Sam Mugel, Ph.D., is its CTO Multiverse Computingglobal leader in developing value-based quantum solutions for businesses.
No matter how great the application, commercializing quantum technologies and achieving scale in a new market requires enormous resources. Quantum startups need to find and grow a list of paying customers at a time when R&D costs still significantly outpace revenue and margins are extremely tight.
As with most maturing technology markets, access to capital is critical to solving these barriers to scaling. The expected growth of the emerging quantum market—is displayed worth $106 billion by 2040—continues to pique investor interest. Private investors is channeled $1.5 billion (mostly through SPACs) in quant startups in 2023 alone, while cumulative public sector investments to date have exceeded $38 billion globally.
These public funds have done a great job of providing the capital needed to grow talent and technology startups. It has even been the main driver for disruptive R&D in some areas. However, as the ecosystem begins to consolidate and funding rounds grow, it is becoming clear that public investment programs need to turn their attention to the pain points they face specifically when going to scale. One of the most important challenges is accessing annual recurring revenue (ARR).
Governments and funding organizations should turn to the province of Gipuzkoa in northeastern Spain, where the government is tackling this particular challenge with a new approach to public investment: It offers financial incentives for partnerships between quantum startups and potential customers.
The sign for escalations is missing
Government investment programs provide substantial capital for equity and R&D. And as discussed earlier, we know that current funding programs have their limitations—including, for example, a government’s reluctance to take on the role of lead investor. These funding programs unfortunately do not always create companies that are attractive to investors. Most notably, they completely overlook the role of ARR in scaling. By funding B2B sales (with provisions for required R&D), governments can actually improve the startup success rate — at no additional cost to the public purse.
The Gipuzkoa government program is designed to incentivize local companies to partner with quantum start-ups, mitigating their commercial risk. Its program creates those commercial relationships that are so essential for startups in creating AARs, providing that essential proof of market performance and a strong incentive for mid- to late-stage investment.
The funding model supports commercialization
It started in 2022, of the Gipuzkoa government Quantum program pays established, local industrial companies to partner with start-ups for industrial research and development of commercial quantum products and services.
The program funds much-needed collaboration between quantum startups and end users to develop and implement real-world commercial applications. It creates an entirely new vector for scaling, one based on building B2B relationships. And with his positioning base for sales, subsidies help generate the ARR that will attract venture capital funding needed to scale startups.
Another of the program’s strengths is that it puts quantum solutions in the hands of industrial users, ensuring an extremely short R&D feedback cycle. This approach differs significantly from that of many players in the ecosystem, such as IBM Q and AWS Bracket, which target users primarily from academia or corporate innovation departments.
More broadly, the program is an investment in the entire value chain for quantum technology. It not only validates and encourages engagements with technology providers from potential local and regional business customers, but also strengthens vital local talent pools.
Subsidies bring benefits throughout the value chain
Government funding usually channels funds used for equity and R&D. It provides the liquidity needed especially in deep technology areas such as quantum technology with its long horizons for Research and Development. However, increasing liquidity is not the primary challenge for post-revenue companies seeking to grow revenue and attract late-stage investment.
What the Gipuzkoa program does right is that it subsidizes the development of B2B relationships that will lead to repeat and scalable product sales. As value added, the effects of each investment dollar will range beyond paying for local wages and will work throughout the local or regional value chain. These benefits will be increased without spending a single dollar more of scarce public resources.
Building a support structure for product sales is only one policy tool available to public funding institutions. However, the subsidies have been so successful in Gipuzkoa that governments elsewhere are likely to adopt similar funding schemes. By helping to create the commercial traction needed to scale operations and generate ARR, governments will take concrete action to protect the economic and strategic values of the maturing quantum ecosystem in which they have already invested so much public capital.
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