Venture Capital Meets Mission Critical • Steve Bowsher, IQT (In-Q-Tel)

President and CEO of IQT (In-Q-Tel), Steve Bowsher pulls back the curtain on this CIA-launched non-profit that's been quietly shaping national security for a quarter-century. Steve shares what he looks for in game-changing startup teams, why IQT is not your average VC, and divulges what emerging technology he’s most excited about right now. 

“People think of us as an investment platform, but the heart of what we do is to facilitate the piloting of technology” -Steve Bowsher

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Transcript

Niki: I'm Niki Christoff, and welcome to Tech’ed Up. 

Today's guest is Steve Bowsher, President and CEO of IQT. It's an investment platform formerly known as In-Q-Tel. The CIA launched the non-profit 25 years ago, and today, it's a major funder of tech startups. Steve's team focuses on finding commercial technologies that can also support our national security mission, from biotech to microchips, AI to space systems.

Today, we're talking about the companies that IQT funds and what Steve looks for in a startup team. 

Thank you for coming in. 

Steve: Good morning. Thank you for having me. I'm excited to be here. 

Niki: And you're still on West Coast time. 

Steve: That's right. I got my smoothie here. I'm ready to go.

Niki: Got your smoothie. Not a coffee guy. [chuckling] We've covered this off. 

It's okay. D.C. is like a [pause] coffee and booze kind of town. But yes, you can have your smoothie because you're from the West Coast. [chuckles]

I'm super excited to have you on because I've been, like you, between D.C. and Silicon Valley in my career and been close to a bunch of startups in the national security space.

You guys have a bunch of money that you put into startups that can help the Intel community and DoD. Tell us a little bit about IQT. 

Steve: Sure. So, we were actually created by CIA 25 years ago. The fundamental premise, which was controversial back then and much more readily accepted today, is that innovation had shifted in the United States from large corporate R&D labs, like Xerox, PARK, and Bell Labs, and university labs to the 10,000 plus venture-backed startup companies that were around in 1999. 

And CIA used to be able to go into places like Xeox Park and Bell Labs and say, “Show me the latest and greatest stuff that you're working on.” And they'd show it to them. And then, CIA could also say, “That's really cool, but you know what? If you maybe added a level of encryption to it or add a feature to it that makes it compatible with a certain version of scientific Linux that only we use anymore, we could really take more advantage of this technology.”

And they'd make those feature modifications. When CIA realized that innovation shifted, they realized they weren't having conversations at the early stage with people developing these new emerging technologies. They weren't able to sort of make feature requests and they were pretty bad at sort of buying technology from these startup companies.

The government really doesn't know how to do business with startup companies. 

Niki: Mm-hmm. Yes!

Steve: Right? And so they, they created In-Q-Tel. And said, “Go solve this problem for us.” We, dug in and we figured out there are problems on both sides of the equation, right? 

Y’know, if you're a procurement officer at one of these agencies and you're thinking about sourcing technology and your choice, choices are IBM, or Oracle, Northrop Grumman, OR some startup company you never heard of that is losing money, has 12 months of cash on its balance sheet, has a team of people wearing hoodies and jeans [Niki: laughs] to meetings, right? They quickly tossed that company out of the procurement process. Yet, that company often had the more innovative technology. 

At the same time, the conventional wisdom in Silicon Valley and other places in our country that had pockets of venture-backed startup companies was that the government is a great market to win once you win it, but it takes too long and too much money to be the first vertical market that you go after. 

Because what people in D.C. don't understand about these startup companies is they get funded in sort of 12 to 24 month time frames. [Niki: mm-hmm] In the founding teams, the entrepreneurs, y’know, they're constantly thinking, “What do I need to demonstrate in order to raise my next round of funding?”

The most tangible form of progress to demonstrate is a purchase order. So, in the early days of companies’ existences, they only want to talk to customers that can make a purchase order decision in less than 12 months so that they can show tangible progress to their investors and reach their next round of funding.

The perception was, “Government doesn't make purchase orders this quickly, so let's not talk to them.” So, neither side really wanted to talk to each other. And we came in and in over 25 years we've built up the trust with the government agencies that we work with - and we now work with a large portion of the U.S. intelligence and defense community, not just CIA anymore. We built up the trust with those agencies for them to share their problems with us. [Niki: mm-hmm]To say, “These are the types of problems that we don't know how we're going to solve. Can you go out and find new innovative technologies that can help us solve these problems?”

