Quantum Tech | How to invest capital in a smart way?
Quantum Tech | How to invest capital in a smart way?
Quantum Computing: Paradigm shift or slow death? | Future state (part 2)
This article will explore how QIS companies can be smart at investing the capital they have raised. For that purpose we take a deeper look at the fundamental dynamics of the space to better understand how they might affect decision making.This article is part of the “paradigm shift or slow death?” series
Quantum Tech startups & private capital
In the previous article we looked at the investment landscape in Quantum Tech for 2021 so far - and it’s a mixed picture. While the total amount invested is up significantly, it is skewed by 3 very large deals. Overall deal count is down, average ticket size up, considerably.
What this means is that investors want to fuel growth rather than new ideas - good news for established ventures, not so great news for new ones. In this article I will explain how, if you are a Quantum Tech startup that has raised money and now needs to spend it, you might best go about it. My findings will be as follows:
Your time horizon is long by the nature of your ambition; surround yourself with a team, investors and partners who feel the same
Revenue is possible but challenging as it requires you to pull off the double challenge of finding a product and a market
Exits drive most valuations and liquidity events
Making it to an exit should be driven by (1) finding the right long-term corporate partners and (2) an acquisition strategy as part of your core growth hypothesis
Acquisitions are best done based on existing best practices and frameworks
None of the above is a list of tasks, all of them are their own process with an owner, metrics and clear goals
What does this mean for how companies should spend their newly acquired capital? Let’s look at the broader context, as a bird’s eye perspective never hurts.
What motivates external capital to invest into Quantum Tech?
It is important we understand motivations and the nature of investors in our companies first, before we can look at how to spend their capital ourselves.
Let’s start with the good news; DeepTech startups are twice as likely as other startups to raise money, and they raise more of it than your typical venture.
For the purpose of this analysis I consider Quantum Tech startups as DeepTech startups - the use of such a proxy is helpful as reliable long term data on QIS is still sparse. And I think you will be happy with that comparison… at least those of you that are risk takers.
DeepTech ventures combine two impossible challenges - finding your product and finding your market. Either one in itself is daunting, successfully pulling off both at the same time is what attracts investors to our corner of private capital interests.
ETH Zurich publishes a magnificent study on DeepTech startups with some fascinating - and encouraging - insights
These are stunning numbers and anyone engaged in a QT venture should be jubilating right about now. Do a Google search on benchmarks for SaaS or marketplace companies, for instance, and you will understand how extraordinary these figures truly are.
If you are able to execute on them, as only 10% make it to an exit; and the name of the DeepTech game is… you guessed it, ‘exit’.
Hey IonQ, hey Honeywell/CQC… are your phones ringing yet?
To truly drive home this point, check out this study by A16Z (maybe the greatest VC ever?), which shows how multiples decline over time as the company, and EBIDTA grows.
…at maturity they tend to settle at 2.5 to 4.5 x.
To summarize, here is what we know:
DeepTech - and per extension Quantum Tech - startups raise more money than typical startups
They combine a unique challenge, which drives risk and opportunity
They present a surprisingly high survival rate
They command stable multiples
They produce tremendous exits
Organic revenue scaling is not their strong suit
Fantastic for smart investors with sufficient patience. Amazing for visionary founders. Really really tough for entrepreneurs dependent on growth.
Will you go with or against the market?
To quote David Grimm: “Don’t get stuck in innovation teams and R&D departments at large enterprises. Look for corporates with an innovative culture across the organization. Interrogate end-budgets and champions who really own the problems you are solving and the right attitude to risk.
Focus may be difficult to sustain. But by capitalizing the business properly, and partnering with VCs that share your passions and understand the unique deeptech pain points, you will have the freedom to make informed choices. That way you’ll need only change direction (on your terms) when you can validate the size of the opportunities presented and deliver them within your runway.
Only work with investors who understand the road ahead, are expecting it to be bumpy and prepared to help you navigate it. At the UCL Technology Fund we spend lots of time talking to the first users, unpicking the problems that the university’s technology is solving and how much it really matters to them. This allows us to understand our companies better and invest well ahead of revenues.”
Wise words.
Why do customers invest into DeepTech?
Let’s back it up with some (shocking) data… only about a quarter of companies make a DeepTech investment out of need, because they have identified a business use case
… and 58% expect to see a return within 5 years. Does that seem healthy or realistic to you?
Interlude
Quantum Tech startups can raise a lot of money more easily, and, history suggests, are most likely to succeed through an exit rather than revenue scaling. However, this is complicated by investor who lack the necessary understanding or time horizon to make this possible. And corporate partners that suffer from FOMO rather than a true interest in Quantum Tech.
