Tech Investors Cull Start-Ups for Pentagon - New York Times http://www.nytimes.com/2007/05/07/technology/07venture.html?_...

May 7, 2007

Tech Investors Cull Start-Ups for Pentagon

By MATT RICHTEL

SAN FRANCISCO, May 6 — The nation’s military, in its search for the next surveillance system, bioterror vaccine
or robot warrior, has decided to take a peek into the garage.

Through a program that recently emerged from an experimental phase, the Defense Department is using some of
the nation’s top technology investors to help it find innovations from tiny start-up companies, which have not
traditionally been a part of the military’s vast supply chain.

The program provides a regular exchange of ideas and periodic meetings between a select group of venture
capitalists and dozens of strategists and buyers from the major military and intelligence branches. Government
officials talk about their needs, and the investors suggest solutions culled from technology start-ups across the
country.

It is in some ways an odd coupling of the historically slow-moving federal agencies and fast-moving investors, who
deal in technologies that are no sooner developed than they are threatened with obsolescence.

But the participants argue that the project, called DeVenCI for Defense Venture Catalyst Initiative, brings
together two groups that have much to gain from each other and that have had trouble finding easy, efficient ways
to work together. Those on the military side of things have adopted the Silicon Valley vernacular to explain the
idea of systematically consulting investors to find new technology.

“We’re a search engine,” said Bob Pohanka, director of DeVenCI, noting that the program is a chance for military
procurement officials to have more intimate contact with investors who make a living scouring laboratories and
universities for the latest innovations.

Venture capitalists “have knowledge of emerging technology that may be developed by companies as small as two
guys in a garage,” Mr. Pohanka said. “These are companies that are not involved in the D.O.D. supply chain.”

For the investors, it is a chance to get closer to a branch of government with vast spending power that is a potential
customer for the start-ups they have backed. That can be particularly valuable because the venture capital
industry, far from enjoying the success of the dot-com boom, has languished in recent years and is looking for new
markets and sales opportunities.

The military is “like a Fortune No. 1 company,” said E. Rogers Novak Jr., managing director of the venture capital
firm Novak Biddle Venture Partners, and one of the investors who consults with the government. “We may get a
customer and the D.O.D. gets something that helps them.”

The project is in its early stages, having convened three meetings since October. And there are questions about

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whether a bureaucratic and careful system built around long-term relationships between the military branches
and their contractors can be compatible with the quicker culture of Silicon Valley.

“Everybody is feeling their way through this relationship,” Mr. Novak said. “The potential is there. The devil is in
the details.”

There is nothing fundamentally new about the military trying to gain access to cutting-edge technology. For much
of the 20th century, it financed and led that development. But that has changed in the last several decades as
innovation has started to move at light speed in the private sector.

Since the Sept. 11 attacks, the military has reached out more to the private sector, trying to make use of a range of
technologies in pursuing security and fighting wars. Some venture capitalists have catered to those demands,
creating firms aimed at military and security needs.

On the public sector side, the Central Intelligence Agency in 1999 started In-Q-Tel, a venture that identifies and
invests in start-ups and technologies whose products could be used in intelligence. And the Defense Advanced
Research Projects Agency backs new technology and has helped create many important advances, including the
Internet.

What makes DeVenCI unusual, its participants say, is that by bringing together military procurement agents and
technology investors it is creating a kind of brokerage for ideas. But it had humbler beginnings, starting out on
more of a special case basis not long after the attacks on the World Trade Center and Pentagon.

One of the early participants was Ted Schlein, a partner at the venture capital firm Kleiner Perkins Caufield &
Byers. Mr. Schlein said he and a handful of other venture capitalists met with military officials to hear about their
needs and then looked for useful technologies. The relationship bore fruit, Mr. Schlein said. He cited a meeting
he had several years ago with then-Defense Secretary Donald Rumsfeld, who was carrying a confidential file.

“Rumsfeld said, ‘I can’t show you what’s in this folder, but you solved some problems for us,’ ” Mr. Schlein
recalled.

By the end of 2005, this team had made suggestions that led to the adoption of 15 technologies for military and
intelligence uses, DeVenCI participants said. In early 2006, the Defense Department decided to expand the
project, and it paid for an office with four full-time staff members led by Mr. Pohanka.

They signed up 11 venture capitalists from 30 applicants to serve two-year terms. These investors are sent
hundreds of pages of information, most of it unclassified, about the needs of military agencies. Then the members
of the group get together in person, as they did in March in Arlington, Va., with representatives from about 50
procurement agencies for various military branches.

The idea of these meetings is not necessarily to short-circuit the usual military procurement process, which
usually involves doing business with one of a handful of big companies like Lockheed Martin and Raytheon,
DeVenCI officials said. Rather, the idea is that the military buyers will see technology that they can recommend to
those massive contractors for new or continuing projects, or, conceivably, that they will sign small initial contracts
with the start-ups so they can further develop a technology for military use.

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“Most of these companies wouldn’t dream of approaching the government because they’ve heard about a
three-year procurement process,” Mr. Pohanka said. He said he tells the venture capitalists and start-ups that the
Defense Department signs 6,000 or more contracts a week with various companies. “There are more than ample
opportunities,” he said.

Some companies have already profited from the program. In 2003, when DeVenCI was in its experimental
phase, the Defense Information Systems Agency was looking for ways to protect computer networks. After
speaking to several companies through DeVenCI and evaluating their technology, the agency wound up working
with ArcSight, a software company based in Cupertino, Calif., which won $3.6 million in related contracts over
the next few years, DeVenCI officials said.

Mr. Novak of Novak Biddle said he brought with him to the March DeVenCI meeting two executives from a small
start-up developing biometric technology that could be used for things like advanced fingerprinting or eye scans.
Mr. Novak said the chief executive and chief technology officer from the Virginia company, which he declined to
name for competitive reasons, gave a presentation to the roughly 50 assembled procurement agents.

The executives took questions and were approached afterward by buyers from several agencies for a more
detailed conversation, and business cards were exchanged.

But it is not all business, the venture capitalists say. For some, there is a patriotic component, one that sometimes
tests their own philosophies about the role of the military.

In 1969, Kevin Fong, a high school student, attended antiwar protests on the campus of Stanford University in
Palo Alto. Now 52 and a managing director with the Mayfield Fund in Menlo Park, he said he believes that
American soldiers need the best equipment possible. He is one of the new participants in DeVenCI.

“There’s a part of me that says the military and conflict are going to happen and you have to be prepared for it,” he
said, explaining part of the reason for his interest.

But he said his first impulse to help came from a recognition that participation in DeVenCI could be good for
business. “When the DeVenCI people approached me, they said the magic words to a V.C.: ‘We’ll hook you up
with buyers,’ ” Mr. Fong said. “How can you resist that?”

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