DEFENSE HORIZONS: Maximizing Returns of Government Venture Capital Programs
Defense Horizons #71
"Maximizing the Returns of Government Venture Capital Programs."
By Andrew S. Mara
"The Federal Intelligence Community and the Department of Defense have made substantial commitments in the venture capital community through In-Q-Tel, OnPoint Technologies, and DeVenCI. Despite these commitments, knowledge of these programs throughout the government is limited. Government venture capital (GVC) programs have insight into many small technology companies that are otherwise invisible. To maximize the value of GVC investments, company information should be shared among government agencies. Despite their innovative approaches to investment funding, GVC programs still struggle with the difficult task of transferring new technologies to the government. Classification, timing, culture, and incentive issues all plague successful technology transfer; however, these challenges are not insurmountable. Successful venture capital efforts in industry often rely on a “technology champion” to usher new technologies into the parent company. GVC programs should adopt a similar strategy to increase the transfer rate of promising technologies."
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 work 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 cuttingedge 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.
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