The rest of the 100 (in alphabetical order by company): George Hoyem, In-Q-Tel (IQT)
George Hoyem, managing partner at In-Q-Tel (IQT), the venture investment unit of the US intelligence community, is probably the largest strategic dealmaker in the US with more than 50 primarily early-stage deals each year.
That the Central Intelligence Agency (CIA) is one of IQT’s clients as a non-profit strategic investment unit means many of these deals are kept private.
For example, in nominating Katie Gray for the GCV Rising Stars 2018 award, only three of the 13 she had worked on were disclosed. The first was a 2015 investment in Sila Nanotechnologies, a company using engineered materials to improve energy storage. This was followed in 2016 by a strategic partnership with Algorithmia, the operator of an algorithm network for app developers, and the third investment was another strategic partnership in March 2017, this time with a developer of composite additive manufacturing technology called Arevo.
But Hoyem, who has more than 25 years of entrepreneurial, operations, and venture capital investing experience in high technology companies, remains active himself and has led close to 20 investments at IQT since he joined in 2010.
Hoyem is the managing partner for the IQT, West Coast Investment team, and heads the enterprise IT investment practice area. This investment area includes companies targeting solutions in advanced analytics, cyber security, data centre infrastructure, cloud and mobile focused technologies.
Earlier in his career, Hoyem has also backed, supported, and served on the boards of several dozen emerging technology companies as managing partner at Blueprint Ventures and at Redleaf Group and El Dorado Ventures before and after the millennium, including Good Technology, which was acquired by Blackberry in November 2015, Solera Networks, which was acquired by Blue Coat in May 2013 and SpectraSensors, which was acquired by Endress & Hauser in 2012.
But Hoyem’s challenges at IQT are the same as many corporate venturing units, at least judging by his concerns for the year ahead.
In the GCV outlook survey, Hoyem said his biggest concerns were about the talent and other costs to build a startup and where we are in the economic cycle and its impact on valuations.
On the latter, he said: “When will the music stop? VCs will continue to worry about valuations and the simple fact that we are at the top of the business cycle, which could continue for a few years or just as easily correct.”
And many of its deals focus on similar pain points, albeit with different end-customers than the corporate venturing units. An anecdote was relayed by Hoyem on a panel at the GCV Synergize conference in New York in the autumn with Miles Reidy, a partner at VC firm QED, and Travis Skelly, a senior vice-president at the venture unit of Citi Bank.
Skelly kicked off the story: “We had a problem that we weren’t getting the data feedback we needed from the intelligence agencies in order to combat money laundering. So we gave George Hoyem a call to see if he could help.”
Hoyem, who also serves on the board of directors of the US trade body National Venture Capital Association, continued the story: “With our connections we were able to convene a group of interested stakeholders to try to nail the problem – the Federal Bureau of Investigation (FBI), the Central Intelligence Agency (CIA) and the National Security Agency (NSA) plus Citi and QED.”
The discussion provided a rare example of corporates, VCs and government agencies working together.
But its role has long been recognised. Writing in June 2014’s Harvard Business Review about corporate venturing but following up on a 2005 research paper he co-authored, academic Josh Lerner gave the example In-Q-Tel for how to both invest and reap value from government or corporate venturing.
There is an “essential lesson” once a venture investor, such as a corporation or government, looks for more than just financial returns: they “need to invest as much in learning from their startups as they do in making and overseeing deals”.
In its annual tax filings, IQT said it was founded in 1999 as a “private, not-for-profit company to help the CIA [Central Intelligence Agency] and broader US intelligence community identify, adapt and deliver cutting-edge technologies that address national security needs. IQT’s strategic investment model … [means,] on average, for every dollar that IQT invests in a company the venture capital [VC] community has invested over $10, helping to deliver crucial new capabilities at lower cost to the government.”
As one of the executives behind IQT’s formation and who remains closely involved put it: “IQT was originally modelled as a technology VC because technology and entrepreneurship was the area of interest for us.”
The government’s traditional contracting approaches to established systems integrators were deemed lacking in “agility” to find and nurture entrepreneurs and companies developing commercial technologies that could be relevant for the intelligence community, which stretches beyond the CIA to now include the Defense Intelligence Agency, Department of Homeland Security’s Science and Technology Directorate, National Security Agency, National Geospatial-Intelligence Agency and others.
