Technology dictates the revenue model

What investors need to understand to assess quantum tech deals

Quantum Tech for executives and investors

  1. This week’s long take looks at an example of how investors fail to understand quantum companies and breaks down a (very high level) way to address it

    • The fan favorite SciFi section this week explores the Quantum Mind

    • Finland, the quantum superpower - last week’s long take, has received tremendous feedback. I made a couple additions and corrections in the online article.

    Paying members can access our weekly investor digest here


Last week Denise Ruffner, Tommaso Demarie and I launched our Weekly Quantum World Detangled videocast. WQWD S1E1 is available on YouTube.

The long take

I speak with investors interested in Quantum Tech every day and this week one conversation, albeit no different from dozens if not hundreds of similar conversations, stood out to me.

A (very) large institutional investor had been pitched by one of the established, well known quantum ventures looking to raise $50M, and they loved it. The pitch was exciting, the prospects endless and the team super professional. A tiny bet in the overall portfolio of this particular investor, writing the check seemed to be a done deal.

Part of the pitch was a revenue projection by the startup of $XXM USD (psst!) for 2020 and when the investor told me about that slide of the pitch deck I started to get nervous and firing dumb questions at him. Let me summarize how I broke this down to him.

First, and this is simple, an investor needs to understand how opportunities, horizons and returns vary across quantum hardware vs software:

  • They have completely different cost structures

  • In consequence very different cash burn

  • But also very different revenue models

So far, so good. Where it gets more complicated in the not everything that shines is gold world of quantum is understanding the impact of this on your portfolio.

  • Depending on the life of your fund how does this impact returns

    • How does the size of the venture change that equation

    • How does a niche focus of the venture change that equation

  • Depending on your IRR requirements what makes most sense

    • Are you investing into hard metrics, projections, a vision

    • Based on that, how do you value said venture

If you were to put all of this into a simple matrix you quickly find your corner of the quantum world best suited to source deals rather than just respond to passive, unqualified deal flow (highly simplified, hand drawn matrix below).

Quantum software ventures present a great opportunity to realize strong returns within the life of a portfolio. Yet, the details matter and dictate critically different cost & revenue models, valuation methods and required skills.

  • Niche software vendors in quantum tend to have a much easier to define TAM/SAM, which makes valuations, channels to market and projections a lot easier

    • Understand the type of software: Are they making compilers? OS? Programming languages? Libraries? Quantum simulation? Something else?

  • Ventures focused on quantum algorithms tend to share those dynamics but with more uncertainty (different risk/return)

  • If you are looking at a venture with cloud ambitions that equation changes since the target market is very different, with different KPIs and it will get harder to find comps for this

  • Currently, a lot of quantum ventures get paid for simply experimenting with a few customers. And that is great. Love it!

    • As an investor, though, you need to push the founder to provide you with a real business model (SaaS, services, platform) today for how they will scale tomorrow. Few have figured that out.

Now with this simple breakdown we could draw a similar, super simplified matrix just for the quantum software world…

Quantum hardware ventures are more complex and more (emotionally) exciting (no offense) and with that uncertainty comes a different risk/return profile.

  • It is fairly simple to assess whether a company has full stack ambitions or is focused on specific components

  • It becomes a lot more difficult to understand and assess an ecosystem around a hardware vendor. How different partners fit together technologically and in business is a spooky puzzle

  • Certain hardware types, or quantum computing modalities, are more likely to solve specific problems. Understanding what a vendors hardware roadmap is, what modality, what algorithms will execute well on it, has tremendous implications on what market and vertical they can be competitive in

TO DO: Draw your own matrix for hardware ventures with full stack, components, VQE/QAOA, topological as a simple start for your categories.

The bottom line is that investors truly need to understand the nuances of the technology and market to be able to properly value a deal. And as with any emerging new technology boundaries are still being drawn and best practices tested.

Back to this week’s conversation with an investor who inspired this article…

Within 10 minutes of going through the above, it turns out that the revenue projections largely relied on professional services fees and simulation work, and only to a small extend on actual quantum technology. Investing into a professional service vision is very different from investing into a quantum tech product/solution vision - different ramp up, target market, margins, KPIs, skills.

I am confident that this particular investor would have caught this on his own before making a deal and surely did not need me to tell him. I am also confident that this is a great example of how 99% of investors in quantum lack the mental framework, scientific understanding and business context of quantum tech to properly perform a reliable due diligence in the sector.

If you are an investor reading this and currently thinking well yeah, this is obvious and would not have happened to me then I’d like to caution you for hindsight. All of you have MBA’s from Harvard, successful startup exits and sky high IQ’s to your name, but in the case of quantum tech all of you but a handful (that’s 5 fingers on one hand, just to avoid confusion) are missing these important details. That’s my experience from hundreds of investor conversations with angels, VCs or PEs over the last 3 years in this space.

For executives in Quantum (click for free handbook) this means that when going fundraising you need to be transparent and forthcoming. Adopt and adhere to fundraising best practices and don’t sell quantum cloud castles.

For investors interested in Quantum (click for free handbook) this means that (1) unless you have a dedicated, full time team in quantum or (2) a true expert on retainer you’re just really missing Las Vegas very much. I do too.

For Quantum Investors

This week we added:

  • 40 new quantum firms to our tracker

  • 18 new quantum institutes

  • 1 new quantum VC fund

  • 6 new quantum deals in our fundraising pipeline

Details available here in our weekly investor digest.

The SciFi corner

My new favorite series Devs on Hulu explores this topic, a label to affix to it is the “Quantum Mind”.

The quantum mind is the believe that human consciousness cannot be explained by classical physics and, in fact, requires quantum mechanical concepts such as superposition and entanglement to be understood. For those who believe this it entails some serious consequences.

The mind is nonlocal or, in other words, it cannot, with classical methods, be ascribed a specific physical location and, theoretically, is able to “reconfigure” in any location.

The mind cannot be simulated by classical methods (for example, neural machine learning networks on classical computers).

The mind can be simulated by quantum systems.

The mind is subject to the observer effect, which is the theory that the mere fact of observing something alters its state. This would mean that our mind has its own state, independent of us as an individual person, and that whenever we “get into our own head” we determine its state. Is happiness a choice after all?

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.

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