Quantum Computing Investment: Will it Stay Niche?

Understanding the Quantum Industry Through Market Trends

Current market trends serve as the most reliable indicators of the quantum industry’s development. While not a perfect measure of technological advancement, these trends demonstrate the willingness of investors to fund ventures within this space.

Forecasts from Boston Consulting Group suggest that quantum computer manufacturers are poised to generate between $5 billion and $10 billion in revenue over the next three to five years. McKinsey anticipates the chemical and pharmaceutical sectors will be among the first to utilize quantum computing, enabling simulations of atomic and molecular structures beyond the capabilities of today’s classical supercomputers.

Early Investment and Emerging Exits

Despite the relative novelty of quantum technologies for many venture capitalists, some investors recognized the potential years ago and are now realizing initial returns on their investments.

For example, IonQ, a U.S.-based company specializing in ion-trapped quantum computers, was established in 2015 and became a publicly traded company in 2021 via a SPAC, achieving a $2 billion valuation. Rigetti, based in Berkeley, is also planning to go public through a SPAC this year, aiming to raise $458 million at a $1.5 billion valuation. Rigetti is focused on developing a superconducting quantum computer capable of scaling up to 80 qubits.

The IPOs of both IonQ and Rigetti have established valuation benchmarks for the entire industry, influencing the assessment of all quantum deals. Crucially, these IPOs demonstrate that venture capitalists can potentially profit from the quantum industry even before widespread commercialization of the technology.

The Rise of Cloud Access and Consolidation

A quantum processor today is a complex instrument requiring a dedicated laboratory setting. Consequently, cloud-based access to these processors is becoming increasingly preferred, a contrast to the early days of classical computing. As a result, quantum hardware manufacturers are actively developing their own cloud-based operating systems.

Currently, replicating the success of Microsoft’s large-scale quantum OS development from the 1980s seems unlikely. Benno Broer, CEO at Qu&Co, predicts, “Although technology maturity will still take many years, the future winners in the quantum computing market will be determined in the next two years. We are expecting a first consolidation phase led by the 10 leading full-stack quantum hardware players.” This suggests a path of industry consolidation through acquisitions.

Government Investment in Quantum Technologies

Venture capital isn’t the sole source of funding for the quantum industry. National quantum programs globally have invested over $9 billion into the ecosystem over the past 15 years. China’s “Quantum Control” project has already allocated approximately $1 billion and is increasing its funding. The European “Quantum Flagship” initiative has spent €500 million over the last 20 years and plans to invest over €1 billion in the next decade.

France is a prominent investor within Europe, dedicating a budget of €1.8 billion to its “Plan Quantique.” North America is also heavily involved, with Canada having already invested $1 billion and the U.S. committing to spend over $1.2 billion in the next five years.

These substantial investments clearly demonstrate governments’ recognition of the importance of quantum technologies. However, state funding can sometimes restrict investment opportunities for VCs in sensitive areas.

Tommaso Calarco, director at the Institute of Quantum Control, emphasizes, “Sufficient investment to enable quantum startups is currently probably the main bottleneck to establishing a strong European quantum ecosystem. Efficient, innovative ways to leverage private investment in synergy with government grants will be key to success in translating leading European expertise into leading industrial capacity. We have a window of opportunity we cannot afford to miss in the next few years.”

Mapping the Quantum Startup Ecosystem

Following initial successes in quantum communication, a detailed analysis of the quantum landscape was undertaken. This led to the creation of a map of the quantum startup ecosystem, categorized into 12 quadrants based on specific quantum technologies and startup stages.

The stages are defined as R&D, prototype, and product. The R&D stage represents the earliest phase, where scientists develop initial functional prototypes. The prototype stage involves a working model, typically confined to laboratory environments. Finally, the product stage signifies a fully operational offering available for sale to customers.

Startups are further divided into four technology categories: sensors and advanced materials, quantum software and algorithms, quantum communication and internet, and quantum computing and hardware.

The map currently identifies 120 startups, with 31% at the product stage, 47% at the prototype stage, and 22% in the R&D stage. Surprisingly, the number of startups in the R&D phase is relatively low. This is often due to the industry’s origins in university laboratories and R&D centers, where spinoffs often operate in stealth mode for extended periods, benefiting from grant funding.

