In-Q-Tel, the CIA's investment arm, partners with Silicon Valley to bring terrorism-fighting tech to market.
In a nondescript high-rise three miles outside Washington, D.C., a little-known firm called In-Q-Tel is investing U.S. tax dollars in startups that benefit the intelligence community. Since its founding in 1999, In-Q-Tel — named after the gadget-toting James Bond character Q — has backed 200 early-stage tech companies whose products range from a wireless-communication device that sits in an agent’s mouth to software that protects PC screens from prying eyes.
Decades ago the federal government might have developed that kind of technology itself. But as the Internet boom in the late 1990s began monopolizing engineer talent and venture capital, Silicon Valley quickly outpaced the government as the country’s nexus of innovation. To get its hands on the best new technology, the CIA created In-Q-Tel.
With offices in suburban Boston and Silicon Valley, In-Q-Tel’s 10-person investment team sources and negotiates deals and advises portfolio companies. In most cases, In-Q-Tel co-invests with blue-chip VC firms, including Kleiner Perkins Caufield & Byers and Greylock Partners — whose partners sit on In-Q-Tel’s board.
In-Q-Tel’s focus is getting new products to market, ideally within three years of investment. It injects from $1 million to $3 million. (An In-Q-Tel spokesperson declined to comment for this story.) After the Boston Marathon bombings, surveillance tech is attracting more attention. Here are some of In-Q-Tel’s most intriguing investments in private firms.
Palantir builds tools that can bring massive amounts of disparate data into one place, allowing users to find patterns — in phone records and financial transactions, for example — that would otherwise be invisible. A group of PayPal alums, including co-founder Peter Thiel, developed Palantir out of software that PayPal initially used to detect fraud.
Co-investors and size of investment: Palantir has raised over $300 million in venture funding. Investors include Thiel’s Founders Fund, Glynn Capital Management, and Yelp co-founder Jeremy Stoppelman.
The San Mateo, Calif., startup is developing a miniature wireless-communication device that sits in a person’s mouth where no one can see it. When a user talks, a minuscule microphone picks up the sound and transmits it to a nearby cellphone or walkie-talkie. The device can also pick up sound from a cellphone, then transmit it through the bone of the tooth so that only the user can hear it.
Co-investors and size of investment: In-Q-Tel’s 2009 investment followed funding from Aberdare Ventures, Novartis Venture Funds, Arboretum Ventures, Abingworth, and RWI Ventures of $67 million. “You get the funding, but you also get the sense that somebody — and you don’t know who that somebody is — is interested,” says founder Amir Abolfathi.
Forget sophisticated, far-off hackers. This startup, based in Hunt Valley, Md., protects computer users from unauthorized “over-the-shoulder eavesdroppers.” Oculis software uses a webcam to check whether anyone nearby is looking at a computer screen and, if so, alerts the user with a pop-up window. For more security-conscious users, the screen will blur automatically when it detects a snooper.
Co-investors and size of investment: Oculis raised $3 million from angel investors and In-Q-Tel. Founder Bill Anderson says that an In-Q-Tel investment “puts a little halo around the company and makes potential government clients more comfortable with us.”
When spies and law enforcement agents need to store biological material — like human tissue — they rely on freezers, which sometimes do a mediocre job preserving samples. That can be especially problematic in deserts and other remote locations. Enter Biomatrica, a San Diego company that can preserve, store, and ship biological material at room temperature using chemicals.
Co-investors and size of investment: Biomatrica raised $5 million from DARPA, In-Q-Tel, and others.
Adapx’s digital pens don’t shoot bullets or spit out poison, à la James Bond. But the Seattle startup sells software for digital pens that allows users to record information in real time, then connect the pen to a PC or cellphone and share the info. Its software also lets soldiers mark up a paper map and transmit that information to troops digitally.
Co-investors and size of investment: Since 2007, Adapx has raised $32 million from In-Q-Tel and investors such as Palladin Capital Group, OVP Venture Partners, Pelion Venture Partners, and Northwest Technology Ventures.
The software designed by this startup, in Cambridge, Mass., can mine text in more than 20 languages. Basis is helping the U.S. government automatically standardize the use of names in documents so that analysts at the CIA and NSA will spell foreign words consistently — making agency files faster to search.
Co-investors and size of investment: Basis raised money from Amazon.com, Accenture, and Kyocera Goldman Sachs Venture Capital.
This story is from the May 20, 2013 issue of Fortune.