In 2004 Palantir was making the rounds in Silicon Valley in search of much-needed funding. The company, then in its seed stage, was looking to create a platform to analyze unstructured information at a time when most companies did not yet appreciate the power of “Big Data” analytics.
Passed over by a number of established venture capital (VC) firms, Palantir CEO Alex Karp was invited to pitch his business plan to In-Q-Tel, a nonprofit VC firm established in 1999 by the CIA to focus investments on the needs of the intelligence community.
The partnership made sense. Intelligence analysts must make sense of large sets of mission-critical information on entities of interest – terror suspects, financial transactions, phone calls and more. Palantir represented a possible way to improve the tools available to the CIA. In-Q-Tel invested nearly $2 million in the young company.
With a recent company valuation of $9 billion, Palantir’s revenue was expected to hit nearly $1 billion by the end of 2014. Its client base includes government agencies and commercial clients. Most importantly for the CIA: Palantir is publicly credited with making possible key analytical insights on Syrian suicide bombing networks, Georgian cyber-attacks, and other mission-critical topics.
Beyond Palantir, In-Q-Tel has had other successes such as the launch of geospatial and network intrusion detection technologies. An example includes a software company called Keyhole – a specialist in geospatial data visualizations – which was acquired by Google and is now a part of the Google Earth product suite. Many investments supported by In-Q-Tel have resulted in technologies that are still used by the intelligence community and have been commercialized for general public use.
Other government agencies have also used a VC-inspired model to nurture innovation that furthers their mission. The U.S. Agency for International Development (USAID) launched Development Innovation Ventures (DIV) in 2010 to bring breakthrough solutions to the developing world. Using a tiered funding model, DIV has made investments in more than 100 solutions across 35 countries, targeting key areas that include energy, agriculture, water and hygiene.
For example, to combat diseases associated with water contamination, DIV invested in a solution aimed at providing chlorine dispensers near water sources. As of 2014 DIV invested over $5 million in three successive funding rounds to pilot and scale the project in Kenya and Uganda.
Could other government agencies take a page out of the In-Q-Tel and USAID DIV playbook and use VC to help accelerate their timeline for developing solutions – including software, hardware, and services that promote their missions? Yes.
Key to the success of In-Q-Tel and USAID DIV has been their use of corporate venture capital (CVC) – a subset of the broader VC model. CVC is an investment vehicle that builds a portfolio of technologies and services to enhance an organization’s overall mission. Here, profit serves only as a secondary motive. Success measures for CVC – including at In-Q-Tel and USAID DIV – have focused primarily on its ability to identify, mature, and implement new tools that enhance the parent company or government agency. CVC is widely used by leading companies in the pharmaceutical, semiconductor, and internet search industries.
One primary benefit of CVC is that it allows government to connect more naturally with start-up companies, some of which may be interested in developing government-centric solutions. Consider the potential benefits for both sides: government could play a more active role in shaping new solutions through early collaboration with emerging companies, while start-ups gain a likely long-term partner with whom they can do business. In Palantir’s case “Big Data” analytics solutions helped solve a major government challenge while providing a steady cash flow to the company during its pivotal early years. These benefits may seem most obvious in terms of IT, but the same operating model could be applied to mechanical, materials, and medical technology ventures.
There are hurdles government must overcome to adopt a CVC model. Agencies are typically well-versed in managing programs and projects. However, CVC requires a more portfolio-centric, big-picture lens – something that seems to be part of the DNA of successful venture capitalists. Additionally, government must learn to manage high failure rates, which is an inherent risk of venture investment. Regulatory, legislative, and cultural change may be required for government agencies to manage failure.
Despite these challenges, the success of In-Q-Tel and USAID DIV offer agencies a path. Government agencies interested in spurring innovation through a venture capital model will need to build out those capabilities that serve VC firms so well, which often include the ability to conduct technology and market assessments; manage an investment selection process; and promote seamless technology adoption. An agency doesn’t have to get everything right on the first try. When developing these capabilities, there is an opportunity to use the “Lean Startup” model and retain only the parts that work.
Chris Biggs is a fellow in Deloitte’s GovLab Innovation Program, as well a Senior Consultant in Deloitte’s Supply Chain practice. With over eight years of public sector experience, Chris’s work has focused on helping Federal agencies implement strategies that both improve logistics capabilities and utilize emerging technologies to help further their missions. Additionally, Chris is a certified Project Management Professional and holds a master’s degree in International Affairs from The George Washington University.
Aleks Ontman is a Senior Consultant in Deloitte’s Technology Strategy and Architecture practice and a fellow in Deloitte’s GovLab Innovation Program. With a background in financial econometrics and technology Aleks’ work focuses on helping Federal agencies further their mission by developing and implementing strategies augmented by emerging trends. Aleks holds a Ph. D. in Materials Science and Engineering from the University of Virginia.