And then we build up the trust with the startup community, the entrepreneurs and the venture capitalists, that when we go talk to them and we say, “Hey, there might be an application of your technology to a U.S. government problem that either you haven't thought of or you thought of and decided it was too complicated to pursue. We can get you an answer of, is there an opportunity for you? Is there a market opportunity in less than 12 months? If there is, we can get you to a purchase order.”  And we have a whole process to do that. We call it investing to deliver capabilities. 

Niki: So, you're like expediting the purchase by, potentially, by the federal government.

Steve: Exactly. So, people think of us as an investment platform, but the heart of what we do is to, uh, facilitate the piloting of technology by an end user at one of more of those agencies of the technology from one of our portfolio companies. Success for us is when the end agency adopts that technology, [Niki: mm-hmm] deploys the technology into mission and operational environment, oftentimes with the enhanced features that we helped the two groups come together on.

We do it at scale, and we've delivered impact across a wide variety of, uh, uh, U.S. intelligence and defense agencies, and now we have top-tier venture capital firms who we've had successful co-investments with in the past, proactively showing us deals in their portfolio because they trust us to help them figure out if there is a government opportunity or not.

Y’know, now, our space has become hot in the government where the government has finally realized that, “Hey, if we want to be equipped for nation-state competition with China and Russia either on the kinetic battlefield or through other asymmetric means that we, the government, need to understand and be able to leverage early-stage emerging technologies from the venture-backed ecosystem in the United States.” 

Niki: Okay. So, I have a bunch of questions. [Steve: Great] So, one question is, and I know something about this - not a ton about it. We were talking before we got started. My former spouse started an In-Q-Tel-funded nano-satellite company, [both chuckling] and then sold it to Google. So, bravo. [Steve: Right] But when, when we were going through that stage and he's going up and down Sand Hill Road with his co-founders, he was looking for this total addressable market, right? Not just DOD. The Defense Department we know has a huge budget, but the Intel community has a black box budget of like, what, a quadrillion dollars? [chuckling] 

Steve just nodded. 

[Niki: laughed] 

Steve: No! I shrugged. [laughs]

Niki: Oh, sorry. [jokingly] Excuse me. [chuckling] Steve shrugged.

[both laugh] 

And so, that total addressable market is huge, but to your point, if you're looking for a seven-year exit as a venture capital firm, it's going to take them a lot longer than that, sometimes. So, you're fast-tracking them to make products that are specifically mission-oriented, so they kind of know that they're likely to get in with a bigger contract.

Steve: Exactly, so one of the challenges is venture capitalists like to invest in things that they understand, right? [Niki: mmh] And for a long time they felt like they didn't understand the government market. And venture capitalists evaluate startup companies across three different paradigms.

They evaluate the team, they evaluate the technology, and they evaluate the market. And venture capital is a hits-driven business. Ten percent of the deals generate 70 percent of the returns in venture capital. [Niki: mmh]  It's kind of like the movie business. Hollywood makes lots of movies that lose money, [Niki: ah] but occasionally they make a uh, uh movie that makes a lot of money, and that pays for all the bad movies they made.

Early-stage venture capitalists lose money on over 50 percent of the deals that they invest in, but as one of my early mentors told me, “You can only lose one times your money, you know, but you can make ten, twenty, a hundred times your money if, if you pick the right winner.”

Niki: And it's Uber, and it’s Facebook, [Steve: Exactly], and everybody has these, you know, dollar signs in their eyes.

Steve: Yeah. Within the industry, it is called a fund returner. [Niki: Oh!] A typical venture firm fund may invest in 30 deals across an individual fund, but they want to know that each of those deals, if they work, can return the entire fund if they're successful.

In my early days there, the venture capitalists would be calling us up and asking us like, “How big is this market?”[Niki: mm-hmm] ‘Cause, ‘cause that's what they need to understand is like, “If this company works, can it be successful?”

It's hard to figure that out if you're not someone who understands government budgets and government procurement processes. And uh, so we've oftentimes become sort of either a translation engine of this is what the government really means when it says it or tells the government this is what the startup company means when they say it.

But also, we're, we're a resource that's again, trusted. I keep coming back to the word “trusted.” It's an important word to IQT in terms of who we are and what we do. We've built up this trust over time where entrepreneurs and VCs trust us to tell them, “Is it worth our time and energy to develop a version of our technology for this market, to hire a federal sales team to go off and do it?”

Niki: So another question, it seems to me intuitively, and I don't actually know this, that a lot of the products that might help the intelligence community are hardware versus software.

Some are software, right? You might have AI, but that you're taking a bunch of compute power or satellites or rockets [Steve: mm-hmm], things that explode all the time and have high risk. But, that that takes more money, right? So, it's more leveraged when you have these investors. 

So, maybe that's another shot in the arm. Is that true or not true?

