Approaching Quantum Computing

The field of quantum computing has emerged as a nascent yet rapidly growing industry, a result of technological advances, new use cases and optimism surrounding medium-term commercial viability. Funding has risen accordingly, reaching a total of $2.2B in 2022 from private funds and tech companies alike. According to a report by Precedence Research, the global quantum computing market was valued at $10B in 2022 and is projected to reach $125 billion by 2030, growing at a CAGR of 37% during the forecast period.

Though the concept of quantum computing has been around for decades, only in recent years has it translated from theory to a tangible reality. The ability of quantum computers to perform calculations exponentially faster than classical computers has the potential to disrupt large industries, which include healthcare, finance and industrials among others. For example, simulations and analysis of complex molecular interactions by quantum computers in the drug discovery process can significantly reduce development costs and time. In finance, quantum technologies are foreseeably able to optimize portfolio management, risk assessments and algorithmic trading, leading to more efficient and accurate investment strategies.

Before elaborating on particular use cases, it’s important to first go through the fundamentals of quantum technology, which are described below.

Terminology

The qubit, or quantum binary digit, is the smallest unit of information used in quantum computing, analogous to the bit used in traditional computers. A bit exists in a single logical state, 1 or 0; in abstract, picture an arrow pointing either up or down. A qubit by contrast exists in a two-state system, capable of sharing a value of 1, 0, or both. Continuing with the previous example, now imagine an arrow pointing at some location within a sphere, with the north pole being equivalent to 1 and the south being 0.

The above phenomenon exhibited by qubits describes the concept of quantum superposition. A qubit is capable of computing all available values for a variable simultaneously; each observable outcome has some sort of probability, with the final outcome only being known by measuring it. For example, try flipping a coin. The expected result is one of heads or tails, but it has some chance of being either of the two while in the air. It is only when the coin lands, in this case the measurement, that the observable outcome is then known.

A process that applies once more than one cubit exists in the same system is that of entanglement. No single qubit is capable of much, but through the process of entanglement, the probabilities belonging to a single qubit are affected by the other qubits in the system. Recalling the coin flip example, now suppose there are two coins instead of one. A total of four outcomes are available, thanks to the combination of probable outcomes from each coin separately.

‘The Quantum Opportunity’, a UK Finance report, mentions that this combination of variables and their complex probabilities within different qubits as interference. By contrast, a traditional computer would need to break down each probability and assess each combination individually.

The more qubits that exist within a system, the more capable a quantum computer becomes. Its ability to outcompete traditional computers at scale is especially helpful for cases involving optimization, data analysis, or running simulations.

Use-Cases

Among the more significant industry players are technology enterprises like Google, IBM and Microsoft, a couple of pure-play, post-IPO companies that include IonQ and Rigetti Computing, and a handful of early to growth state startups. Most are experimenting with an array of potential solutions, acknowledging that practical mainstream usage of quantum computing is quite a few years away. A few examples of industries exhibiting the ongoing adoption of quantum computing are below.

Blockchain

In 1994, mathematician Peter Shor proposed a quantum algorithm capable of finding prime factors of large numbers efficiently, an impossibility for comparable algorithms of the time. ‘The security of our online transactions rests on the assumption that factoring integers with a thousand or more digits is practically impossible’ quotes IBM. A quantum computer with a sufficient number of qubits, if running Shor’s algorithm, has the potential to exploit public-key cryptography schemes.

Anything operating on the blockchain is at risk, from cryptocurrencies to identity management. CB Insights suggests that the exploration of ‘quantum-resistant’ technologies are in full swing, from new blockchain protocols to enterprise tech. For example, Sixscape, a Singaporean cryptography startup, is focusing on the creation of new, quantum-safe algorithms to use for digital certificates, digital signatures and encryption.

Finance

More financial institutions are exploring vertically integrated quantum computing solutions for portfolio management, trade settlement and trading, with Goldman Sachs being a prominent example. In conjunction with IBM, Goldman researchers began focusing on the advantages of using quantum to determine options and derivatives pricing in less time.  

