ARLINGTON, Va. – Gilman Louie has done several things falling outside of a traditional venture capitalist’s lifestyle. He has flown F-16s with the Virginia Air National Guard, negotiated contracts with the former Soviet Union and attended a State Dinner at the White House.
However, Louie says, “there’s nothing like the thrill of going to a store, looking on the shelf and seeing hundreds of thousands of people buying your product.”
Before becoming the president and chief executive officer of In-Q-Tel Inc., the two-year-old VC arm of the Central Intelligence Agency, Louie was a computer gaming executive.
His successes have included the F-16 Fighting Falcon flight simulator, which he designed in his mother’s house, and Tetris, which he brought over from the Soviet Union in 1988.
Louie learned about computers through fantasy games. As a young man, he was a “paper gamer,” and he used to sneak into San Francisco City College to play games on their teletype machines.
Louie wanted to follow his interests in college by majoring in computer science, but his high school counselor, Irving Shapiro, said it was a bad idea.
“First of all you’re a smart kid, but you’re not as smart as the rest of the kids in your class,” Shapiro told Louie. “You’re always number 30 [out of the 30 kids in the honors program]. If you major in business, you can hire those other 29 kids.”
The Big Hits
Louie decided he was going to start a computer gaming business and kept that mindset throughout college. Before he graduated from San Francisco State University, he had hired his Delta Sigma Pi Fraternity brothers for a computer business he ran out it of his parents’ house.
“I used every one of my professors to help me write my business plan,” he says, which was not common “in ’82 and ’83 out of a Cal State University.”
A Hungarian businessman approached Louie’s company, Spectrum HoloByte Inc., with a game he had not been able to sell. Manufacturers kept saying the game, Tetris, was addictive but not marketable, because it had no animation, nobody died and it was just a game about falling blocks.
When Louie found out the programmer, Alexey Pajitnov, was Russian, Louie loved the game even more, despite the fact that other companies had said Americans would not buy a Communist game during the height of the Cold War.
“Put it in a red box with a hammer and sickle on top of it, and we’ll sell millions of these things,” Louie says he told his partner Phil Adam at the time. “Everybody told us it was a stupid idea.”
Despite Louie’s dealings with Communist Russia, it was his work on the F-16 Fighting Falcon flight simulator that eventually got him tangled with the CIA. The game was popular with real Air Force pilots, and his company began receiving emails from pilots identifying the differences between actually flying and the game that Louie had written – not from any real flight experience but from manuals.
At one point, Col. Dick Stamm showed up demanding to know where they had gotten their information about the combat planes. Once the gamers convinced Col. Stamm they had learned it from public documents, he asked them to build a light trainer for the military.
“There’s been a lovefest between the military and computer gamers ever since then,” Louie says adding that the military uses several games in training applications now.
In 1999, a national magazine organized a real dogfight over Atlanta in T-34 Mentor training aircraft between business executives with prior military experience. The magazine thought it would be interesting to throw a computer gamer into the mix and asked Louie to join them. He was pitted against Randy Jayne, a recruiter for Heidrick & Struggles International Inc. and a former McDonnell Douglas executive and Vietnam pilot. Louie lost to Jayne, but Jayne presented Louie with the position at In-Q-Tel. At first, Louie turned it down, but “when I saw it [the business plan] I said wow, is this our government’,” he says.
Technology First, Profits Second
Congress established In-Q-Tel in March 1999, and the organization began operations in October when Louie came on board. Congress has funded the operation with $63 million through two funding cycles and was expected to add at least another $30 million in a third cycle last month.
Congress established the group to do one thing: find new technologies for the CIA. Profit is secondary, but Louie says it is a “good metric to see if you made your bets right.” Although the group has not made any exits yet, all profits will be plowed back into future investments.
Louie calls the group a “venture catalyst” and says the group is a hybrid of four VC models: traditional, corporate, incubator and social.
The firm sometimes resembles a traditional VC firm in its operations, but In-Q-Tel also acts like a strategic corporate VC fund, except its focus is on national security technologies. Louie said the group acts as a technology incubator in providing engineers to foster the technologies and using the CIA to beta-test the products. Finally, the characteristics of a social VC fund come into play, because In-Q-Tel is a non-profit. In-Q-Tel’s return-on-investment (ROI) is measured as social ROI, because the real bottom line is how much these technologies help the U.S. government. Louie calls himself a catalyst, because the speed at which In-Q-Tel can bring these technologies to maturity impacts the firm’s success.
Louie got his first taste of VC during the buyout of Spectrum HoloByte from Pergamon Press Ltd., which was led by Kleiner Perkins Caufield & Byers and joined by other firms including Accel Partners.
He brings a Silicon Valley network and an entrepreneurial mentality to the group that includes former government workers, academics and business people.
Louie says the secret of the Valley is taking calculated risks. VCs make many mistakes, but their successes make up for their failures in “orders of magnitude.”
Entrepreneurs start a company, and if it fails, they start another one. He says this mentality could help government agencies that have been hurt by a zero-tolerance-for-failure policy in the 90s.
“They’ve been beaten up for so long that they have a certain level of self-doubt,” he said. “They’ve got everybody looking at every little thing that they do.” He said his group can give confidence back to the CIA, a formerly innovative group that developed the U-2 spy plane, the SR-71 project and the first generation of satellites.
In-Q-Tel has about 16 companies in a portfolio that makes equity investments or offers debt instruments. The firm may also give companies a contract to help them develop a technology and then license that technology to another company that can build an application suitable for the CIA.
Louie says “the agency’s needs are no different than any of the commercial world.” The Agency needs include search engines, information security and geospatial tools. He encourages companies to develop the same product for both government and commercial users, because if the technology works in a national security environment it will probably have many commercial uses as well.
Despite the “Q” borrowed from James Bond films, In-Q-Tel is not helping entrepreneurs develop BMWs packed with heat-seeking missiles. Some of their products cover “boring” sectors such as document security, database browsers and micro sensor technology intended for uses like efficient bomb-detecting machines.
Louie sounds like a kid in a toy shop describing his technology projects, but that’s just where he wants to be.
“The greatest charge of being a venture capitalist or an entrepreneur is that you can come up with an idea and then within 24 to 48 months it becomes real,” Louie says. “And, you have a bunch of people who are going along with you who take the idea and make it even better than you could possibly imagine it to be. That’s cool.”-C.R.F.