Steve: It's certainly true for a certain set of deals. So, we invest across a wide variety of technology. So, we certainly do software. The partner agencies we work with have large data centers, [Niki: mm-hmm] right? So, they need all the software that a traditional Fortune 1000 company has to search data, store data, present it, integrate it, y’ know, that sort of stuff.

And so, those software companies look a lot like traditional software companies with, y’know, one set of capital requirements. The cybersecurity area is another area that we invest in. It's also mainly software. But to your point, we also, uh, invest in a lot of hardware-related companies, whether that's platforms, whether that's drones, satellites, platforms on the water, that sort of stuff, to components that go in those platforms, to batteries, to materials, to gadgets, that James Bond would use, y’know, out in the field.

And so, we're approximately 50-50 in terms of our investing between software and hardware [Niki: Ah, okay!] which is unusual for most venture capital firms are much more, software-centric. 

Niki: Right. They want an app because again, it's consumer-focused. It's easy for them to understand.

Steve: Exactly. To your point, software companies typically require less money to get the feedback to understand if there’s a market there or not. Venture capital industry is full of pithy little sayings. And, and when I first started in the venture capital industry for a traditional venture capital firm, one of the phrases I heard when you got, uh, to the point where you'd built the product and you're ready to try and sell it, you know, some crusty old VC would say, “Well, it's time to see if the dogs are going to eat the dog food.”

Niki: Oh my gosh, right. [Steve: laughs] I know they said that at Google too, “Eat your own dog food,” right.

Steve: [laughs] Yeah, there's a lot of truth to it. Most startup companies actually end up building the technology they set out to build. It may take a little bit longer. It may take a little bit more money, to build it. Where companies fail is, you know, do people actually buy it? [Niki: Right!] Is there a market, and is that market large enough? 

Typically, the initial round of funding for a company is called the seed round. Next round is called series A and then series B, very logical nomenclature after, after that. 

And so, where a lot of companies fail is in that series A, series B time frame when they've built the product, they're going to market it and [interrupts self] A definition of proof of that there's a market for my product is typically, “Show me that you sold the same product, same version of the product 10 to 20 times to, to a set of customers that all want to pay you money for it to solve a similar business problem,” [Niki: mmh] Right? Some people start selling one-offs, like, “I sold a version of this product over here to solve this problem of version over here to solve this problem”- that doesn't feel like a scalable market.

And so, one of the advantages that IQT brings to the agencies we work with is when you get involved in those companies as they're trying to prove out whether there's a market there or not, they're much more amenable to listening to, “Hey, can you add encryption to it? Can you make compatible with scientific Linux.”

Because what they're desperately trying to do is get to 10 or 20 referenceable customers to raise their next round of money, which is often times the scale round, which is, “We've proven our market. Now, let's go scale the company to go meet the needs of the market, and hire a whole bunch of salespeople, add engineers, add additional features,” that sort of stuff.

Niki: Okay, so this leads to, sort of, the next category I want to talk about, which is the national security mission. So, you are, as you said, started by the CIA, but it's a nonprofit, so it's very mission-oriented, and you're not just servicing the CIA. You're servicing D.O.D., N.S.A., D.I.A., N.R.O. 

The D.C. audience will know what all these things mean. [Steve: Yep]

So, you've got a bunch of agencies, which, of course, increases that market. Are the companies that you're investing in, obviously, there's a different kind of due diligence because you're doing national security checks. Can they then sell to other countries too, or no? [Steve: yep] But, once you all have invested in a company, are they restricted as far as commercial use or other public sector use?

Steve: They are not restricted [Niki: ok!]  first of all. Second of all, we are independent, not for profit. We're a 501c3. And, and, and so the important distinction there for people to understand is that means we're not investing to try and drive financial returns.

As a strategic investor, we are investing to drive impact to the government agencies. So, we measure ourselves on that pilot rate and adoption rate that I mentioned before. The companies we work with, if they are successful selling to the government are able to use that as references to go out and sell to other people, both commercial customers and other government customers.

In reality, it really means other allied or government customers. I think, one, I'm not sure China or Russia is going to buy [chuckles] American technology. 

Niki: Probably not. Well, they might steal it. [cross talk] They might steal it. [chuckles] Sorry, I know, but it's true. [Steve: chuckles] I say stuff like that on this podcast all the time. Steal it and then sell it back to us.

Yeah. Yeah. It's a terrific business model. 

Steve: It would also probably jeopardize the company's ability to sell to U.S. government customers. But, y’know, uh, look, the U.S. has been, I think, very clear in communicating that it believes it needs to build allied relationships with folks like Great Britain and Australia through AUKUS.

