Today, we’re looking at In-Q-Tel, the secretive firm funding some of America’s leading tech companies, operated by none other than the CIA.
It’s surprising that more people don’t know about this company. But it’s not like their returns have been noticeable.
In fact, unlike every other VC in the world, In-Q-Tel seems profoundly uninterested in turning a profit…
This is a fantastic issue.
You’ll learn:
- What are Silicon Valley’s national security roots?
- What military products did Silicon Valley use to build?
- What was Silicon Valley’s first IPO?
- Why did the end of the Cold War lead the CIA into venture capital?
- How did In-Q-Tel get started?
- Why does In-Q-Tel not care about turning a profit?
- Is In-Q-Tel really a VC after all?
- 🎟️ What does In-Q-Tel invest in?
- 🎟️ What size checks do they write?
- 🎟️ What explains In-Q-Tel’s poor financial performance?
- 🎟️ What are some famous companies backed by In-Q-Tel?
- 🎟️ What is In-Q-Tel’s greatest success story?
- 🎟️ Why startups might not want to take CIA money?
- 🎟️ What are some of their current secret investments? (← Crazy stuff in here!)
Let’s go 👇
Note: This issue isn’t sponsored by anyone. But to read the whole thing you’ll need the All-Access Pass. 🎟️
Table of Contents
The CIA’s secretive venture capital fund
As America’s top intelligence service, the Central Intelligence Agency (CIA) keeps busy with everything you’d expect from a spy agency — covert operations, information analysis, cyber warfare, all that fun stuff.
But the agency also has a little side gig you may not know about. They’re a venture capitalist for some of America’s leading tech companies.
Through In-Q-Tel, the CIA provides early-stage equity funding to companies building technology that might prove useful to intelligence agencies.
To date, In-Q-Tel has invested over 700 companies, by far one of the most active VCs in the defense and intelligence space.
And, true to form, many of its investments are never even made public.
While CIA money influencing commercial technological innovation has proven controversial, this relationship is not as out of place as it first seems.
In fact, a big reason Silicon Valley even got started was to serve the needs of the intelligence and defense communities.
Silicon Valley’s origins are in national security
Over the past few decades, tech companies have focused almost exclusively on consumer tech. But it wasn’t always this way.
Back in Silicon Valley’s early days, the government was the main customer for emerging technology (and in many cases, the only customer).
During World War II, Fred Terman (often called the “Father of Silicon Valley“) saw the possibilities afforded by defense spending while working on radio research at Harvard.
After the war he returned to Stanford, bringing with him 11 research students, and a determination to win government contracts.
Building out the university’s practical research capabilities, Stanford became a hotbed of defense research during the Korean War.
That influence also spread to the private companies springing up in the area:
- Varian went public in 1956 in Silicon Valley’s first IPO. The firm’s main business was selling military microwave tubes.
- In the 1960s, the Pentagon accounted for 80% of Fairchild Semiconductor’s revenue. Fairchild’s research eventually spawned the creation of Intel.
- Lockheed’s Silicon Valley campus at Sunnyvale grew to 28,000 employees in 1965, making it the valley’s largest employer. They company was entirely focused on creating military rockets and government spy satellites.
In perhaps the most poetic example of how government contracts helped kickstart Silicon Valley’s tech scene, Steve Wozniak (Apple’s co-founder) is the son of a Lockheed engineer who worked at the Sunnyvale facility.
Silicon Valley wasn’t suited for contracting
This model continued throughout the Cold War, with government contracts providing the money for private companies and research institutions to pursue technological innovation.
The CIA itself made ample use of contracting, with the U-2 spy plane, SR-71 “Blackbird,” and CORONA surveillance satellites all created in coordination with Lockheed.
The Cold War fueled defense spending from the ’60s through the ’80s. But once the USSR fell in the 90s, defense spending dried up, and the contracting model became unworkable.
And we all know, in the late 90s the dotcom boom got underway.
- The decline in defense spending meant that the government could no longer foot the bill of technological innovation entirely.
