"The disastrous rise of misplaced power exists"

Some of the country's most influential venture capitalists and former spy chiefs are investing in companies now providing the government with the sweeping electronic spy system and evolving cyberwarfare programs exposed by Mr. Snowden.

More than 80 companies work with the NSA on cybersecurity and surveillance, according to a recent report in the German magazine Der Spiegel that was based on top secret documents provided by Mr. Snowden. They include firms like the one that employed Mr. Snowden as an infrastructure analyst in Hawaii, Booz Allen Hamilton Inc.,as well as scores of new players.

Last year, venture capitalists pumped about $700 million into security startups, almost a 10th of the estimated market, according to Lawrence Pingree, research director at Gartner Inc., IT +0.88% the U.S. information technology research company.

That's a small part of a broader technology market expected to grow from $67.1 billion this year to more than $93 billion in 2017, he said.

The increases are driven by budget shifts toward cyberwarfare and surveillance and away from ground forces. In his most recent Pentagon budget proposal, President Barack Obama sought cuts in most areas, but is seeking more money for military cyber operations.

"Money always follows problems," said Mr. Pingree.

One prominent player, Endgame Inc., is an Atlanta-based company that provides the U.S. government with the technological tools and know-how to conduct surveillance and, when needed, cyberattacks.

"Endgame is part of an emerging industrial-cyber complex that provides capabilities to our federal agencies much in the same way one might sell bullets to the government," said David Cowan, a partner at Bessemer Venture Partners, a leading venture capital firm that is one of several investors that have given Endgame $80 million.
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Paladin Capital Group, the Washington-based private-equity firm led by former Central Intelligence Agency Director James Woolsey, has given the company millions of dollars. Endgame's new board chairman is Christopher Darby, president of In-Q-Tel, the CIA-backed venture capital fund. Mr. Darby is joined on the board by Kenneth Minihan, a retired Air Force general who once served as head of the NSA.

The private-sector intelligence world has driven perceptions that the government is cultivating what former NSA Director Michael Hayden has called a "digital Blackwater." That 2011 comparison to the private security contractor was meant to be complimentary. But it suggested to some possible conflicts between public service and private aims.

"Where do we want to draw the line as a country for what should only be reserved for government intelligence officers?" asks Tim Shorrock, author of "Spies for Hire: The Secret World of Intelligence Outsourcing," a 2008 book about the role of contractors in intelligence. "Beneath that veil of secrecy, these companies can be helping agencies and making decisions that are colored by their financial interest."

Investors say they understand the concerns, but argue the U.S. government doesn't have enough institutional talent to keep pace with metastasizing dangers in cyberspace.

"Do you go out and hire a mercenary force to defend the kingdom?" said Bob Ackerman, founder of Allegis Capital LLC, which funds a variety of cybersecurity companies. "It's probably not the first choice, but you may have to out of necessity."

"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist."