1999 Charter Agreement isto…[I]nvent the Agency of the future byraising its IT competence to that of thebest practices of the private sector andthen to explore new areas of research thatequip it with capabilities that protect andadvance our country’s national securitywell into the 21st century. (BENS, 2001,p. 6)3

The In-Q-Tel CEO and Board of Trust-ees set strategic policies and overseeoperations. The CIA is the sole source offunds for In-Q-Tel at this time; however,the firm remains an independent entity.4

Although In-Q-Tel does not requireAgency approval for its business deals,which can include equity investments,contracts, and other partnering relation-ships, there is a significant amount ofcoordination between the CIA and In-Q-Tel on all business-related issues. The CIAdoes not have a typical “program man-agement” oversight relationship with In-Q-Tel — the corporation makes decisionsand provides the CIA with results. (Yan-nuzzi, 2000)

In-Q-Tel was designed to be an agile,flexible commercial firm that could workon its own terms with firms in Silicon Val-ley and throughout the world. The com-pany has offices in Rosslyn, Virginia andMenlo Park, California. Currently, In-Q-Tel employs approximately 45 individu-als (35 in Virginia and 10 in California) inthree general areas: operations, technical,and venture. The relationship between theCIA and In-Q-Tel is acknowledged, and

work performed by In-Q-Tel, as well asits relationship with other firms and aca-demic institutions, is generally unclas-sified.

THE IN-Q-TEL MODEL

The concept of operations for In-Q-Telcontinues to evolve. The firm initiallyfocused on the role of technology sys-tems integrator; in this role, In-Q-Telsearched the marketplace for commercialoff-the-shelf (COTS) technologies thatcould satisfy the Agency’s needs (BENS,2001). In-Q-Tel currently performs as acatalyst in developing technologies tosolve specific CIA enter-prise IT problems whilesimultaneously movingthem into the commer-cial marketplace. In-Q-Tel leverages off of thecommercial sector tosatisfy the Agency’s needs by providinginput to promising technologies duringthe early stages of development. In-Q-Telhas the ability to partner with public andprivate companies worldwide, as well aswith academic institutions and laborato-ries.

In-Q-Tel engages with the companiesin a variety of ways, including work pro-grams and equity investments. Invest-ments typically range from $500,000 to$2.5 million in each company, with a totalcommitment of up to $5 million for theduration of the relationship (In-Q-Tel,2002). Generally, In-Q-Tel is one of sev-eral venture capital firms investing in eachIT company. In-Q-Tel has an expert in-house team that evaluates each technologythrough a rigorous technical review process

“The concept ofoperations forIn-Q-Tel continuesto evolve.”


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and provides feedback to the portfo-lio (IT) firm. Portfolio firms with suc-cessful technologies may enjoy a stra-tegic advantage (resulting from In-Q-Tel funding, technical input, or the pros-pect of marketing their products to theCIA) as their products enter the com-mercial marketplace. Some versions ofthe commercial products that emergetypically have been or will be evalu-ated by the CIA. For its investment ofup to $5 million through In-Q-Tel, theCIA’s return may be a cutting-edge so-lution to an IT problem that uses tech-nologies unlikely to be developed

through federal fund-ing alone.

In-Q-Tel is a hybridorganization, combin-ing various governmentand private sector mod-els. Much like a gov-ernment Research andDevelopment (R&D)

organization, In-Q-Tel is bound througha contract to only one customer, the fed-eral government. However, as a leancommercial corporation, it is not lim-ited by government bureaucratic con-straints, civil service policies, or regu-lations and procedures.

In-Q-Tel characterizes itself as a “ven-ture catalyst” rather than a venture capi-tal firm, an expeditor of new technolo-gies (In-Q-Tel, 2002). CEO Gilman Louiemakes it clear that “[m]ost venture fundsfocus in on the business model…[w]ehave a deep technical expertise…Themost important thing is the technologyreturn…[o]f secondary importance is thefinancial return” (Johnston, 2001, p. E5).