- Technological innovation began to shift to startups pursuing market commercialization, rather than large firms operating on government contracts.
- Startups that were used to rapid adoption and iteration were entirely incompatible with slow government procurement processes.
The motivation to develop an alternative funding model was perhaps strongest at the CIA. As the digital world became an increasing part of intelligence work, the agency risked getting left behind without access to private sector innovation.
So, the CIA embraced a funding model more amenable to the growing tech sector: venture capital.
In-Q-Tel’s early days
The roots of In-Q-Tel can be traced to the 90s, when CIA director George Tenet advocated for a market-based solution to bridge the gap between the agency’s capabilities and commercial technology.
Showcasing the transition between funding models, Tenet recruited two businessmen with entirely different backgrounds to run the new firm:
Norm Augustine, who had previously served as the CEO of Lockheed Martin,
And Gilman Louie, who got rich starting a video game company as a college dropout.
In its earliest iteration, the CIA’s VC arm was called ”Peleus”, named after the mythological hero who fathered the greatest Greek warrior, Achilles.
But the firm eventually became known as In-Q-Tel, a nod to the fictional MI6 quartermaster who supplies James Bond with his high-tech gadgets.
By 1999, In-Q-Tel was up and running as the CIA’s new experimental funding model, with a structure that’s as weird as you’d expect from a government-linked venture capital firm.
In-Q-Tel’s unique structure
In-Q-Tel isn’t technically a division of the CIA.
Instead, it’s a separate not-for-profit company incorporated in Delaware that’s bound to the agency by a special charter.
As demonstrated by its not-for-profit status, In-Q-Tel’s mission is not to make money for the CIA. Rather, the firm is directed to
“…identify and deliver cutting edge technologies to the US intelligence community.”
In fact, unlike every other VC in the world, In-Q-Tel seems profoundly uninterested in turning a profit.
On an internalized basis, the firm has posted losses in 9 of the past 10 years, with 2021’s shortfall amounting to nearly $50 million.
But In-Q-Tel still has plenty of money to invest, largely because the CIA pumps tons of money into the firm.
From 2017 to 2021, total government contributions to In-Q-Tel amounted to nearly $500 million.
Although the firm is unable to pay the bills without CIA help, In-Q-Tel’s assets have grown to more than $1 billion. Sure, this is small compared to VC giants like Sequoia (~$100 billion in assets), but still large enough to have real influence.
Given these figures, it’s worth considering whether In-Q-Tel is really a venture capital firm at all.
Is In-Q-Tel really a VC firm?
If In-Q-Tel doesn’t actually make money, it looks more like a subsidy program for technology useful to intelligence agencies.
One way of understanding In-Q-Tel is as a technology vetting service for other VCs.
If In-Q-Tel invests in a company, chances are that the underlying technology is both legitimate and useful, drawing in more investors and catalyzing further development. In fact, In-Q-Tel brags that each dollar they invest creates $28 in private sector investment.
Whatever the case, it’s clear that In-Q-Tel’s work has promoted the development of some very useful technologies — including some you probably use daily.
In-Q-Tel’s Portfolio: What Does the CIA Invest In?
Like traditional venture capital firms, investment from In-Q-Tel comes with both financial backing and strategic guidance.
Unlike other VC firms, though, that strategic guidance is mostly about taking a firm’s existing technology and adapting it to intelligence work:
- In-Q-Tel operates work programs where government agencies advise companies on implementing tech modifications that would be useful for intelligence work.
- Over 75% of In-Q-Tel’s investments have been field-tested by a government agency, with about 50% adopted for real use.
- The firm targets companies with technology that can be tested and implemented for government use within 12-24 months.
Financially, investments range from $500k to $3 million – on the smaller end of VC investing. This likely means In-Q-Tel focuses on seed-stage companies.
What explains In-Q-Tel’s poor financial performance?
One curious fact about In-Q-Tel is that it holds about $380m in publicly traded securities, compared with about $542m in investments related to its mission of fostering new technology.
One possible explanation is that In-Q-Tel holds onto the shares of any investments that go public, rather than sell into the IPO like VCs normally do.
