Quantum modalities define your MOAT

How tech details determine your revenue model in quantum tech

Dear Quantum fans,

For years our Quantum Tech Community was characterized by a feeling of cooperation and mutual support. Like so many things, the current pandemic and economic crisis has accelerated trends that long were on the horizon; this is true for Quantum Tech as much as for any other industry. As some of us are facing unprecedented challenges, others are climbing to previously unknown heights thanks to new capital raises, customers, products or high profile additions to their teams. With that, it seems to me, that tensions and competition arise and stiffen.

This is why I am excited to launch OneQuantum, a community for Quantum Tech startups from all around the world. where entrepreneurs can collaborate, exchange, learn, grow and succeed in a safe and trusted environment.

A great example of our mission is Farai from South Africa, who reached out over the weekend with his vision to contribute to Quantum Tech.

My partner in crime in this venture, Denise Ruffner from Cambridge Quantum Computing, and I believe this is a crucial next step for our Quantum Tech Community and invite you all to join us on this spooky journey.

#quantumiscoming

This week I want to explore the importance of a MOAT in building a Quantum Tech business and how investors can understand moats within Quantum Tech.

What is a moat?

A moat is a deep, broad ditch that surrounds a castle and provides it with a preliminary line of defense. In their heyday, moats rendered the enemies’ most effective weapons useless. 

In other words, a moat is a sustainable competitive advantage. 

It is possible to start a business without a moat, of course, but it makes your life a lot harder. The problem is that as soon as you are successful, you can expect company. Remember the hundreds of Groupon copycats? With a moat, you can seize the advantage by keeping enemies away and customers protected.

You believe this doesn’t apply to Quantum Tech because it is oh so hard? Think again - I track the ecosystem very closely and last week alone 9 new Quantum Tech startups arrived on the scene. And yes, they all have similar credentials to yours.

More important, though, is the investor perspective. At some point, you will have exhausted your savings, family money, credit cards and research grants and will need to raise public money. That is mostly a good thing - congrats if you have reached this point.

Investors, wrong or right, frame everything in terms of moats. How will a company generate revenue? How will they be able to scale it? How can they protect and defend it?

This is the fundamental line of questioning at the core of every investment decision. If you want to be successful, beyond just getting lucky, in raising private capital, you need to come with well prepared answers to those questions.

How to build a moat in Quantum Tech

Certainly, your skills and experience in building quantum hardware and software is a huge competitive advantage. But our community is growing, bring more and more competition, and that is a great thing. So you do need to think about competition from the very beginning of forming a company.

Beyond your scientific prowess, a moat can come from a limited number of sources:

  1. Network effects - this occurs when the value of your product/solution increases with the number of users. Facebook is the typical example of this - pretty boring and useless if it’s just you on there. Add a couple hundred friends and it all the sudden becomes addictive, hugely profitable and largely untouchable.

  2. Switching costs - this is an old school enterprise technology strategy. Once you are ingrained into a company’s core processes, the cost in time, money and resources to switch to a solution that might be somewhat better/different from yours is simply too high. As long as you keep delivering incremental improvements and fair customer support, you are unlikely to be dethroned.

  3. Cost advantages - most often delivered by scaling a product/solution over a large user base. SaaS is an example loved by many investors. The cloud, too, has a variable cost base that increases at a lower rate than the increase in customers after a certain inflection point.

  4. Intangible assets - this is the one closest to home for most of you: your IP, your R&D but also your brand, culture and team. Be strategic about building, tracking, fostering and communicating all of these aspects of your internal assets.

  5. Efficient scale - you own a niche. Rather than going after a slice of the large pie, you try to own much of the cupcake, thus discouraging others from competing with you since dividing it up just isn’t worth the effort.

All of these are well researched and understood business concepts, that, especially in Quantum Tech, are driven by both your technology choices and target market. Strategizing and implementing these should be a top priority for any Quantum Tech entrepreneur - not just for your business but especially for your investors.

Quantum Tech startups are welcome to join us in our OneQuantum community to learn more about MOATs and collaborate around building them.