In-Q-Tel’s investment in portfolio firmsincludes time and technical expertise, the

unusual opportunity of allowing firms totest their technology using the CIA as atest bed, and funding. In addition to per-forming a review of each company’s tech-nology, In-Q-Tel also performs an in-depth review of each company’s finan-cial status before entering into a contrac-tual arrangement to ensure that the com-pany is financially sound. Depending onthe circumstances, In-Q-Tel’s contractualarrangements with portfolio firms caninclude one or more of several compo-nents: a software licensing agreement, anagreement that funds technology devel-opment or modification in accordancewith a specific Statement of Work, andan equity investment in the firm (Rich-ard, R. B. & Cook, K., personal interview,March 1, 2002). Approximately half ofIn-Q-Tel’s deals include an equity invest-ment (BENS, 2001).5

THE IN-Q-TEL OPERATIONAL MODELThe In-Q-Tel Operational Model is

comprised of four discrete entities: theCIA, QIC (In-Q-Tel Interface Center), In-Q-Tel, and commercial firms/academia(see Figure 1). The QIC, a 13-memberorganization, serves as the link — andoften the “translator” — between the CIAand In-Q-Tel. As the interface organiza-tion, QIC ensures that the CIA’s require-ments are accurately identified before theyare passed to In-Q-Tel; it is also respon-sible for the transition of commercial ITsolutions from In-Q-Tel to the Agency.

The QIC manages contract administra-tion and oversight of In-Q-Tel. The QICand In-Q-Tel use a collaborative process,the “Q Process,” for the development andexecution of projects.6 The “Q Process”is an eight-step process that begins withStep Q

0, Agency Needs Definition and

“In-Q-Tel is ahybrid organiza-tion, combiningvarious govern-ment and privatesector models.”


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moves through step Qd,

Deployment andAgency Acquisition, with several reviewboards and required approvals along theway.

During the Agency Needs Definitionphase, the CIA develops strategic goalsto pass to the QIC. Within the parametersset by the strategic goals, the QIC surveysusers across the CIA to define the IT Prob-lem Set for the fiscal year. The QIC thenrefines, prioritizes, and declassifies theProblem Set for submission to In-Q-Tel.In-Q-Tel searches the commercial marketsto “landscape the technological ‘spaces’that it plans on engaging to meet the Prob-lem Sets” (BENS, 2001, p. A-1) and theninvests in technologies from firms oracademia that will satisfy an AgencyProblem Set and also be viable commercialproducts.

Later in the process, In-Q-Tel tests thetechnologies against the Agency’sneeds, provides feedback to the firms,

and determines whether further fundingfor prototype development or a pilot pro-gram with the Agency is appropriate. In-Q-Tel actively advises the firms regard-ing commercialization of the productsthroughout the process. The final phasesof the process involve transitioning tech-nology solutions, via the QIC, to the CIAfor integration into mission-critical sys-tems. By the end of the process, an In-Q-Tel portfolio company will typically havea product with commercial potential.

Problem Sets are generally broadareas of interest. FY2001 Problem Setsincluded secure mobile office capabili-ties, Web discovery techniques, ana-lytic tools and techniques, Internet pri-vacy technologies, and collection tech-nologies. Since September 11, 2001,there has been a shift to technologiesthat enhance intelligence efforts sup-porting the war on terrorism, accom-panied by a dramatic increase in the

Figure 1. In-Q-Tel Model

CIA Silicon Valley/Academia

Board of Trustees

QIC

FuelInnovative

R&D

Needs

Technology Infusion

Technology/Solutions

StrategicProblems

In-Q-Tel

This is a modified version of the diagram in the Army Science Board Venture Capital Panel Briefing,Version 5.0, dated 7/25/01.


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number of proposals and business planssubmitted to In-Q-Tel.

