Quantum Tech for executives and investors
We are back to business as (the new) normal and in our long take we do a broad sweep on investment opportunities in Quantum Tech from deal sourcing to due diligence. The short take covers relevant news for investors and executives. The fan favorite SciFi section looks at spooky quantum entanglement.
Lastly, a new addition this week is my personal video series for Quantum Tech vendors and startups, in which I offer business best practices and frameworks to help us all rebound stronger from the crisis and take action NOW.
Last week I started a video series for Quantum Tech vendors and startups with business frameworks and best practices on how to rebound stronger from a crisis
If you are a quantum venture looking for funding please contact us to be added to our weekly mailers to investors.
I love to get your feedback, praise and scolding - email me at andre@estrapadus.com or on www.interference.consulting
The long take
I have been involved with the investment community for fifteen years. First, I helped start the co-investment practice at SSA & Company where we worked with large financial partners such as General Atlantic or Apollo to identify manufacturers, SMBs or carve outs to invest in and turn them around. Then I spent a decade of my life founding and running three startups, for all of which I had to raise capital and source, engage and convert investors, and, as happily as possible, deal with them on our boards of directors. For the last 3 years my focus has been on Quantum Tech and I speak to investors interested in this area every day. I run a Quantum Tech deal sourcing operation and have developed many proprietary due diligence frameworks specific to quantum businesses.
My goal this week is to share some of that expertise as it relates to Quantum as pretty much every day I get asked by investors about the space. Is it too early? Is it too risky? But why would we need help?
This week's newsletter is dedicated to answering some of the most pressing questions I get from investors when talking about Quantum.
What has been investment activity in Quantum so far?
This is, of course, difficult to answer as deals are not always public and nobody (including us) has yet managed to aggregate all available data on this topic. What we do know is that:
Investments (excluding government funding) in the QIS space are small, i.e. barely scratching the $1B mark
Peaked in 2018 with roughly 300 deals made
Have declined since but remained at around 150 deals a year
Cover the entire spectrum of 3F’s, seed to VC and even PE
Many follow up rounds have been downrounds
This does not paint a rosy picture for the investor interested in the QIS space but the way we see it is that there is a lot of opportunity for smart money to make returns in (a) specific niches and (b) consolidation scenarios.
Is it too early?
That data beckons the question if it is too early for the mainstream investor to get into the QIS space. Our answer to that is yes, assuming you have the need to return money within the lifetime of your fund and no special deal sourcing and DD edge that allows you to capitalize on opportunities.
QIS is not yet a market for your “normal” angels, syndicates or VCs that are bored with A.I. or blockchain and looking for the next playground. This space takes commitment, scientific skill and strict discipline in order to identify those opportunities that have a revenue potential and thus a path to an exit (strategic acquisition) or large follow up rounds that do not put pressure on the valuation.
Isn't Quantum all risk capital and large funding rounds?
No. We have seen some big risk capital bets but those were mostly made in 2012 - 2014, most famously, perhaps, by Blackberry founder Mike Lazaridis who invested several hundred millions in QIS institutes and ventures in and around his native Waterloo, Canada. While we have no verifiable financial information on these deals, the Waterloo QIS ecosystem has, in consequence, emerged as one of the leading global hotspots in the field both academically and commercially, fueling hope that Mike might indeed reap the fruits of this effort a few years from now.
And while QIS applications, especially Quantum Computers, require significant resources, not all of the checks are necessarily that large:
We have seen many A Round consortiums with individual checks from $500K - 2M
There has and continues to be significant seed stage funding
And even angel activity at the university lab spinout level
While the large players and ventures certainly burn through 1/2 a million to a couple $M a month and are thirsty for cash, there are a lot of very strong teams and deals with much different economics in the mix.
Is it too risky?
Yes. No risk, no fun.
Any QIS venture CEO who tells you that risk is manageable is lying. We still know too little in terms of how the technology will play out and what that means for Go to Market and revenue models to project with confidence how we would mitigate those risks.
Unless you are just wanting to bet on the jokey, and that certainly is a valid strategy.
We would argue, though, that at this point we have sufficient data on the market and ecosystem, enough reference points and experience to, at least, establish strong benchmarks within various QIS applications. This allows us to separate the wheat from the chaff, and put much more realistic product and commercial scenarios around specific deals.
In other words, investors committed to QIS can now pick winners with a degree of confidence rather than rely solely on gut or luck.
How to source Quantum deals?
I believe that sourcing is one of the most critical steps to success in an investor funnel. If you put 💩 in on the top, 💩 comes out of it at the bottom. We still see so many investors going about deal sourcing in a random or opportunistic way rather than making it a systematic, data driven step of their process.