By the late 1990s this need to reach out to entrepreneurs for technology had reached a point requiring a IQT-approach because government contracts were no longer the primary source of defense technology, especially as part of the national security agenda increasingly involved understanding the security opportunity and threats brought about by the internet and computing power.
Military contracts after the Second World War were critical in providing resources to fund the development of internet, personal computer and information technology.
But by the late 1990s, as one source close to IQT’s formation put it in a profile by Global Government Venturing, a sister paper in mid-2014, the government went from contracting about 80% of technology it could use for national security to about 20%, with 80% by third-parties. The historical pattern of technology transfer, from federally financed laboratories to the military and eventually to civilian use, had reversed after the ending of the Cold War and the collapse of the Soviet Union.
The government was also looking for ways to tap into private research and development for companies not willing or able to go through its established non-equity funding programs, such as the US government’s Small Business Innovation Research (SBIR) grants. Analysis by Global University Venturing, another sister paper to GCV, to end-October 2013 of more than 170 portfolio companies back by IQT showed 39 have gained $70.5m in SBIR funding, according to public sources.
While these grants are often overshadowed by the equity investments from venture capital funds, SBIR grants have been often important, especially at a startup’s earliest days when the technology is being developed for commercialisation.
IQT’s need for cutting edge technology means it maintains links with multiple corporations, such as bank Citi, and universities, including ASU, MIT, Harvard and University of California.
One corporate venturing head of investments said: “There is a different level of relationship in private–public in this security space and we [and IQT] both approach entrepreneurs with the same needs. We do portfolio swaps as a benefit from dealing with the same currency, for example denial-of-service attacks, so we have a level of expertise for portfolio companies.”
This special relationship in security is shown by how often IQT co-invests in companies alongside corporate venturing units to effectively reverse-engineer commercial development for government use. Analysis by Global Corporate Venturing, of the syndicates in IQT’s public deals to end-October 2013 show nearly half (77 of 172) contained corporate venturing units.
For universities, the links are also extensive, especially as Michael Crow, president of Arizona State University (ASU), had been non-executive chairman of IQT.
About the millennium, ASU had formed a partnership between its tech transfer unit, Arizona Technology Enterprises (AZTE), and IQT to help develop a Partnership for Research in Spatial Modelling (Prism). IQT agreed to support the development of Prism’s handwriting recognition and document segmentation technology.
Gilman Louie, then-In-Q-Tel’s president and CEO, said: “ASU’s 3-D handwriting technology offers unique capabilities for recognising handwriting and segmenting documents.
“In-Q-Tel is very pleased with its partnership with ASU’s Prism. They have made significant progress toward a solution that will not only have broad utility for the intelligence community but potentially attractive commercial applications as well.”
IQT’s list of university spinouts a few years ago includes:
Language Weaver, which was acquired by SDL in July 2010 for $42.5m and was founded in 2002 by the University of Southern California’s Kevin Knight and Daniel Marcu, to commercialise a statistical approach to automatic language translation and natural language processing – now known as statistical machine translation software.
Qynergy, which was founded in 2001 by Paul Shirley for the purpose of developing a beta-voltaic QynCell technology based upon a licensed technology from Sandia National Laboratories and the University of New Mexico.
Decru, a networked storage provider sold for Network Appliance for $272m in 2005 after co-founded four years earlier by Serge Plotkin, an associate professor of computer science at Stanford University who formerly worked on network security for the Israeli military.
Cambrios, which makes transparent electrodes based on silver nanowires to simplify electronics manufacturing processes and was founded in 2002 by Drs Angela Belcher of MIT and Evelyn Hu of the University of California, Santa Barbara.
SiOnyx, which has exclusive rights to license a Harvard-owned portfolio of patents related to black silicon, which involves a laser implant technique that alters the photonic properties of semiconductor devices after its formation in 2006 by Harvard University professors Eric Mazur and James Carey.
SpectraFluidics, which uses technology invented by professors and researchers from the mechanical engineering and chemistry departments of the University of California, Santa Barbara, and since IQT’s investment in 2010 has won two US Army development and engineering contracts and a $1.3m contract from the US Department of Homeland Security, Transportation Security Administration.