Historically, In-Q-Tel receives ap-proximately 600 business plans annu-ally and provides funding to approxi-

mately 10 technologystart-ups as a result. InFY2001, In-Q-Telfunded approximately$30 million for pro-grams, pilots, and pro-totypes. CEO GilmanLouie estimates that ap-proximately 80 percentof the companies fundedby In-Q-Tel in 2001 hadnever done businesswith the federal govern-

ment (Cortese, 2001). These firms includeMohomine, Intelliseek, Traction Soft-ware, Tacit Knowledge Systems,MediaSnap, and Browse3D. BetweenSeptember and November 2001, In-Q-Telreceived over 600 business plans (ap-proximately the number of plans receivedduring the previous year); a minimum of15 technology investments was antici-pated in FY2002 (Kady, 2001).

CORPORATE CULTUREIn-Q-Tel has achieved relative suc-

cess over the past three years. In part,this has been due to the company’s cul-ture, which is energetic and creative.The current President and CEO, GilmanLouie, was previously a Silicon Valleyentrepreneur, an executive at HasbroToys, and developer of computergames. Louie believes that In-Q-Tel willfail if it falls into the trap of becoming agovernment bureaucracy. Louie states,“I do not want this organization to bejust another research organization that

was created by the federal government,whose sole mission in life is to get big-ger and get more dollars from the fed-eral government…I want this to be verylean, very small, very quick-moving,with…people who don’t want to makeit a career” (Loeb, 2000, p. A-15). In-Q-Tel employees have diverse back-grounds, but their experience is over-whelmingly from the commercial sec-tor. Many come from start-up compa-nies, have worked for or consulted withthe federal government, and have tech-nical or business/law backgrounds.

In-Q-Tel’s Web site (www.inqtel.com)stresses that the company is designed foragility, that employees who fill positionssuch as “Visionary Solutions Architect”are expected to stay with the companyonly three years before moving on, andthat only the best and brightest are cho-sen to participate. The Web site de-scribes the in-house technical teams asswat teams, the technologies In-Q-Telinvests in as frame-breaking, and statesthat if your technology rocks…we’d liketo talk to you. In-Q-Tel is clearly work-ing from a frame of reference that willappeal to the firms it hopes to attract.

In-Q-Tel’s success can also be attrib-uted to the fact that it has an office in Sili-con Valley and proactively reaches out tofirms with attractive technologies. In-Q-Tel does not merely issue a request forwhite papers and then wait for a response.The company receives proposals as aresult of its Venture Capital Outreachprogram, from referrals, in response tonewspaper and magazine articles, as wellas through its public Web site. Finally,In-Q-Tel can offer firms technical advan-tages that they cannot find elsewhere: arigorous technical review process, an

“Historically,In-Q-Tel receivesapproximately600 businessplans annuallyand providesfunding toapproximately10 technologystart-ups as aresult.”


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opportunity to use the CIA as a test bed,and the potential of partnering with andtransitioning technologies to this “poweruser” in the intelligence community.

In their Report of the IndependentPanel on the CIA In-Q-Tel Venture, sub-mitted to Congress in June 2001, theBusiness Executives for National Secu-rity (BENS) stated, “the In-Q-Tel busi-ness model makes sense and itsprogress to date is impressive for a two-year old venture… In-Q-Tel’s potentialadvantage to the CIA outweighs therisk. In-Q-Tel should continue as theCIA’s entrepreneurial and innovativeventure facilitating the delivery of newtechnology to the CIA” (BENS, 2001,p. v).

PROBLEMS WITH THE IN-Q-TEL MODEL

The BENS report indicated, however,that there was room for improvement inthe In-Q-Tel model, particularly regard-ing the relationship and communicationbetween In-Q-Tel and the CIA and theimplementation of new technologywithin the CIA’s business processes.Most of the problems cited were a resultof inefficient government processes andsecurity challenges associated with in-serting tested technologies into CIA sys-tems (software or hardware to be insertedmust be approved by up to six reviewboards). Few problems were noted re-garding the actual functioning of In-Q-Tel as a corporation, its relationship withoutside technology firms, or its abilityto attract and invest in new technologies.