This would also partially explain the company’s poor financial performance, since it takes a sale to realize revenue from an asset that has increased in value.
It doesn’t seem like In-Q-Tel gets traditional voting board seats. However, it looks like they get ”observer” board seats (which still gives them access to privileged company information.)
Like any early-stage investor, not all of In-Q-Tel’s investments are likely to work out. But the firm has had a few notable successes in recent years, especially in technologies with dual civilian and government applications.
Famous companies backed by In-Q-Tel
Keyhole (now Google Earth)
In 2003, In-Q-Tel invested in Keyhole, a company building technology to construct 3D visualizations of the earth’s surface.
Highlighting the diversity of intelligence agencies In-Q-Tel ultimately serves, this technology was of interest to the National Geospatial-Intelligence Agency rather than the CIA itself.
Within two weeks, Keyhole had been adapted for intelligence work and was used to support troop movements in Iraq.
But the firm is better known for serving as the foundation of Google Earth. Just a year after In-Q-Tel’s investment, Google bought Keyhole in full, using it as the basis for their release of Google Earth in 2005.
As a result of the acquisition, In-Q-Tel briefly held some shares in Google, but quickly sold them.
QD Vision (now part of Samsung)
In 2008, In-Q-Tel invested in a small Massachusetts company called QD Vision.
QD was working on patented ”quantum dot” display technology, which had the potential to provide clearer, sharper digital displays. More than a decade later, that quantum dot technology forms the basis of the current generation of QLED TVs.
In fact, QD Vision was so successful that Samsung acquired the firm in 2016 to build out its own QLED offerings.
Quantum dot technology is so revolutionary that the researchers who initially discovered the underlying science were awarded the Nobel Prize.
Though it’s oddly unclear what intelligence value In-Q-Tel initially saw in QD Vision. At the time, the firm had already secured more than $5m in contracts from various governmental groups focused on advanced technology
It’s possible this was just a pure R&D play, with little direct link to the CIA itself.
Palantir
Palantir is arguably In-Q-Tel’s greatest success story.
Founded in 2003 by Peter Thiel and a collection of other tech entrepreneurs, Palantir is a comprehensive data mining firm that detects threats and helps governments make decisions.
That’s obviously an enticing pitch for an intelligence agency. But surprisingly, back in the early 2000s most traditional VCs were uninterested.
From 2005 to 2008, the CIA was Palantir’s only customer. But the agency provided valuable alpha testing for early versions of the firm’s software.
Today, Palantir is a $36 billion publicly traded firm (NYSE: PLTR) whose clients include the NSA, the FBI, and the CIA. (Allegedly, Palantir software was even used to help kill Bin Laden.)
But Palantir is increasingly serving commercial clients as well. In 2010, JPMorgan was the firm’s first non-government customer, with Morgan Stanley and Airbus now utilizing Palantir software as well.
In-Q-Tel’s current secret investments
In-Q-Tel’s current portfolio isn’t entirely public. So far, the firm has made over 100 secret investments.
One of those secret investments (which eventually leaked in 2016) was in Skincential Sciences, a skincare startup now known as Clearista.
Why did the CIA invest in skincare, and why did they want to keep it quiet?
No one’s really sure. But Skincential was researching extracting DNA from the outer layer of skin to run diagnostic tests, which might have caught the agency’s attention.
In fact, biotech and DNA-related investments continue to be a big area of interest for In-Q-Tel.
Area 1: Biotech
One of the most fascinating (and worrying) areas of CIA investment is in genetic engineering.
In-Q-Tel is an investor in Ginko Bioworks, a genetics firm focused on programming cells that went public in 2021 (NYSE: DNA).
The idea of doing biological manufacturing is definitely exciting. Cells replicate according to DNA instructions, so what if we could change the instructions?
But there are also obvious dangers here. In 2002, scientists proved they could recreate the polio virus using nothing more than its DNA sequence and commercially available machines.