The U.S. government works very closely with NATO and so there's a whole set of alliances out there where it's good for the U.S. to work on a common technology platform with its partner.

Niki: So, you don't restrict, [Steve: right] so, you don't restrict them, but they might restrict themselves if they went to-

Steve: They might, they might restrict themselves.

And by the way, they are subject to all the CFIUS and FIRRMA and export control rules that exist out there. 

Niki: Okay. So, another question.

What are you most interested in? What technology right now is sort of grabbing your attention? 

Steve: I'll give you a macro technology and a very tactical one [Niki: Okay] as well. So, on the macro level, y’know, China's came out a few years ago and said, “Europe won the industrial revolution in the 19th century and that's why they were the world leaders. The U.S. won the IT revolution in the 20th century and that's why they've been the global leader since World War II. We believe that whoever wins the bio revolution is gonna be the leaders in the 21st century. And we, China, want to do that.” 

So, I think one of the most interesting areas of technology right now is what's going on in bio. And I think there's a couple different themes to that. One is AI applied to bio as it relates to drug discovery. [Niki: mm-hmm] I'm fascinated by this, as you get a little older, and I'm a little older than you, you start to think about health problems, and the application of AI to one diagnose me better, to develop new therapeutic drugs, or medical devices to treat me better are all things I'm cheerleading for because [Niki: Very positive AI] 

I know, I, yeah, modestly, I want to live forever, [chuckling] so-

Niki: Oh my gosh! You've been in Silicon Valley! [Steve: laughing] You're going to freeze yourself and then, uh, they'll crack you open with all the other folks. 

Steve: Exactly!  [both chuckling] At a micro, more tactical level, certainly, if you're paying any attention to the conflicts going on in Ukraine or Gaza or conversations about potential conflict in Taiwan, drones are, y’know, incredibly important and they've revolutionized the battlefield.

And what the truth of the matter is, is right now, you can have what's called an FPV, a first-person view drone, operated by one operator who can guide and direct the drone on his mission. You can sometimes have those drones operate autonomously, but getting a swarm of drones to operate autonomously together, y’know, a hundred drones to go out there and work in a coordinated pattern to attack something; that autonomy doesn't really exist yet.

And so, I'm fascinated by this idea of who's going to develop the autonomy technology first to manage a swarm of drones. ‘Cause again, I think drones are the future, and I know China is working on it. We, the U.S. are working on it. Europe's working on it. None of it is really ready for prime time yet, but I think that's a really fascinating area to focus on.

Niki: I'm super fascinated by drones, too. We had a guest on the podcast, Sean Gurley, who's a Kiwi, founder of PrimerAI. 

Steve: Well, I know Sean! Great guy!  

Niki: Okay, so Sean came on and was talking about the idea that you could have, you can have the most like shit-hot, y’know, fighter jet, and if you've got a swarm of drones just jamming it up [Steve: yep], you can very cheaply take down something that we have always been advanced in, which is these planes, just with kind of off-the-shelf drones, if you can get it to do exactly what you said. 

Steve: Absolutely. I'll give a shout-out to a guy we were talking about earlier, Chris Brose, [Niki: Yes] who worked for Senator McCain on his D.O.D stuff and is now the Chief Strategy Officer at Anduril. He wrote a book called The Kill Chain, which basically, the thesis was, in all the war games that they played about potential conflict with China, China always won.

And China always won because the U.S. deployed a small number of incredibly capable heavily manned platforms, fighter aircraft carriers, fighter jets, those sorts of things. By the way, those things are all really expensive.

Right? [Niki: yeah] The supply, right? And China would respond with a large number of really cheap attributable (which means you can lose them) autonomous drones, and they would, y’know, disrupt the U.S. operations. And you look at what Ukraine's been doing, able to do to Russia. Ukraine doesn't have a navy, [Niki: right] and they basically stopped Russia from doing anything with its navy due to drones. Israel thought it had this great missile defense shield. That's been the real revolution of both these two conflicts that are existing right now.

So that's the way conflict is headed. These drones are also useful for intelligence missions.

On the one hand, the U.S. has to figure out how to manufacture them much more cheaply and effectively, like China can do with DJI.

Niki: [interrupts excitedly] With our own component parts. We don't want to be buying. 

Steve: Exactly. Exactly! But the second thing we have to figure out is the autonomy software to go on these things to help them operate in tandem.

Niki: Okay. I'm super interested in drones. Bio, I had not thought about as the revolution that China was bringing.

Steve: I think bio is the macro tech, the macro technology to think about for the next, ten years. Generative AI, I think, is pretty interesting, but I think bio is, is even more interesting, although, of course, the two will probably intersect somewhat here.