The report did indicate, however, thatdue to ineffective marketing within theCIA, key users and stakeholders were

not fully aware of In-Q-Tel’s capabili-ties. The BENS report recommendedthat a more proactive QIC could re-solve the majority of these interfaceproblems. The BENS report also rec-ommended that In-Q-Tel not expand itsmission beyond the CIA until it hasbeen judged a success in its currentmission, possibly upon the expirationof its charter agreement in July 2004(BENS, 2001).

In response to the BENS report, theCIA has implemented several initia-tives to streamline and expedite tech-nology insertion into its IT architectureand aggressively market In-Q-Tel’s ca-pabilities within the Agency (Directorof QIC and QIC Contracting Officer,personal interview, February 21, 2002).The QIC now informs users and stake-holders, early on, of promising tech-nologies and solicits their input on thetailoring process. The newly consoli-dated Chief Information Officer (CIO)function at the Agency will also helpcoordinate and streamline the entireprocess, from the generation of Prob-lem Sets to the finalprocurement of IT.

Most notably, theDCI has established anindependent solutiontransfer fund specificallyearmarked for establish-ing pilot programs, nor-mally 12 to 18 monthsin duration, to imple-ment new technologieswithin the Agency. A potential user is pro-vided solution transfer funding to test apromising technology in his system; theuser is not required to deplete his ownbudget to support the pilot program.

“The QIC nowinforms users andstakeholders,early on, of prom-ising technologiesand solicits theirinput on thetailoring process.”


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If the pilot is successful, the Agencywill issue a separate contract to buy thetechnology, either on a sole source basisor through a limited, best-value competi-

tion if more than onesource is identified. Cur-rently, there are sevenactive pilot programswithin the Agency andthree more to be launched.Finally, the QIC and In-Q-Tel are in the process of

revising their performance metrics to focuson areas such as the acceleration of tech-nology insertion rather than on the num-ber of proposals received or the numberof contracts issued.

Despite the need for continuous im-provement in the areas of coordinationand communication with its customer, sig-nificant progress is being made in theseareas. In-Q-Tel continues to evolve as auseful, effective tool for the CIA.

INTRODUCTION OF NEWTECHNOLOGIES WITHIN DOD

There are several organizations, pro-grams, and authorities within DoD thatwere created to encourage commercialfirms to partner with the federal govern-ment and to introduce new technologiesto military systems. These arrangementshave met with varying degrees of success.The Defense Advanced Research ProjectsAgency (DARPA), Federally FundedResearch and Development Centers(FFRDC), and Research Laboratories areall chartered to develop state-of-the-arttechnologies.

The Small Business Innovative Research(SBIR) program and the Small Business

Technology Transfer (STTR) programwere established to provide cutting-edgetechnologies and innovative solutions toDoD by tapping small U.S. technologycompanies and research institutions. Inorder to ease burdensome statutory andregulatory restrictions associated withgovernment contracting, 10 U.S.C. 2371and Section 845 authorities were grantedto DARPA, and ultimately the military ser-vices, to allow for the award of vehiclesother than Federal Acquisition Regulation(FAR) contracts to firms that do not nor-mally work with the government. Under10 U.S.C. 2371, authority is granted toissue non-FAR agreements, termed “OtherTransactions,” for basic, applied, or ad-vanced research. The National Defense Au-thorization Act for FY94, Public Law 103-160, Section 845 grants the authority tocarry out prototype projects without ap-plying several procurement-unique stat-utes.

The effectiveness of each of these toolsin attracting cutting-edge, commercial tech-nologies to the federal government, and howeach compares to the In-Q-Tel model, isexamined below.

ORGANIZATIONS THAT BRINGNEW TECHNOLOGIES TO DOD

DARPA handles projects, each lastingan average of three to five years, de-signed to ensure that the United Statesmaintains a lead in developing state-of-the-art technologies to meet military chal-lenges of the future. In accordance withits charter, DARPA investigates ideas andperforms fundamental research/develop-ment and prototyping efforts but doesnot carry these efforts through to pro-duction. Appropriately chartered DoDagencies must procure commercial or

“In-Q-Telcontinues toevolve as auseful, effectivetool for the CIA.”


