Maximizing the Returns of Government Venture Capital Programs (2011)

The stories of Google and Segway certainly end differently. With a market capitalization of over $180 billion, Google is arguably the biggest success in the information technology (IT) industry in the last decade. The phrase google it has worked its way into everyday language and dictionaries. On the other hand, Segway remains a privately held company whose products are largely relegated to use by tourists in major cities and security personnel at airports. We certainly do not hear people say that they segwayed to this morning. Oddly enough, these companies started out in similar places. Both had potentially game-changing new technologies that needed investment to further their development and company growth, and both received this investment from Kleiner, Perkins, Caufield, & Byers, a well-regarded venture capital (VC) firm. The stories of Google and Segway succinctly demonstrate both the power and pitfalls of the VC industry. Venture capitalists have unparalleled access to cutting-edge technology. However, this technology is generally in an immature state, and its successful development and implementation are far from guaranteed. Venture capitalists provide the funding necessary to advance the technology and in return are given partial ownership (an equity stake) in the company. In this sense, the Federal Government and venture capitalists are involved in related, though separated, worlds. Like venture capitalists, the government invests billions of dollars in the research and development (R&D) of new technologies, many of which will never mature into a usable product. The government does not receive an equity stake, however. For decades, the government was the major source of cutting-edge technology research. In the 1980s and 1990s, however, private sector investment began to outstrip public sector investment, especially in the IT field. Suddenly, the government no longer had its finger on the pulse of technology development. It was falling behind the private sector. In response, several government agencies created their own VC-like entities meant to reconnect the government to the private sector and harness new technology investments. The largest of these programs, and the topics of this paper, are the Central Intelligence Agency (and the larger Intelligence Community) In-Q-Tel, the U.S. Army OnPoint Technologies, and the Department of Defense (DOD) Defense Venture Catalyst Initiative (DeVenCI). This paper examines how government venture capital (GVC) initiatives can provide four key benefits to the government: a wider window on new technology development, an increased potential government supplier base, more leverage of private investment, and more rapid acquisition of new technologies. The majority of the information in this paper was compiled from interviews with corporate and private venture capitalists and survey responses as well as interviews from GVC-backed companies. All of the surveys and interviews were nonattributional, a necessary caveat to ensure that the interviewees could provide honest and uncensored responses. While this study generally focuses on improvements to these programs, it should be noted that most companies surveyed and interviewed were largely positive about their interaction with GVC programs. In a survey, 81.5 percent of In-Q-Tel and 100 percent of OnPoint Technologies companies rated these programs as similar to or better than their private VC investors. (1) GVC Programs In-Q-Tel Founded in 1999, In-Q-Tel is a nonprofit entity funded entirely by the Federal Intelligence Community (IC). Through 2007, In-Q-Tel had received approximately $350 million in funding, of which about $150 million has been directly invested in small technology companies either as equity or work program investments. (2) The majority of In-Q-Tel investments are in the IT field, which is fitting given IC interest in data management, analysis, and processing. …