Looking for a VC? Try Uncle Sam

December 2004 / January 2005 By: Bernard Chachula Volume 2 Number 6

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Only those who will risk going too far can possibly find out how far one can go." Innovation is like that, forcing us invariably into uncharted waters in the hopes of spectacular gain.
T.S. Eliot

Several months ago, the Wright Brothers Institute, Inc., was asked to do a study for the Air Force Research Lab exploring how the Air Force might make use of venture capital techniques to accelerate innovation within its operations. I was brought in to support this particular study based on my background in the technology transfer area and my legal training. In the course of that study, I found many innovative activities underway, but at the same time I came away with the impression that, collectively, the federal sector was just scratching the surface of the great potential inherent in the domain of federal research.

The embrace of risk to achieve innovation is not a natural human state, in my view. Nonetheless, as we in the defense sector continue to adjust from the demobilization of the Cold War, we are experiencing a new type of mobilization in the wake of the attacks of 9/11. This mobilization relies less on massive numbers of personnel and heavy equipment but, instead, looks to capitalize on innovation and the leveraging of technology to take the battle to an elusive enemy. And so it is that numerous agencies have looked to venture capital activities to fast-forward the integration of new technologies to support their missions. It's a good thing, too, particularly as the government's share of research and development, as a share of the total in the economy, has been shrinking.

What I found in my study is that organizations don't do a particularly good job at talking to one another. For example, I found an under-appreciation of the significant venture capital work done by Department of Energy contractors spanning more than a decade. As if starting on a clean sheet of paper, for example, the Central Intelligence Agency created its own venture capital firm, In-Q-Tel, in 1999. This was the catalyst to the federal government's fascination with the possibilities of VC techniques.

Today, the CIA model continues to set the pace and describes what, at least for now, appears to be the outer limits of currently contemplated investment activity levels or commitment to the venturing process. The CIA operates a 13-member steering function called the In-Q-Tel Interface Center, "QIC" (pronounced "quick"), within the agency that interfaces with the nonprofit In-Q-Tel, staffed by 58 people. It makes equity investments, but only some of the time. Indeed, In-Q-Tel readily describes itself not so much as a corporate venture capital activity but a "catalyst" for innovation within the agency, and dealing primarily with information technology challenges.

One federal agency after another has been drawn (or led) to adopting one variation or another of the CIA's model. All, including the CIA's own experiment, are still too new to definitely judge success. Nonetheless, the DoD, the Army, the Navy, the National Geospatial-Intelligence Agency (NGA) and NASA have all started down the path of using venture capital to help solve their technology gaps.

The DoD calls its program the Defense Venture Catalyst Initiative (DeVenCI). Its vision is, in partnership with VCs, which make the actual investments, to engage the emerging technology commercialization community to address DoD's operational challenges.

The NGA conducts its VC activities through a for-profit company, Rosettex Technology and Ventures Group, using the mechanisms of the National Technology Alliance, a program NGA operates as executive agent on behalf of the intelligence community. Rosettex is a joint venture of the Sarnoff Corporation and SRI International. It began operations in June 2001.

The Army chose to establish a technology fund called OnPoint Technologies, a nonprofit fund managed by MILCOM Technologies of Maitland, Fla. This fund began operations in May 2003 and is focused largely on man-portable power technologies.

The Navy conducts its VC activities through its Commercial Technology Transition Office (CTTO). Like DoD's DeVenCI, but unlike the Army program, the Navy does not make equity investments. It relies on a program called VCs@Sea as well as guidance from a VC panel operating under the Naval Research Advisory Committee to advertise its technology pain points and begin dialogue on possible solutions.

The Department of Homeland Security has not announced plans to pursue any VC activities, but there is language in draft FY05 legislation that would mandate DHS to study this area.

Finally, NASA announced in September its interest in creating a non-profit entity called the Mercury Fund that would be patterned after In-Q-Tel.

Adoption of federal sector venture capitalism has its challenges, after all.
Besides the threat of politically motivated attacks that this activity is mere corporate welfare, there is the real possibility that investments may fail and embarrass the sponsoring agency. This is risky business. Plus, many in the federal sector don't appreciate the fundamental difference between federal and private activity. In the private sector, you can do anything that you want unless it is prohibited by law, regulation, or corporate self-governance restrictions. In the federal sector, you can only do something if it is allowed. This is clearest in the fiscal area.

That is not to say that VC activities aren't doable, but a federal agency executive contemplating this needs to find (or have enacted) an authorizing statute to ensure that that agency has been granted sufficient power to execute the envisioned, VC-enhanced, business model.

Last year, the President's Council of Advisors on Science and Technology recommended a teamwork approach among the federal agencies and the private and university sectors to help achieve improved success in the area of technology transfer. I think this study was right on the mark and that its recommendations extend beyond technology transfer to this emerging area of federally related venture capital activity. Moreover, I think that in the rush to try out new techniques, laudable as that is, we shouldn't forget all the technology commercialization tools we already have at our disposal and may not be using to the fullest. Before stepping out with the public's money, we would be well advised to reexamine these familiar tools for their underutilized value, particularly with the capital marketplace. We might find innovation right under our feet.Happy exploring!

Colonel Bernard M. Chachula (USAF, Ret) is an Ohio attorney who consulted for the Wright Brothers Institute, Inc. of Dayton, Ohio, to produce a venture capital study for the Air Force Research Lab. The study is available by contacting the author at chachula@earthlink.net or through the Wright Brothers Institute at 937-252-6849.