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military products that incorporate thetechnologies. DARPA establishes agree-ments with industry and educational in-stitutions using FAR contracts as well asSection 845 prototyping agreements andOther Transactions (primarily for consor-tia arrangements). DARPA has had mixedsuccess in attracting non-traditional firmsto do government business.

The DARPA Web site, last updated inJune 2002, indicates that the majority ofrecent Section 845 prototyping agreementswere awarded to large traditional defensecontractors (The Defense Advanced Re-search Projects Agency [DARPA], 2002).However, it is likely that small, commer-cial firms may be second- or third-tier sub-contractors working under non-FARagreements with the primes. Typically,universities lead the consortia underDARPA’s Other Transaction arrange-ments; however, it is also likely that small,high-tech firms participate on the teams.

Clearly, DARPA and In-Q-Tel have sig-nificantly different missions. DARPA’s roleis to develop the very best technologiesto support future military requirements,with possible commercial applications tofollow. In contrast, In-Q-Tel’s focus is totap existing or potential commercial tech-nologies that can be tested and used, ininnovative and creative ways, to solvecurrent IT problems within the Agency.In choosing technologies, commercialapplications are key to In-Q-Tel, but notnecessarily to DARPA. Based on the pub-lished statistics, DARPA tends to contractor establish agreements with traditionaldefense firms or universities rather thanwith small commercial firms; small com-mercial firms are potentially second- orthird-tier subcontractors. To date, In-Q-Tel’s commercial arrangements are solely

with high-tech firms. Although DARPAplays a critical role within DoD, it doesnot perform the same function for DoDthat In-Q-Tel performs for the CIA.

FFRDCs are privately administered,nonprofit organizations sponsored by thegovernment (DoD and civilian agencies),with restrictions on their activities to pre-serve their independence and objectivity.FFRDCs work as strategic partners with asponsoring government agency, as wellas with industry and educational institu-tions, to solve complex technical problems(BENS, 2001). FFRDCs are tied togovernment contracts, are part of the gov-ernment culture, and tend to be too slowand bureaucratic to react flexibly to thedynamic environment that surrounds IT(BENS, 2001). Historically, FFRDCs hireengineers to work in-house — they rarelypartner with non-traditional commercialfirms. Although both In-Q-Tel andFFRDCs are nonprofit organizationsbound to the federal government throughcontractual arrange-ments, they have radi-cally different culturesand methods of doingbusiness.

Government, univer-sity, and corporate labo-ratories generally workon technical solutionsin-house. Often devel-opment cycles arelengthy and costs are high. Laboratoriesprovide new technologies to DoD in ac-cordance with the terms of contracts,grants, or cooperative agreements; how-ever, the mission of laboratories is gen-erally different from In-Q-Tel’s missionof partnering with commercial compa-nies to leverage off of existing private

“Historically,FFRDCs hireengineers to workin-house — theyrarely partnerwith non-traditionalcommercialfirms.”


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sector research and development (BENS,2001). Most laboratories are more orientedtoward developing an in-house productto satisfy a government requirement ratherthan seeking a commercial solution.

PROGRAMS THAT BRINGNEW TECHNOLOGIES TO DOD

The Small BusinessInnovative ResearchProgram funds funda-mental research anddevelopment projectsthat support DoD re-quirements and alsohave potential in thecommercial market-place. The firms solic-ited by DoD are smallcompanies organized

for profit that have a maximum of 500employees. Awards are offered in twophases. Phase I awards are six monthsin duration and funded up to $100,000;Phase II awards are two years in length,funded from $500,000 to $750,000,and result in fabrication of a prototype.After Phase II, the firms must work in-dependently to market their products forproduction. A survey of the firms thatwere awarded contracts over the pastfiscal year reveals a mix of non-traditional and DoD small businessesparticipate in the program.

