Updated: Jul 22, 2022
My friend Hilary Kaye from HKA Marcom asked me if I had any thoughts on the current macroeconomic and geopolitical environment, and its potential impact on our quantum tech sector.
Below is my response to her - please be sure to also read her own article on it, which will include comments by many other industry stakeholders.
Starting off, I do not yet feel the fear in the air. Everybody knows about the terrible and brutal war against the Ukraine, and the impact it has on our already stretched supply chain. You’d have to be living behind a rock not to have seen the beating the public markets took across all asset classes from currencies to equity, bonds and crypto - a great time to move to Miami, a lot of unexpected housing vacancies - and, of course, record inflation rates.
Yet, nobody seems to panic. Unless you work on Wall Street.
“You can look but you won’t find a stretch of futility as pervasive as the one that is landing on Wall Street. Even in the long and storied history of market meltdowns, the breadth of losses is without equal, based on data that goes back to the Great Depression.” https://www.bloomberg.com/news/articles/2022-06-17/in-prevalence-of-selling-this-is-a-market-rout-without-equal
We are entering a historic downturn.
And while quantum tech won’t be spared, I am confident that it will remain relatively sheltered.
The driving factor in quantum tech is the tension between maturity curve vs market forces more so than micro- or macro economic trends. While every sector and venture needs to adhere to good business hygiene, quantum tech is isolated from the environment by its very own, spooky nature.
Quantum Tech is still a very young industry, there is as much science as engineering that needs to be done in order for users to get any real value out of this paradigm shifting technology. And while market forces - driven by investors and stakeholders in QT - drive hype and expectations, reality is that we are too early to be measured by that yardstick. I am a huge proponent of commercialization and solution selling, and that is my goal for QT, the point we are at in the current development, though, is still very much dominated by scientific development and even research.
Thus, while there undoubtedly will be financial pressure on every vendor and startup in QT, I do not expect us to see a fall out due to the current externalities.
The Quantum Winter - as analyzed a few weeks ago - is not (yet?) coming. At least not because of the broader context.
QT vendors and startups are flush with recent cash - many of the leading startups have recently raised A, B or even C rounds and, while their burn is significant, are adequately resourced for 2 to 3 years on average.
Additionally, government funded programs typically take a longer time horizon and there is no serious QT firm out there that does not have at least some public research funding. These grants might not be enough to scale a venture, but they are enough to keep the dream alive - as Whurley said in a recent tweet put it in a box and focus on survival.
A correction is possible and healthy but it will affect only those who have been too late to the party or too reckless to plan ahead, which, to my understanding, is not the case for anyone within the leading 50 or so large OEMs and startups within our space.
Additionally, QT is a strategic priority. Sure, A.I., digital, automation and maybe even blockchain are important. Even transformative in certain cases. Yet, none of these technologies holds the same value redistribution potential as quantum tech. And while QT POCs are most certainly at an earlier stage than other projects, I do not see any serious user cutting them as part of the predicted downturn.
And let's not forget that quantum tech is a national priority of the highest order for the major markets in North America, Europe, parts of Asia, Israel and other regions.
The combination of these factors should not make anyone feel safe, in the slightest. Cash will get expensive, resources scarce, capital slow and projects will be scrutinized more intensely. Execution will be key. For those Quantum Tech vendors and startups that will deliver both on the scientific & product roadmap, as well as the solution & enterprise aspect of it, I see the next 2 years as an opportunity to truly prove the potential of the technology and position themselves for true scaling.
Pressure will come from what entrepreneurs know as the "valley of death" and technologists as the "peak of delusion". Quantum, and this is a good thing, is rapidly maturing. However, not all products and companies will survive. This is a consequence of lack of execution, building for the sake of the technology or failing to listen to customers and the market more so than the environment.
The QT market is poised for consolidation, full stack providers will emerge as winners and capital will flow to those projects promising the best approach to this yet unsolved puzzle.
Strategic investments will start to take a large share of the investment dollars. Money that is less sensitive to market conditions and more patient in nature.
And I expect a big SPAC squeeze. The process of completing a SPAC is becoming significantly more onerous, public perceptions are deteriorating and the capital behind it tends to be more price sensitive - potentially preferring other asset classes during a recession.
That said, no startup gets around the fact that cash is always rare and scaling never easy. Within Quantum Tech, very few ventures have reached the point of inflection where incoming proceeds support the business rather than the existing balance sheet.
Also, no vendor can disguise the need for enterprise grade solutions with spooky claims - selling to commercial clients requires technological maturity as much as financial upside, strong integration with existing infrastructure and the support of middle management.
For the foreseeable future, these factors will drive the success of quantum tech vendors much more significantly than the current geopolitical and macroeconomic environment.
Uncertainty is a certainty - thank you Sequoia - QT ventures need to focus on the fundamentals rather than externalities.