We are left with two choices, both dependent on your board of directors & investors being fully aligned with this vision:
Find those corporate partners who will not dump you after 5 years since they actually want to solve a business problem
Make smart acquisitions to support growth projections and skill expansion
Now that we have a better grasp on the fundamental market dynamics and what it might mean for your commercial success, let’s take a look at acquisitions in DeepTech and what we can learn from them. You’ll understand shortly why they are so important.
I won’t dive into how to identify good corporate partners in this article, maybe something to write about another time.
How to allocate your capital?
If you agree that organic revenue growth in QT is difficult at best, we are left with few options. One of them is to acquire revenue.
First up, let’s take a look at our friends from McKinsey who show that acquisitions increase organic revenue growth.
This is fascinating as it is obvious to anyone that acquisitions add to your revenue, and, if done well, your profits. What is less obvious, and offers so much hope, is that the right acquisition significantly drives organic revenue growth.
This might be explained by synergies, supplemental capabilities and skills, or maybe even the proverbial “hot hand” that fuels a bit of a winning streak. Whatever the reason, acquisitions are the best way to drive organic revenue growth in DeepTech.
So how to make good acquisitions?
There is no silver bullet or secret sauce to it, but, a lot of process and best practices that have stood the test of time.
Acquiring external revenue, or, in other words smartly investing your investor’s capital, is a rigorous process:
Impart structure to your deal process - don’t be haphazard about it, personality driven or let a junior resources run simple numbers. Acquisitions are about strategy that require an intimate understanding of the ecosystem.
Leverage the right resources - this is where you put your capital to play by forming your task force of the best possible lawyers, accountants, bankers and advisors. Use their skill & experience to be successful.
Rotate staff between departments - nobody knows better than your team, involve them at the leadership level of your acquisition efforts.
Source deals from outside and inside - a strong deal pipeline is the #1 KPI to successful investing of any type. This pipeline needs to be a living, breathing, growing thing, managed daily, and fed from all possible directions.
Synergies matter - post-acquisition strategies need to be planned at the deal stage, not just to leverage joint cost & revenue opportunities but also to develop metrics, roles & responsibilities, and a better strategy (train, equip and track)
Separate Due Diligence activities - the DD on a deal should be done by a formal team and strictly be based on process & facts. Set up your war room, respect boundaries, run the data. The rest is a CEO decision.
In fact, the key success factors to M&A deals are well understood - it’s all in the execution
If you agree with the above, then you also agree that the due diligence process is a critical aspect of this process (yes, this is a challenge to you).
There are many DD frameworks and approaches, which one you pick doesn’t matter half as much as that you pick one, own it and score it. Here is one potentially relevant example:
OneQuantum - the leading global Quantum Tech community organization to provide community, mentoring, career services and projects:
OneQuantum Africa is hosting a workshop on June 16th, free RSVP here
OneQuantum African Summit II will be on October 13th & 14th, free RSVP here
Women in Quantum Summit V is on July 19th & 20th, free RSVP here
OneQuantum Nepal Speakers Series on August 5th, free RSVP here
OneQuantum India is hosting a workshop on June 19th, free RSVP here
Interference Advisors - the leading data provider on the Quantum Tech ecosystem
QIS Data - we published a new QIS market forecast, 2021 investment analysis and other data CLICK HERE
Entanglement Capital - an investment fund dedicated to Quantum Tech
We are currently raising our 2021 fund aimed at operating a Quantum Tech accelerator program with a highly experienced partner, for growth stage QIS startups. Interested investors may contact us, as we are still accepting LPs.
A domain broker is currently offering www.QuantumComputer.com for sale and the best offer on the table so far is around $70,000 USD from a well known QC startup - if you would like to enter this bidding war and add the URL to your personal collection please contact me for a referral.
In this article I explored what motivates and drives the fundamental dynamics of deal making in Quantum Tech, and, by consequence, best strategies to attain success by commercial metrics. I stipulate that:Smart investors in DeepTech are motivated by exits
Customers act out of FOMO or short-term thinking (with a few exceptions)
Organic revenue growth is very hard to fit into those two constraints
Acquiring external revenue thus needs to be a core part of your growth strategy
Acquisitions need to follow a strict process with clear metrics and owners
Don’t reinvent the wheel - this has been done before
In the next couple weeks we will explore organic revenue growth and enterprise use cases a bit more, but, the data has spoken, an acquisition strategy for any well funded QIS startup, is a sine qua non.