Congress established the Small Busi-ness Technology Transfer Program in1992 to fund cooperative research anddevelopment projects involving smallbusinesses and research institutions.The purpose of the program is to en-able research institutions to move theirtechnologies to the public and commer-cial sectors. The DoD STTR Program

was funded at $31 million in FY2000(Office of the Secretary of Defense,2002).

Both of these programs function likeIn-Q-Tel in that they encourage non-tra-ditional firms and research institutions toprovide new technologies to the federalgovernment. However, the SBIR andSTTR programs require the issuance ofgovernment contracts and the transfer andobligation of funds, a time-consuming,rigid process at best. These governmentprograms are not implemented with In-Q-Tel’s speed and agility. In addition, In-Q-Tel searches out, funds, and tests onlytechnologies that have definite commer-cial applications; the high-tech firmspartnering with In-Q-Tel are expected tomake significant amounts of money on thecommercial market, much more than thelimited amount of money that In-Q-Telprovides.

The high-tech firms are primarily at-tracted by the technical review performedby In-Q-Tel and the prestige of having theCIA as a customer, not the small amountof funding provided for research and de-velopment. This is not necessarily true ofthe companies responding to the SBIRsolicitation, which may rely solely on gov-ernment funding for their projects. Underthe SBIR and STTR programs, the pre-requisite for contract award is not com-mercial viability; government interest restsprimarily with the military application ofthe technology.

EFFECTIVENESS OF DOD’S ORGANIZATIONS,PROGRAMS, AND AUTHORITIES

DoD has a number of tools — organi-zations, programs, and authorities — thathave introduced new technologies intomilitary systems with relative success.

“The high-techfirms are prima-rily attracted bythe technicalreview performedby In-Q-Tel andthe prestige ofhaving the CIAas a customer….”


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However, none of these approaches hasenabled DoD to leverage off of success-ful commercial technologies in the waythat In-Q-Tel has worked for the CIA.In-Q-Tel represents a combination ofgovernment and commercial structures.

Although it is an independent corpor-ation, it is contractually bound to thefederal government much like theFFRDC model and its strategic objectivesare intertwined with the strategic objec-tives of its only customer. Unlike anypurely DoD organization or program,though, it has a commercial culture andextended reach into the commercial com-munity. No DoD organization, program,or contracting authority fills the uniqueniche filled by In-Q-Tel. The addition ofa “venture catalyst” firm to the currentDoD structures would provide one moreeffective tool to enable the military tomove into the information age.

ESTABLISHING A “VENTURE CATALYST”FIRM FOR DOD

When assessing the feasibility of es-tablishing an entity based on the In-Q-Tel model, DoD must consider whetherits establishment would conflict with anystatutes or regulations, the cost of estab-lishing a similar firm, and the organiza-tional buy-in that would be required forsuccess. Based on advice from internalattorneys, as well as an independent lawfirm, the CIA made the determination thatIn-Q-Tel lawfully could be formed, char-tered, and funded with no special legisla-tion other than the appropriation of funds(Director of QIC and QIC ContractingOfficer, personal interview, February 21,2002).

Norman Augustine and other privatecitizens formed In-Q-Tel with the under-standing that it would specifically sup-port CIA activities. The legal basis forits formation is the same as for any othernonprofit corporation. The Agency thenchartered and funded In-Q-Tel througha government contract. The CIA’s con-tracts with In-Q-Tel are based on theFAR, although the Agency relied on Sec-tion 8 of the CIA Act of 1949 to waivecertain provisions that otherwise wouldhave applied. The CIA believes thatfunding an organization like In-Q-Telusing 10 U.S.C. 2371 authority wouldallow even more flexibility, since underOther Transactions, most FAR regula-tions are optional, intellectual propertyprovisions can be crafted, and most pro-curement-specific statutes are waived. Itappears that there are no statutes or regu-lations that would prevent DoD from es-tablishing an In-Q-Teltype arrangement.

