When we come to look back at which events from late 2019 to today had the greatest economic, geopolitical and technological impact, we may find ourselves de-emphasizing the pandemic and paying comparatively greater attention to the arms race in quantum computing that is taking place concurrently.
Alongside its profound human and societal impacts, COVID-19 has spurred dramatic increases in technology investment and adoption, further expediting the penetration of technology into every corner of the global economy. However, that represents the acceleration of a pre-existing trend. A revolution in quantum computing, by contrast, could mark a fundamental step-change and departure from what has come before.
Google fired the starting gun in October 2019 with its claim to have reached ‘quantum supremacy’, meaning that it had built a functioning quantum computer capable of solving a problem beyond even the most powerful classical computer. In a little over three minutes, its Sycamore processor completed a process that would purportedly have taken the world’s fastest supercomputer some 10 millennia. While IBM subsequently disputed the extent of Sycamore’s supremacy over classical computers, in December 2020 a group of researchers from four Chinese universities announced another seismic leap forward. Their prototype Jiŭzhāng quantum computer is reportedly 10 billion times faster than Google’s.
The figures are staggering, but also consistent with what has long been theorized about the potential of quantum technology – if only it were possible to construct computers capable of processing information not in two states, i.e. 1 or 0, but instead in any superposition of 1 and 0. This crucial shift to solving complex problems through probabilities, rather than through definitive binary outcomes, obliterates traditional limits on computational power and enables the processing of exponentially more data. First Sycamore, and now Jiŭzhāng, appear to be making major strides toward achieving this reality.
Despite its monumental problem-solving potential, quantum technology has been, until recently, largely overlooked by the global investment community as a niche and somewhat esoteric segment of the technology landscape. Even as record volumes of capital poured into private technology companies through venture capital, growth capital and private equity funds in the past decade, only $1.4bn was invested into quantum technologies – approximately 0.25% of the total value of venture capital fundraising between 2010 and 2019, according to PitchBook.
Instead, the technology was primarily conceived of as a security risk, due to its potential to crack the RSA and AES encryption system that underpins large volumes of secure data transmission globally. Accordingly, it had been viewed as a more obvious focus area for national governments, rather than venture capital firms with investment horizons, exit pressures and return expectations.
But this is changing as the commercial applications of quantum computing develop rapidly. Terra Quantum, a Swiss start-up, has claimed a major breakthrough in encryption technology by being able to securely transmit data on existing optical fiber infrastructure over a distance of 40,000km. This development could pave the way for businesses to build quantum key distribution networks around the world, with immediate usability. Meanwhile, the recently announced plans of Delft University spin-out QphoX to commercialize a ‘quantum modem’ represent a tangible step towards developing the ‘quantum internet’, in which machines will be linked to create superfast computing power.
Industries we can expect to be eventually transformed by quantum computing include financial services. An exponential increase in the speed of transactions would allow institutions to process at greater scale with lower costs, with Goldman Sachs and JPMorgan among the bulge-bracket banks reported last year to be exploring ‘quantum finance’. Moreover, a study by Goldman Sachs found that quantum computing could be brought to bear in resolving complex calculations in financial markets within just five years. Similarly, in time it may also revolutionize information transmission, packaging and securing data more efficiently and thereby freeing up the capacity of communication channels.
The technology is already in use in industries where outcomes are not as time-sensitive, accommodating the cumbersome preparations currently required to execute superfast calculations. One particularly exciting application is in R&D for drug development. XtalPi, a Boston-headquartered start-up, applies quantum mechanics to augment research modelling to predict, with high precision, the physiochemical and pharmaceutical properties of small-molecule drug candidates, as well as their crystal structure.
These emerging commercial applications are helping to drive some incipient M&A activity in the field. Honeywell, the US technology conglomerate, is acquiring Cambridge Quantum Computing, merging the start-up with its in-house quantum computing operations and injecting up to $300 million into the new venture, in which it will hold a 55% stake.
Despite this, however, we should not overstate the maturity of the quantum computing market. Deal activity will likely remain low for the foreseeable future. The market is still largely split between a handful of technology giants and a long tail of pre-profit and pre-revenue start-ups, leaving few obvious acquisition candidates, for either private equity investors or strategic buyers.
And while quantum computing businesses like IonQ Inc and Arqit recently listed on the NYSE and Nasdaq respectively, via Special Purpose Acquisition Companies (SPACs), this shouldn’t be interpreted as a sign of market maturity. On the contrary, like other early-stage peers, IonQ is years away from projecting profits, while the majority of the $650m in capital raised via the transaction came from a simultaneous private investment from the likes of Silver Lake and Fidelity. Likewise, Arqit is still two years away from the planned launch of its signature quantum encryption satellites, while private investment constituted a sizeable $70m portion of the $400m in gross proceeds raised through its de-SPAC merger.
It is venture capital investment and growth financing activity that is likely to be much more buoyant, as quantum computing start-ups seek funding to support their growth and subsidize the expensive and tricky process of developing this cutting-edge technology. Earlier this year, the California-based quantum computing company PsiQuantum unveiled plans to build its own photonics-based computer, having raised $215m in venture funding since 2015.
However, global technology giants have been at the forefront of financing activity, principally through their venture capital arms, alongside funding their own in-house R&D. Tencent and Google were among the investors in XtalPi’s early fundraising rounds, for example. They can also expect to be in pole position for the impending windfall in government funding, as states race to build national champions in quantum innovation.
Despite this, there remains a clear opportunity for venture and growth investors to support the emergence of the global quantum computing sector in the coming years. Both financial and strategic funders will play an important role in the ecosystem. But recent breakthroughs are no guarantee of smooth sailing in the future. Venture and growth capital funds must recognize that this is a market where the technology risks are high – but commensurate with the potential returns on offer from backing a truly world-changing technology from the outset.
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