Why Europe’s Quantum Startups Need A Path To Profit

Private investors poured $1.2 billion into quantum computing startups and scaleups in 2023, compared with $2.3 billion in the previous year. The good news for European companies is that most of that precipitous fall in global funding was accounted for by figures coming out of the U.S. and Asia. Against the trend, investment in Europe, Middle East and Africa quantum ventures crept up by around 3.0%.

The figures are contained in a new report from European investors, OpenOcean and Lakestar, Finnish quantum company IQM and The Quantum Insider. And as the study- (The State of Quantum) points out, while businesses in the sector haven’t experienced an investment winter, there has certainly been some significant global cooling. And while Europe managed to avoid the steep decline seen elsewhere (75% in North America and 17% in the APAC region), the funding landscape has changed.

That poses an interesting conundrum for startups and scaleups working in the sector. As things stand, quantum computing is a long-term proposition for investors, with any sort of mainstream adoption perhaps five or ten years away. There are competing technologies and, as things stand, no one can be absolutely clear who the winners and losers will be.

Nevertheless, investors look set to be a little bit more picky in 2024. In practice, startups in the sector can’t expect to access funding simply because they have developed some interesting or ground-breaking technology.

Pathway to Profit

“Investors in Quantum computing are more educated now,” says Dr Jan Goetz, CEO of IQM. “You have to have the right technology and you have to address the current market. You also have to have to position yourself for the future market.”

Equally important, Goetz says businesses have to offer something tangible. “It’s important to have a real product and a clear path to profitability,” he adds.

In practice, that could involve showing evidence that the technology on offer is not only potentially valuable for applications at some future date but also capable of generating some commercial revenue in the here and now.

That raises the question – is there a present-day market?

The short answer is, yes, but it is limited. For its part, IQM – which has grown from a university spin-out to a sizable business with 300 employees – currently has two markets for its superconductor-based products – high-performance quantum computing centers and universities.

Dr Goetz believes the hoped for commercial phase will follow the timelines of potential buyers. For instance, he says pharma and chemicals companies with R&D programs stretching many years into the future are already looking at how quantum computing can help them solve scientific problems. Their own long timelines match the time needed to develop the necessary quantum solutions.

ORCA is a British company that recently acquired the photonics division of U.S. network business GXC. It has also carved out a market for its products. “We have exited 2023 having sold five of our systems and – to me more importantly – we have actually delivered and installed four of them,” says CEO Richard Murray. “There are now four different systems in three different sites around the world hosting an ORCA system.

The latest sale involves the supply of a system to Britain’s publicly-funded National Quantum Computing Centre where it will provide a testbed facility for machine learning, combining quantum and neural networks technologies.

Public Money Mitigates VC Shortfall

This kind of sale highlights the importance of public money in the nascent quantum marketplace. Indeed, as the State of Quantum report points out, the global impact of falling VC investment was mitigated by continuing public investment. The report identifies $4.5 billion in global annual government spending, averaged over a ten-year period, with 20 governments undertaking coordinated programs.

Public support can take the form of challenges or grants but Dr Goetz believes the best approach governments can take is to make a point of active procurement. “This helps companies because it generates revenue,” he says. “This is super impactful because it helps to bring in private investment.”

Revenue Brings Investment

Generally speaking, revenue waves a friendly flag to investors.ORCA’s acquisition of a U.S. photonics company is a case in point. As Richard Murray explains, the deal was made possible by an equity raise (sum undisclosed) to provide funding. Investor confidence – and indeed the confidence to go ahead with the deal – was boosted, he believes, by a sales track record

“One factor was the revenue which we’ve been securing as a company,” he says. “To go the whole way in quantum computing, it does help a lot to have ongoing revenues as we’ve had through our activities. So in part, what we did is a consequence of being a successful business.” The acquisition of the GXC division will enable ORCA to develop and bring to the market its own photonics materials and components, he adds.

But Murray stresses that an investor’s assessment of a quantum startup or scaleup’s commercial success to date will not simply be about the value of the sales themselves. Rather, revenue generation is a flag that something is going right. Today’s revenue won’t necessarily be a guide to the future, he says: “But it is a strong indicator of a highly capable and functional team.”

Routes to Market

An investor-friendly business model isn’t just about sales. As the State of Quantum Report points out, businesses will have to think about routes to market. Will kit be sold directly to customers or will computing facilities be offered as a service via the cloud? This is something that will be worked out in 2024, the report suggests.

For instance, IQM offers its most expensive product to state-of-the-art quantum centers and a cheaper alternative is available for universities. It also looking at delivery via the cloud. ORCA sees scope for instaling its computers in data centers, allowing them to offer quantum-as-a-service. The report also expects more work to be done on hybrid solutions combining different technologies.

There’s still a lot to be worked out.