In an immature field like QIS especially, where the number of companies is limited, and good deals are not necessarily advertised on Google or at conferences, this is even more crucial than in many other areas of investment.
That is why for almost 3 years we have been building a database of QIS companies by application and region, and continue to work on updating and augmenting it every day. For that we not only rely on conferences and Google, but on our large network of QIS researchers and executives, our social media following, the reach of our newsletter and many other channels. It’s a full time job.
How to assess Quantum deals?
The other part that we believe needs to be systemized and customized to QIS is the due diligence stage. Here, too, we see too many investors in QIS relying on their “smarts” or generic product and business DD.
Yet, QIS technologies are so complex and so nuanced that we do not believe that suffices. Furthermore, use cases are aspirational and customers mostly in POC mode, meaning typical commercial DD might fail to capture the opportunity/risk appropriately.
In our DD frameworks we focus on two sides of the coin. The technology, for which we have specific assessments based on the QIS application and type. And the GtM, for which we have specific assessments for an immature technology such as QIS. This enables us to fact check a deals validity and value, as much as to create benchmarks across products and use cases for comparison. Surely not perfect but much better than the alternatives.
Why would an investor need help in QIS?
A lot of investors are very successful and smart. And you deserve it. You have worked hard to get to where you are and you are more diligent and data driven than most other executives. Yet, for a spooky science like QIS this simply is not enough - the devil is in the details, and the details make a huge difference.
Furthermore, doing this full time, or even dedicating and entire fund (team) to QIS currently makes sense for only a select few. Even for these handful of investors it is challenging to keep up with fundraising, deal flow, DD and operational deals, in a environment as complex and fast moving as QIS. If you are not one of those funds, then the odds are against you.
Unless you consider luck a strategy, you will need help for systematic deal flow and DD from both a technical and product side to succeed in QIS.
What are the opportunities in the current market?
The current pandemic and ensuing economic crisis has, no doubt, rushed in the infamous Quantum winter. I have first hand information of some of the most well known QIS players going through considerable struggles as they try to deal with this crisis. This, good or bad, will lead to a number of opportunities:
Follow on (down)rounds as many larger players need to control monthly burn, yet keep the lights on for the future. Deals are to be made if you can write large checks and have the stomach for it
The winners, and not all large QIS companies are struggling, will most likely be looking to consolidate the market later this year and in 2021. Ecosystems will be build
There still is a large number of interesting seed activity as smaller, highly focused teams with much smaller cash needs are building MVPs
For executives interested in Quantum this means there is money to be raised out there if you are able to substantiate your scientific claims and show a valid go to market plan. It also means that just being an amazing quantum scientist is not enough to raise money and - albeit we see some lone investors putting their capital into quantum cloud castles - investors will look for a commercially viable MVP, partners, ecosystem and sales and marketing skills to execute on it.
For investors interested in Quantum this means there is plenty of opportunity but none of it is a get rich quick scheme. Yet, realizing returns within the life of a fund is possible indeed. Focus on the data, don’t invest based on your gut or your pseudo scientific understanding, and stick to frameworks and benchmarks when evaluating potential deals. Get the help you need to outperform in this space - this is not a blockchain.
For Quantum Executives
Fujitsu is strengthening its ecosystem through a partnership with Canadian Quantum Benchmark to foster joint research on quantum algorithms.
A lot of press has been made within Quantum Key Distribution related research over the last week. The EU QT Flagship initiative announced a photon based encryption link at the same time that University of Glasgow researches share new work in quantum entanglement. ID Quantique released a new random number generator. MIT and Harvard collaborated on a new quantum network repeater to control noise.
A researcher paper out of the University of Chicago wins the IBM Q prize for best research for a novel approach to implement near term “killer apps”.
For Quantum Investors
The USA DoD, through it’s DARPA investment arm, funds Rigetti with a $8.6M grant last week. The timing is certainly no coincidence and one can value this investment as a clear signal that the US government considers Quantum Computing a national priority, as well as the need for diversification in capabilities beyond IBM, Google or Honeywell.
The SciFi corner
A yet to be reviewed paper published a few weeks ago explores the question if we can determine the maximum violation - or degree of collaboration across quantum entangled objects - mathematically. And the answer is: no. In other words, the paper proves that we cannot calculate this so called complexity theory.
What this means is that there is no (theoretical) FINITE number (of a mathematical explanation) that can describe a quantum system with (theoretically) INFINITE variables. Or as Einstein said, quantum is spooky beyond our comprehension (sorry, Albert, for paraphrasing).
At Interference Advisors we bring together Quantum Tech with business executives and investors through data, insights and market research.
Our members can access up to date data sets and reports online, we offer advisory services for executives and investors, and make co-investments with a select group of leading funds (companies looking for funding OR investors looking for deal flow please email me).
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