Healthcare

Applications of quantum computing in healthcare include simulating chemical reactions, fast-tracking drug design or genome sequencing, and accurately predicting future patient care, which all hinge on the ability for a quantum computer to quickly analyze large amounts of available data. Few pure-play companies exist that employ quantum technology solely for healthcare, with ProteinQure, a startup building a computational drug discovery platform, is a notable exception.

Investment Assumptions

Because of the fast growth in quantum computing, investors are closely monitoring the markets to identify successful startups as early in their lifecycle as possible. Before evaluating any quantum startup, its worth considering the following assumptions that help frame screening and initial due diligence.

1. Quantum computers aren’t replacing traditional computers

It’s important to get as much of an understanding of what quantum computers can and cannot do. A common misconception is that quantum computers are to replace the need for traditional computers; best case, a quantum computer can potentially augment the effectiveness of a traditional computer, but the difference in capabilities between the two won’t result in any obsoletion. A traditional computer, for example, is easily able to store data - useful for purchases, orders, creating forecasts, or any other everyday task that relies on a database. By contrast, a quantum computer cannot possibly store data, as its memory might last for a few milliseconds at most.

In the years that follow, quantum computers are expected to dramatically outperform traditional computers in certain cases, but limitations exist, from costliness, manufacturing difficulties, and intense temperature cooling requirements to the computations being prone to high error rates.

2. Few market participants

Among all participants in the quantum computing market, the largest five account for almost half of the total market share. It is thought that there are less than 100 companies with some level of focus on quantum computers today. It isn’t a stretch to imagine why; the degree of specialization required of personnel, high capital intensity of most projects and low success rate of current iterations of the technology all result in a lack of any commercially viable solutions.

3. Exploring the ‘adjacent’ industries

The rosy long-term prospects of quantum computing are felt elsewhere, in what can be thought of as market ‘adjacents’ - that is, companies with a focus on technology that support the existence of quantum computers. Bluefors Cryogenics for example, a manufacturer of dilution refrigerator measurement systems, is one of the few independent suppliers of cooling technology. FormFactor is another company closely tied to quantum computing, as it supplies semiconductor testing and measurement products.

It helps to spot ‘adjacents’ that only partially cater to quantum computing, like Agilent Technologies, a life sciences company that employs quantum technology in the medical instruments it sells for lab use. Why? Each example has a much wider product moat, meaning the likelihood of their survival isn’t overly predicated on the high risks inherent to the quantum computing industry. They’re also better capitalized, are generating some form of recurring cash flows, and get access to a variety of customers who might be eventual buyers of quantum technology.

4. Acknowledge that the problem must be large enough

Lucas Siow, Co-Founder and CEO at ProteinQure, claims that founders in quantum computing are best to focus on the ‘can’t live without the solution’ problems. ‘To warrant a quantum approach, you should be looking to enable something novel or for at least 10x improvements.’ To him, quantum computers in use today only offer solutions for particular sorts of problems; addressing a general problem, be it something computationally intensive, data rich or in existence because other techniques aren’t producing results, isn’t yet a justification for a founder to look to quantum technology for a viable solution.

Startup Assessment

The previous assumptions in mind, evaluating the potential for success in a quantum computing startup requires an acknowledgement that the technology is equally complex as it is quick to evolve. To be fully informed before an investment decision requires a thorough comprehension of the practicality of quantum technology, today and in the long-term, along with high performing founders and a compelling business model.

Determining the viability of the core technology is above all else. There are different approaches to developing quantum technology that companies pursue, each with its own set of advantages and limitations. For example, gate-based quantum computers, used by Google and IBM, rely on manipulating individual qubits through a series of logic gates to perform computations. The emergence of topological quantum computers from companies like Microsoft, use properties of certain materials, like superconductors, to transmit and store information.

The technical expertise from the founders can’t be ignored, and is often the determining factor between a yes or no to an investment. Any role in quantum computing requires many years of experience in studies that include quantum physics, computer science or engineering, with expertise in more specialized disciplines being even more preferrable. Large enterprises that are at the forefront of quantum computing research rely heavily on teams with decades of experience.

As with most companies, quantum computing startups that display excellence when it comes to business strategy get the nod over those that are almost completely product focused. Though the true point of differentiation is almost always in the technology, companies that cater to particular industry needs and can establish lucrative enterprise partnerships are more resilient.