Fetch Technologies, which was founded in 1999 by two faculty members at the University of Southern California Information Sciences Institute to make web data accessible and useful for the enterprise by using customised software agents (and was acquired by Connotate in March 2012).
Geosemble, a 2004 spinoff from the University of Southern California whose GeoXray product automates the process of discovering, geospatially visualising, monitoring and sharing relevant unstructured information from any source before its acquisition by IQT-backed TerraGo.
Overall, however, university spinouts seem to have been a minority source of dealflow.
In its regulatory filing, IQT said by end-March 2012 it had invested in more than 180 portfolio companies, “many of which have produced technologies that have contributed directly to intelligence community missions”.
“Technology delivered by IQT, for example, makes it possible to fuse data from maps, images, text and other sources; visualise information in ways not previously possible; rapidly process vast amounts of information in multiple languages; and identify the critical intelligence faster and more effectively.”
George Tenet, former director of the CIA who was in charge of IQT’s creation, in his book, The Storm: My Years at the CIA, put it more succinctly: “The In-Q-Tel alliance has put the Agency back at the leading edge of technology.”
This was some achievement given skepticism that government could effectively fund a VC firm run independently and reap both financial and strategic returns, according to sources working on its launch. A 2001 report for the US Congress and the CIA by consultancy Business Executives for National Security (Bens) called Accelerating the Acquisition and Implementation of New Technologies for Intelligence, Report of the Independent Panel on the Central Intelligence Agency In-Q-Tel Venture found IQT had made a good start.
Lawrence Meador, chairman of the independent, 30-strong panel, wrote in a preface to the Bens report, published by news provider FCW: “I would note for the record that several members of this panel from a variety of industry sectors approached this assessment process with what I would describe as an initial reaction of skepticism and concern about the basic In-Q-Tel business model from a policy, legal and competitive perspective.”
The panel concluded, however, “the In-Q-Tel business model makes sense, and its progress to date is impressive for a two-year-old venture”.
Insiders credited IQT’s relative success and longevity to its focus on getting the startups’ technology through the In-Q-Tel Interface Centre (QIC) and into use by the intelligence community. IQT’s peers, such as DaVenci, OnPoint and Chart Venture Partners, have struggled to maintain the levels of funding IQT has collected.
The decision to set up IQT as an independent firm with staff initially sharing part of any profits – called carried interest – through an In-Q-Tel Employee Fund attracted talented people, such as its first chief executive, Gilman Louie, a former video-game entrepreneur who headed Hasbro Interactive’s Games.com group, able to find and back entrepreneurial companies. But the timing of its launch was also opportune as the intelligence community received a shock with the 11 September 2001 Al Qaeda attacks on the US mainland and subsequently received greater attention and resources to both prevent another such assault and guide the invasions of Afghanistan and Iraq.
For example, IQT had in 2001 invested about $2m in the series A round of mapping service Keyhole, co-founded by ex-foreign affairs operative John Hanke and named after the KH reconnaissance satellites, the original satellite military reconnaissance system. Keyhole proved invaluable tracking missiles in Iraq and was in 2004 acquired by US-listed search engine provider Google to form part of its Google Earth service. IQT received shares in Google as part of the sale and later reportedly sold 5,636 of them after Google’s flotation in 2005 reaping more than $2.2m.
IQT also invested in US-based data analytics firm Palantir’s A round after working with its founders to help their form company, online money exchange PayPal, fight off Russian fraudsters, according to co-investors and IQT’s staff.
However, Louie’s departure in 2006 to set up a VC firm, Alsop Louie, with a former journalist led to two short-term CEOs, Amit Yoran and Scott Yancey, before its incumbent, Chris Darby, joined. Regulatory filings show Darby’s contract has been renewed until January 2016 and then again after he settled the organisation and helped its evolution to what one insider called a more “mature” organisation.
Darby had been an effective CEO at tech firm Sarvega before its sale to chip maker Intel.
David Cowan, partner at VC firm Bessemer Venture Partners, the startup investment group founded by steel magnate Henry Phipps in 1911, at the time of Darby’s appointment told news provider SiliconBeat: “We at Bessemer were invested in Sarvega, and so we saw him in action. Through strong recruiting, good strategic moves, and effective business development, Darby turned the company around and saved our investment.”