According to theBENS report, totalGeneral and Adminis-trative costs for In-Q-Tel were approximately$12.6 million for thefirst year, includingstart-up costs of ap-proximately $2.5 mil-lion, and annual recurring costs, includ-ing salaries for employees and compen-sation for Board Members of approxi-mately $10.1 million (BENS, 2001). Inorder to establish an In-Q-Tel-like en-tity, DoD would need approximately$13 million for start-up and adminis-trative expenses as well as additionalfunding for mission delivery (programs,prototypes, etc.), equity investments,

“No DoDorganization,program, orcontractingauthority fillsthe unique nichefilled byIn-Q-Tel.”


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and miscellaneous items. Total CIAfunding for In-Q-Tel was $28.7 millionin FY99, $37.27 million in FY00, and$33 million in FY01 (BENS, 2001).

QIC and In-Q-Tel employees pro-vided the following “lessons learned”that might be valuable to a governmentagency:7

• Establishing a business and opera-tional relationship with a firm like In-Q-Tel is not easy. You need supportfrom the Head of the Agency downthe chain of command. Everyoneneeds to be committed to success.

• You need the ability to think outsidethe box and manage rather thanavoid risk.

• Initially, you must start with a well-defined, bounded set of technologiesto go after. You can always expandthe Problem Set to incorporate new

technologies later.

• Your organiza-tion may need a culturechange — if you aregoing to insert newtechnologies from theoutside, the idea that“if it isn’t developedin-house it isn’t good”

must change.

• When starting to work with this typeof firm, limit your technologies. Atfirst, pick a well-defined technologythat is somewhat easier to transfer toensure success. Once you pick thetechnology, pick members for the

Board of Directors who have exper-tise in the technology areas.

• Remember that a company like In-Q-Tel has a high overhead and ishuman- capital intensive, because ofthe cadre of engineers who test tech-nologies. If the technology is lesscomplex, the overhead may be re-duced.

• Once a decision is made to establisha company like In-Q-Tel, commit-ment and patience is necessary.

In order to manage risk, avoid pitfalls,and benefit from lessons learned, anorganization choosing to establish anentity similar to In-Q-Tel should considerconsulting with (or even employing)experienced CIA and In-Q-Tel personnelto establish a business plan geared towardsuccess.

RECOMMENDATION

Establishing a “venture catalyst firm”would greatly benefit DoD by providinga new approach to developing and insert-ing commercial technologies into militarysystems. As an addition to rather than areplacement for existing programs andauthorities, this model would enhanceDoD’s ability to attract and tailor newtechnologies to provide innovative solu-tions; establish an efficient, flexibleconduit for contracting with cutting-edge firms; enable DoD to leverage offof the commercial sector technologiesthat might not be available within thelimitations of the federal acquisition

“You need theability to thinkoutside the boxand managerather thanavoid risk.”


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system and with federal funding alone;and further encourage development ofdual use technologies.

This model applies not only to IT, butalso to other commercial technologies thatsupport the DoD mission. There are noreadily apparent legal or financial barri-ers, provided that funds are appropriated,that would prevent DoD from establishing

Wendy Molzahn is a program manager with the Department of theNavy. She has also performed duties of a contract negotiator,contracting officer, and chief of the contracting office. Ms. Molzahn isa member of the Acquisition Professional Community. She receiveda B.A. from Smith College, an M.A. from the University of Rochester,and, in June 2002, an M.S. degree in national resource strategy fromthe Industrial College of the Armed Forces.

(E-mail address: [email protected])

an arrangement similar to the arrange-ment between the CIA and In-Q-Tel. Thestumbling block is whether or not DoDhas the ability to transform its culture toaccommodate the innovation, risk, andflexibility that must accompany this newapproach to technology insertion if it isto succeed.8


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ENDNOTES

6. The eight steps of the “Q” Process,although all are not addressed in thispaper, are as follows:Q

0Agency Needs Definition

Q1

Portfolio ManagementQ

2Contracting

Q3

Contract Definition and DemoQ

4Prototype and Test

Qp

QIC/IQT PilotingQ

bEnd-User Piloting

Qd

Deployment and AgencyAcquisition (BENS, AppendixA).

