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The secret behind the CIA's venture capital arm
June 2, 2005, 4:00 AM PT
By Charles Cooper and Michael Kanellos
Staff Writer, CNET News.com

Running the publicly funded arm of the CIA in Silicon Valley for the last six years, Gilman Louie is used to living in a fishbowl of sorts.
As chief executive officer of In-Q-Tel, Louie has the job of operating as a venture capitalist charged with helping to deliver new technologies to the CIA as well as the rest of the U.S. intelligence community.

"At the end of the day the mission is to find technologies that can protect lives," he says.

But In-Q-Tel occupies a unique rung in the federal bureaucracy. As a publicly funded operation, it is bound by the usual requirements governing conflict of interest that are familiar to other government agencies. At the same time, it is forced to keep a lot of information about what it's doing close to the vest because, well, it's the CIA.

Sometimes that's an uncomfortable fit. Earlier this year, for instance, the New York Post raised the specter of a conflict of interest after some employees sold stock in a company In-Q-Tel had invested in. CNET News.com recently sat down with Louie to find out more as well as to learn how he views the evolving role of In-Q-Tel in equipping the government with new technologies in its war on terror.

Q: In-Q-Tel was recently accused by a New York Post columnist of being involved in a "pump and dump" scheme. Is there a conflict of interest between being a government-funded nonprofit and conducting private stock sales?
Louie: I don't think the writer was off base in asking the question. He may not have had all these facts right, but the foundation of the question of whether it's reasonable to have a nonprofit whose principal job it is to make investments is: Have employees benefited?

When we were setting up In-Q-Tel, the CIA said, "Look, we want you to build a model that can analog to the commercial world." In our particular case, we wanted to get people from the industry. You've got to remember it was 1998 and that was in the middle of the bubble.

But how do you square that circle? You've got the mission of a publicly financed company that also has to take into account the realities of the surrounding world.
Louie: Here was the basic premise: How do you get people first to treat the taxpayers' dollars as if it was their own? No. 2 is how do you attract the talent to come on? How do you get people from the best schools or the private sector?

We said we want to have a side-by-side fund, which is pretty universal in venture capital. We designed a compensation scheme that's fair that would get us to the right people--but not overly compensate them. We have an agreement with the government that says after the moment a stock becomes available, you have a short period of time where you're expected to liquidate those resources. We tie the employee funds in the same way. You don't get to choose; we choose for you.

What do you mean?
Louie: Which stocks to play in...You get a percentage to all the deals. But it comes off of your salary. We give you annual compensation pay, and a certain percentage of that is set aside for long-term compensation that is automatically invested. You pay your taxes and then we take a chunk of that to invest in your stocks. And they may do well, and they may not do well.

Is this a unique arrangement when it comes to government-funded agencies?
Louie: Well, there wasn't really a government venture fund until we kind of showed up. Is it unique now among government venture

Continued ...

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Originally posted by Purl Gurl:
You know who was once the head of the CIA.

George H. W. Bush

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