But, at the micro level, the, the sort of mission that exists today that I'm excited about, it's the autonomy for drones. 

Niki: One of my clients; I'm actually working on, I'll just bring it up now, an Op-Ed on how we need to open up experimentation for counter-drone technology with the FAA. [Steve: yup] Anyway, it's a little policy plug for one of my people. [Steve: yup, yup] You don't have to do it. [chuckling] Don't worry about it.

[both laugh] 

Steve: I'm happy to be present for it. [laughing] 

Niki: Be present for this plug [chuckling] but it makes sense, right? Because in addition to having drones, we want to be able to counter drones. So, Okay. Last question is, what do you personally look for in a team? We have a lot of people in Silicon Valley listening to this.

When you're looking not just for a product that can be tailored to fit the mission, what do you look for in the actual team you're investing in? 

Steve: So, it's a great question. I'll start by saying another one of these pithy little sayings that someone told me when I first got in the venture business, which is, “Winners keep winning.”

The first thing I always look for in a person is: have they achieved success at some point in their life? It doesn't have to be in technology. It doesn't have to be in the area of technology that they're now representing to me that they want to go build, but I'm just looking for something that says, “ This person is a winner.”

Right? Because if they've demonstrated that before in some aspect of their life, I think it's more likely that it will be a winner in this opportunity that they're presenting.

Niki: Interesting. So, not just a business winner, but just in general, it's a successful person. 

Steve: Yeah. Like, look, a great athlete, a great musician, a great artist, someone who was successful at whatever job he or she was doing, y’know, maybe their first job out of college, right?

I'm just looking for that trait. I'm looking for that trait that says, you know, “Hey, whatever it is that I decide to care about at some point in life, I did well at that.” Because I think that's a trait that remains in people throughout their life.

The next thing I look for is vision and the ability to communicate vision. When you're an entrepreneur, when you're starting a company for the first time, a lot of what you have to do is make your company appear bigger than it really is, more substantive than it really is, and make people - whether it's employees you're trying to recruit, investors that you're trying to get to invest in your company, customers that you're trying to land for the first company, make them believe in your vision in a way that they will do dumb things like they'll quit their job at Google [Niki: laughs] to go work for some startup company that has six months of cash. [chuckling] 

Niki: Swagger! I feel like it goes a long way. 

[both laugh] 

Steve: Right! I look for vision and ability to communicate the vision. And then, the last thing I look for is pertinence around the domain problem they're trying to solve. So, I'm a big believer that the best companies solve problems that the founding team really understand. [Niki: mm-hmm]  I'll spend a lot of time trying to understand what is the problem that you're trying to solve? What is your uh, uh, uh understanding and pertinence to it? And is it realistic to believe that you've come up with some way to solve a problem that no one else has been able to figure out yet? So, those are three things that I look for in them. 

Niki: That's so specific. I don't think I've actually ever had someone on this show or even in my life explain exactly those traits. [Steve: yeah] But it makes sense. [Steve: yup] You're going to hit probably more if you understand that they have some subject matter expertise and really get it. 

Steve: Yeah. Yeah. By the way, one thing I didn't mention, but I also innately evaluate grit and resilience. Cuz, I forget the woman that wrote the book about the learning mindset? All of us who've raised kids have ever read that book [laughing] because we want to instill grit and resilience in our kids. That has become the buzzword these days. 

You look for that as well because startups don't go smoothly. [Niki: Mm-hmm, Yeah, bumpy!] There's, there's bumps along the way everywhere and it's easy for people to get discouraged and throw in the towel, and the best entrepreneurs, the ones that win are, are the people that are just so passionate about succeeding that they don't let any sort of hiccup discourage them.

Niki: I love it. Grit and resilience. I don't have kids, but it's interesting to me to watch the young, [Steve: laugh] the young generation who's at times, this is like a different topic, but sometimes a little thin-skinned. So, yeah, gotta toughen them up [Steve: Exactly] so that they can have their face first in the pavement and then get their business still off the ground, [Steve: chuckling] which it is really hard.

It's super hard to be a startup founder. [Steve: yup] It's really hard to be raising money and building a product at the same time. 

I'm delighted to have you come on the podcast to explain a slightly different kind of fund than we're used to talking about. And, especially, I'm like a national security hawk slash democracy super-fan.

So, I'm personally interested in the mission and thank you for coming on. 

Steve: Well, thank you. We love people interested in what we do. I came to IQT 18 years ago. I didn't think I'd stay for 18 years, but, uh, I can't imagine enjoying a job more than I do today. So, so I love talking about it.

So, thank you.