7. Interviews with Director of the QICand QIC Contracting Officer, Febru-ary 21, 2002 and Interview with ChiefOperating Officer and Director, Tech-nology Assessment at In-Q-Tel,March 1, 2002.

8. The Department of the Army is cur-rently considering this issue. TheArmy Science Board Venture CapitalPanel issued a report on July 25, 2001stating that existing programs andauthorities provide enough flexibilityto introduce state-of-the-art, criticaltechnologies to the Army. However,the FY02 DoD Appropriations Billand Congressional language earmark$25 million for the purpose of es-tablishing a venture capital invest-ment corporation for the Depart-ment of the Army. The Army is cur-rently assessing the risk of estab-lishing this type of entity and at-tempting to define a technologyproblem set (Army Science BoardVenture Capital Panel briefing, Ver-sion 5.0, dated July 25, 2001).

1. In January 2001, the BENS estab-lished and supported an independentpanel to assess In-Q-Tel’s strategy,structure, processes, technologies,and legal foundation. This assess-ment was required by a Congres-sionally Directed Action in FY2000Conference Committee markup lan-guage, to perform “an independentcost versus benefits assessment” ofCIA’s In-Q-Tel venture. The panel’sreport was submitted in June 2001(BENS, page iii).

2. Quoting Charter Agreement, July1999. The Charter Agreement hassince been amended.

3. Quoting Charter Agreement, July1999. The Charter Agreement hassince been amended.

4. A detailed discussion of the contrac-tual and funding arrangements be-tween the CIA and In-Q-Tel is foundin the section of this paper entitled,Establishing a “Venture Catalyst”Firm for DoD.

5. Although In-Q-Tel has not yet seen amajor Return on Investment, a Memo-randum of Agreement between In-Q-Tel and the CIA defines the alloca-tion of profits traceable to CIA fund-ing: 50 percent of profits go to In-Q-Tel Problem Sets and 50 percent tostrategic IT initiatives defined by theCIA.


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REFERENCES

Kady, M. II. (2001, November 19). Top-secret, well-funded: In-Q-Tel’s$100 million venture fund docu-ments sharp increase in new busi-ness plans for the CIA. WashingtonBusiness Journal. Retrieved Janu-ary 27, 2003 from http://wash ing ton .b i z jou rna l s . com/washington/stories/2001/11/19/story5.html

Loeb, V. (2000, March 1). Silicon Valleyveteran tries a venture at CIA: Fundaims to keep Agency on top of hightech. The Washington Post, p. A15.

Office of the Secretary of Defense, Ac-quisition & Technology. (2002). Ma-terial retrieved March 15, 2002 fromwww.acq.osd.mil/sadbu/sbir/

Yannuzzi, R. E. (2000, Winter). In-Q-Tel: A new partnership between theCIA and the private sector. DefenseIntelligence Journal, 9(1), 25–38.

Business Executives for National Secu-rity (BENS). (2001, June). Reportof the independent panel on theCIA’s In-Q-Tel venture, pp. iii, v, 5,6, 8, 13, 15, 38, 46–48.

Cortese, A. (2001, December 30). Sud-denly Uncle Sam wants to bankrollyour company. The New York Times,p. B1.

Defense Advanced Research ProjectsAgency (DARPA). (2002). Materialretrieved June 30, 2002 from www.arpa.mil/cmo/Java/Prototype.html

In-Q-Tel. (2002). Material retrievedMarch 15, 2002 from www.inqtel.com/about/index.htm

Johnston, N. (2001, June 25). Intelliseekgains $1.4 million from CIA-backedfirm. The Washington Post, p. E5.

Documents

CIA in-Q-TEL Applicability