How can investors identify a moat in quantum tech?

Just a few days ago I discussed a well known Quantum Computing hardware (superconducting) startup with a large investor. After initial interest, he confessed to me a couple days later that, after all, he is not interested and said that he recently made an investment into a photonics quantum computing startup. With that, he feels, his “quantum tech play” is fully covered.

This investor wasn't just comparing apples and oranges, he took a wrong turn in the multiverse without any chances of ever finding his way back. Rather than bashing him, let’s break this down and figure out how we can address the issue:

This investor surely is very smart, well educated and professional. He understands that there are different types of quantum computing hardware, with different timelines and different expected outcomes. What he failed to understand is how different the approach of an ambitious NISQ venture with partners, MVPs and use cases is compared to the utopia of a photonic approach that, down the road, might usher in a SciFi future.

Mistake #1 - failure to understand how the QC modality defines your TAM/SAM

Let’s give him the benefit of the doubt, maybe it’s a personal choice and he decided to make a big bet. Love it! The photonics company, probably aiming for 1M qubits in 10-20 years has a fundamentally different business model than the NISQ company. The photonics company will deliver such a transformative machine - probably over night without many iterations - that the most likely monetization will be a futuresque application to transform and take over an entire industry. The NISQ company has a current pipeline of customers with existing commitments and a phased road map of scaling it over the next 5 years; generating incremental revenue along the way.

Mistake #2 - failure to understand how the QC modality defines the revenue model

Nonetheless excited by the prospects of his investments, said investor believes he is now part of the paradigm shift that is quantum. He invested in a big way into one of the most ambitious quantum tech companies out there, did his due diligence and has a plan. He’s comfortable with the risk and dreaming of being Tony Stark. And while he dreams about this future, dozens of quantum tech companies in NISQ hardware, quantum software, sensing and communications will slowly and surely revolutionize little corners of the world without him noticing it.

Mistake #3 - failure to understand that there are many paths that lead to Rome and they all have their purpose.

Let me be clear, this investors mistake was not to invest into the photonics company. It’s an excellent venture and I wish him could luck with his bet. His mistake was to believe that now his portfolio covers the quantum tech space.

For entrepreneurs in Quantum (click for free handbook) - this means it is in your best interest to pro-actively address this with your investors. I can tell you from personal, painful experience that there are few things worse in the long term than the wrong investors who start to turn impatient or nervous.

For investors interested in Quantum (click for free handbook) - this means that you have to take the science behind quantum seriously and invest the time and resources to understand it properly. In quantum the horse is sometimes the jockey and the jockey is sometimes the horse, to spot this your discerning eye needs constant training in the quantum race to spot the details that make the difference.

This week we added the following to our Quantum Tech database:

  • 9 quantum tech companies

  • 12 quantum institutes

  • 0 quantum researchers

  • 5 quantum investors

  • 9 closed quantum deals

  • 5 quantum fundraising deals

Subscribers to our paid weekly investor digest can review a summary of the details.

Non paying subscribers can read about investment opportunities in quantum and how technology dictates the revenue model.

Loop quantum gravity is a theory attempting to merge quantum mechanics and general relativity respecting the matter of the standard model and Einstein’s observation that gravity is a property and not a force.

Plain English: To date, we do not yet have a fully formulated theory to describe gravity. Many have been proposed, many rejected and a few have emerged as leading contenders.

The concept of quantum gravity states that time and space are granular and discrete entities with a minimum distance. These would be “arranged” in a loop (similar to atoms), that themselves are woven into a fine fabric of inter tangled loops - or what you and I call space and time.

While LQG is not proven it is one of the most widely accepted theories in the filed and would bring radical implications with it, namely the fact that space and time is not continuous but rather can be described physically and mathematically like any other element in nature. Spooky!

At Interference Advisors we bring together Quantum Tech 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 email me. 10,000+ a month rely on our data, insights and reports.

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… and enjoy our Weekly Quantum World Detangled Episode 5 with Denise Ruffner, Tommaso Demarie and special guest Tony Uttley from Honeywell.