Considering approximately 400 laboratories worldwide are engaged in quantum technologies, and assuming a maximum of two startups can emerge from each, we can estimate the potential number of future quantum startups. This figure is expected to remain relatively stable in the near term, as the number of laboratories and scientific groups is unlikely to increase dramatically. However, a significant hardware breakthrough could spur a new wave of quantum software startups.

Funding Trends Across Quantum Technologies

Quantum hardware startups with established products generally attract the largest funding rounds. PsiQuantum, a photonics startup, has raised $650 million to date, notably founded by a grandson of Erwin Schrödinger.

Quantum software startups secure the second-highest level of funding. Both hardware and software companies experience a substantial increase in funding when transitioning from the prototype to the product stage, reflecting investor confidence in market maturity. Conversely, quantum sensors and communications startups see only a modest funding increase, potentially due to investor uncertainty regarding the viability of these markets.

The distribution of total funding and valuations mirrors these trends. Hardware startups lead in both categories, with photonics companies receiving the most capital and exhibiting valuations two times higher on average. However, this difference in funding also reflects their greater capital requirements rather than exceptional investor enthusiasm.

VCs currently show less interest in the quantum sensors and communications sectors. Communications are heavily funded by governments, who prioritize control over such resources, particularly in cybersecurity. Sensors, while having practical applications, haven’t yet reached a level of market vibrancy that attracts significant VC investment.

Quantum software, even without existing hardware, is attracting considerable capital. Harry Buhrman, founding director of QuSoft, states, “I am thrilled to see that quantum software startups are figuring so prominently in total funding and valuation cap. With appropriate software, I foresee that we can use quantum computers to take the role of a ‘programmable molecule,’ allowing simulations to be performed with speeds and accuracies out of reach of conventional computers. Such simulations will be invaluable in the fields of material and chemical design, accelerating the development of, for example, more efficient batteries, catalysts and solar panels.”

The Emerging Landscape of Quantum Venture Capital

Currently, approximately 300 quantum startups globally have transitioned from a stealth phase into active operation, as reported by Crunchbase.

However, the number of investors actively funding these quantum ventures remains limited. Crunchbase data indicates that only 15 venture capital firms, encompassing both traditional funds and accelerators, have made investments in at least three distinct quantum startups.

When considering entrepreneurship initiatives, university programs like Creative Destruction Lab and Innovate UK, incubators such as the European Innovation Council and AGORANOV, micro VCs like Acequia Capital, investment banks including Bpifrance, governmental bodies like In-Q-Tel, the National Science Foundation, and SGInnovate, alongside agencies like EASME, the total number of involved entities rises to around 30.

Leading Quantum Investors

Quantonation, headquartered in Paris, currently leads in investment count, having supported 15 quantum startups to date.

DCVC, a U.S.-based fund, holds the second position with six quantum investments. Their focus appears to be primarily on quantum software companies – including BEIT, Q-CTRL, BoxCat, Agnostiq and Horizon Quantum Computing – though they have also invested in Rigetti, a superconducting quantum computer firm preparing for a public offering.

Parkwalk Advisors secures the third spot, boasting a portfolio of five quantum startups based in the U.K.: Quantum Motion Technologies, Oxford Quantum Circuits, Riverlane, Phasecraft and Nu Quantum.

Runa Capital, alongside HTGF, Oxford Sciences Innovation, Airbus Ventures, Bloomberg Beta and Techstars, are tied for fourth place, each having invested in four quantum startups.

The Role of Accelerators

Prominent accelerators are also actively participating in the quantum technology investment space. Organizations like Techstars, Plug and Play, Y Combinator, and Entrepreneur First have access to ventures in their earliest stages.

This early access is particularly advantageous within the quantum industry, where a significant number of startups initially operate in stealth mode.

Investment Trends and Future Outlook

Despite the growing attention, quantum investments haven't yet reached mainstream levels. Approximately 90 quantum investments were recorded in 2021.

The total funding amount remains relatively modest when compared to other venture-backed sectors: $1.4 billion in 2021 and $700 million in 2020.

Successful investment in quantum computing necessitates a long-term perspective, demanding both specialized knowledge and unwavering dedication. It is anticipated that this situation will persist, with specialist VCs continuing to dominate early-stage quantum venture funding, while generalist VCs may participate in later growth rounds.