Safe or not, In-Q-Tel is forging ahead with several other investments in this sector, including:
- Colossal Biosciences, which is developing genetic editing techniques to “de-extinct” animals like the wooly mammoth, the Tasmanian tiger, and the dodo bird (yes, really).
- Univercells, a company doing “biologics,” which is creating medical products like vaccines that are derived from living organisms.
Area 2: Energy & Power
Energy is another big area of interest for In-Q-Tel. The firm is an investor in Reach, which is trying to build efficient wireless energy transfer with “power-beaming” technology.
The idea of wireless energy is to charge devices from a distance, instead of needing to plug them in – similar to how Wi-Fi facilitates wireless data delivery.
We don’t pretend to really understand the science behind this, but considering solar power is basically nothing more than wireless energy transfer, this technology might not be as far-fetched as it first seems.
The intelligence angle here is pretty simple. Imagine autonomous drones or vehicles that can operate in harsh environments without ever needing to refuel, since they can be recharged from a distance.
Aside from Reach, In-Q-Tel has a few other interesting energy investments:
- Anthro, which is trying to augment battery bower with flexible designs that take up less space. In addition to drone tech, these batteries could facilitate wearable electronics for soldiers to take into the field.
- Tokamak Energy, a British company that’s focused on nuclear fusion energy. Given the importance of energy for national security, it’s not surprising In-Q-Tel wants access if this tech ever takes off.
Area 3: Artificial Intelligence
Of course, In-Q-Tel wouldn’t be a modern VC if it didn’t have a few AI-related investments. But the firm seems more interested in AI’s possibilities in the physical world than the digital one.
Black.ai, for instance, is an In-Q-Tel portfolio company that integrates AI with real-time video capture to detect behavioral patterns.
Retail firms can use this technology to prevent shoplifting, but it’s not hard to imagine why an intelligence agency might be interested in an AI that can flag suspicious behavior.
Related to their Black.ai investment, In-Q-Tel has a few other portfolio companies working on similar AI technologies:
- Behavioral Signals, which is building AI algorithms that can supposedly monitor emotions and stress levels from speech to identify and measure threat levels.
- Matterport, which uses AI to create a “digital twin” of physical locations on the computer. This is the technology behind those 3D virtual tours you might find while apartment hunting.
What can we learn from In-Q-Tel?
As a subsidy program wrapped in a venture capital model, In-Q-Tel is a unique approach to fostering the development of useful tech for the government.
What can we learn from the successes and failures of that model?
Should startups take CIA money?
If In-Q-Tel wants to invest in your company, it’d probably be tough to tell the CIA no. But taking the money might not be a great idea.
And this isn’t about secret backdoors or nefarious influence! If the CIA wants to do a sketchy business deal, it would probably keep it in-house (like secretly purchasing one of the world’s largest cryptography firms and operating a Bahamian bank for offshore money laundering).
Instead, this is about the government limiting the commercial application of new technology.
In some cases, In-Q-Tel funding is conditional on firms agreeing to exclusively sell to the government. Major changes to the underlying technology to serve government interests are also common.
Given the government’s blank checkbook, they can be a tremendous customer. But the In-Q-Tel model could also potentially crowd out commercial applications of innovative technology.
Should the In-Q-Tel model be replicated for other agencies?
Probably not.
At one point, NASA tried to replicate In-Q-Tel with their own Red Planet Capital, designed to invest in space technologies. But Red Planet made a single investment before funding was canceled.
Meanwhile, the US Army has its own Army Venture Capital Corporation. The firm has sat dormant for ten years with no funding, but is currently trying to make a comeback.
As the In-Q-Tel experiment shows, it’s challenging to make government VC profitable. And without a self-sustaining model, these firms will always face funding pressure.
And this is why the CIA might be uniquely suited for the task.
In addition to having a budget that’s effectively secret (the only figure that’s made public is the aggregate figure for all intelligence agencies), Congress has been happy to give intelligence agencies essentially as much money as they ask for.
With a secret, unlimited budget, the CIA has cash to burn investing in useful technologies without worrying about profit. But that’s not the case for all government agencies.
See you next time,
Brian
