NEW YORK — MotionDSP Inc. co-founder Sean Varah was in his office in San Mateo, Calif., in October 2006 when he got an e-mail from a potential investor. The sender had been cruising the technology blog TechCrunch and read about Motion DSP's software, which enhances images from videos and mobile phones. Two weeks later, four engineers flew in to test the program. In April, the startup landed an undisclosed sum.
There's a twist to this tale: MotionDSP's investor isn't a neighboring venture capital firm or an acquisitive company such as Microsoft Corp. or Yahoo Inc. The money came from In-Q-Tel, the Arlington, Va.-based venture capital business of the Central Intelligence Agency.
In-Q-Tel's non-executive chairman is Arizona State University President Michael Crow.
Since In-Q-Tel was founded in 1999, the firm has reviewed more than 6,300 business plans for everything from identity recognition software to nano-sized electronic circuits. In-Q-Tel has put about $200 million into more than 100 companies, beating traditional venture capital investors to technologies such as the mapping software that's become Google Earth.
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"One of the most important things about In-Q-Tel is that they're out there proactively looking for companies," Varah says. "They have a customer with a high technical standard."
That customer, the CIA, has had its share of gaffes. The agency failed to predict Iraq's invasion of Kuwait in 1990, events leading to the collapse of the Soviet Union in 1991 and nuclear arms tests by India and Pakistan in 1998. Recently, the CIA overestimated Iraq's capabilities in building weapons of mass destruction, according to a July 2004 report by the U.S. Senate Select Committee on Intelligence.
"The failures of Iraq have left a lasting cloud over the administration and, by extension, over the intelligence community," says Steven Aftergood, a senior research analyst at the Federation of American Scientists.
"Not about money"
In-Q-Tel itself hasn't escaped controversy in its eight years as the CIA's venture arm. Until June, its 55 employees were required to put 10 percent of their compensation into a fund that invested in the same startups In-Q-Tel was backing. The profits became part of their bonuses as In-Q-Tel generated hefty returns.
In 2005, In-Q-Tel sold for $12 million investments that had cost it $1.96 million, according to tax filings. That raised concern about the fund's mission.
"This is not about making money," says Peter Barris, managing general partner at venture capital firm New Enterprise Associates in Reston, Va., and an In-Q-Tel director. "The focus should be on getting technology into the hands of the right people."
In-Q-Tel is on its fourth chief executive officer, Christopher Darby, 48, who joined from Intel Corp. in September 2006. Darby brings a blend of entrepreneurialism and executive experience. He started at Northern Telecom Ltd., now Nortel Networks Corp., and moved to Digital Equipment Corp.'s telecommunications division. He led several software and Internet consulting and security firms after that.
"Darby has skill in the corporate area," Crow said. "He brings an understanding of the relationship between small companies and large corporations."
At In-Q-Tel, Darby eliminated the controversial employee investment fund. And he switched In-Q-Tel's focus from taking equity stakes in startups to acquiring technologies to meet the goals the CIA outlines in its annual directive called the "problem set."
The top objectives are fighting terrorism and countering nuclear, biological and chemical weapons, Darby says. In-Q-Tel is exploring holography and virtual reality in addition to the more mundane practices of searching text and video and translating languages.
"The virtual world will make it to the intelligence world," Darby says.
How will CIA use it?
In September, In-Q-Tel made an undisclosed investment in Forterra Systems Inc., whose software simulates situations like urban warfare and lets participants place themselves in the action. Darby won't say what the CIA will use it for. He never says the word CIA; he calls the agency "the customer."
"The raison d'etre for us is to get the right technology to the community," Darby says, referring to the CIA and its analysts. "It's important to look at the customer's problem set."
In-Q-Tel is investing in video capture, such as the technology offered by Pixim Inc. This software can handle extreme backlight as well as low light, enabling images captured under adverse conditions to be viewable. It's also investing in software that enables images to be searched. In-Q-Tel has invested in PiXlogic, whose software uses visual pattern recognition.
MotionDSP's Varah says In-Q-Tel is a year ahead of other venture capital firms because its main client has a good grasp of its needs.
While that may benefit the companies whose technologies In-Q-Tel is pursuing, Darby will have to ensure the pieces he assembles deliver comprehensive and accurate intelligence. Such a result has eluded the spy agency at some important times in the past.