But the effect on IQT as an organisation of a period of management succession allowed what insiders called “political factors” to force substantial changes in its approach and operation. The Employee Incentive Plan (EIP) giving staff carried interest in return for investing 10% of their salary in a fund was closed in 2007, according to its regulatory filing.
In effect, there was concern that IQT was too good at doing deals – its regulatory filing for 2005 reported by newswire Bloomberg showed IQT sold for $12m investments that had cost it $1.96m.
As well as closing its EIP, IQT also moved towards an approach of offering more cash for companies’ technology development or conversion to intelligence community needs rather than taking equity and following on in deals. One co-investor alongside IQT in multiple deals said it has taken years for the organisation to recover its cultural connection to entrepreneurs and reengage with them through a series of hires, including both George Hoyem and Peter Kuper in 2010.
IQT’s focus on what it calls paying for work programs and non-recurring engineering and sometimes receiving warrants in return rather than necessarily investing directly for equity means it acts as a conduit for startups’ technology to be seen and become ready for use by the intelligence community – its primary purpose – without necessarily diluting other investors’ equity.
As one outside analyst noted, VC’s now “love them because if you pass IQT diligence they can safely assume that the technology or product has value and is technically sound”.
But while dozens of VCs have done multiple deals in IQT-backed companies, its reputation can be mixed for some. One VC, who discovered IQT had backed database company Palantir only while conducting due diligence on it as a potential investment, said: “I’ve not bumped into IQT much despite having done 50 deals from Stanford as they are not needed and if all else is equal we’d rather not with IQT as government backing a negative not a positive because they have different incentives and a pain in the butt.”
A co-investor said by IQT now trying to avoid diluting outside investors on deals meant the government was effectively underpinning the broader venture industry. The analyst concurred that its data showed “security plays are predictably acquired by bigger players for nice multiple,” with IQT-backed ArcSight acquired by Hewlett-Packard for $1.5bn in 2013 after its initial public offering in 2008 and IBM buying Initiate in 2010.
In turn, by accessing venture capital-backed technologies, IQT said in its regulatory filing it had “leveraged more than $3.9bn in private-sector funds to support technology for the CIA and the intelligence community”.
Effectively, therefore, IQT has evolved to a more sophisticated open innovation program with venture capital investments of up to $3m as just one tool.
However, IQT has actively examined the ethics of the technologies it can help develop through its portfolio, commissioning noted academic Patrick Lin to review the applications for drones, or unmanned aircraft. It has also been active to make sure the technologies stay available even if a startup is struggling.
In December 2003, news provider Institutional Investor gave an example of US¬-based software company Graviton that ran into financial trouble earlier that year and laid off its engineering team when its wireless sensor system for detecting chemical and radiological exposures was only two-thirds complete. In-Q-Tel helped arrange a transfer of Graviton’s technology to a new company, Soflinx, which rehired the engineers.
More recently, Geosemble, a 2004 spinoff from the University of Southern California (USC) whose GeoXray product automates the process of discovering, geospatially visualising, monitoring and sharing relevant unstructured information from any source, was acquired by IQT portfolio company TerraGo in July 2012. Geosemble had been a partially-owned subsidary of IQT-backed Fetch Technologies, a data services company that also grew out of collaborations between USC researchers and the government.
Under Darby, IQT has added an open source “laboratory”, called Lab41, on the opposite side of the hallway to its investment team.
Overall, IQT divides its “focus areas” into information and communication technology, such as advanced analytics, cloud and infrastructure, digital identity, tools for field missions and mobility, and physical and biological, including DNA fingerprinting, genome analysis, energy harvesting and batteries, lasers and threat detection.
The ‘Q” in its name, while only added to “intelligence” to bring some marketing pizzazz by referencing the gadgets man in the James Bond media franchise, remains apt. IQT’s portfolio companies develop tools suitable for a spy book, including Sonitus Medical, which told news provider NPR in 2012 it had received IQT funding to turn its hearing aid into a two-way radio that allows users to attach the device to their teeth rather than their ear to hear sound.