Assessment of the next likeliest quantum computing vendor targets for a reverse merger with a special purpose acquisition company (SPAC) investment vehicle.
Two “full-stack” (i.e., offering hardware, software, and services) quantum computing vendors (IonQ and Rigetti Computing) have gone public in the past twelve months, and another full-stack vendor (D-Wave Systems) plans to do so in 2Q22, all three via reverse mergers with special purpose acquisition companies (SPACs).
Outlook: Omdia believes that it will remain rare for private quantum computing vendors to access the public equity markets over the next 36–48 months. However, those vendors that do so will likely also adopt the SPAC reverse merger approach.
The hard job
Burning cash: Quantum computing hardware vendors most need to raise funds in the public equity market, compared to quantum computing software providers or consultants. At this current early stage of quantum computing technology and market development, these vendors are investing significantly in research and development, while generating comparatively little revenue. In short, they are burning through venture capital (VC) to build traction in the market.
- D-Wave Systems, in a recent investor presentation, forecasts a cash burn of $58 million in 2022, $80 million in 2023, and $59 million in 2024 before becoming cash flow positive in 2025. This is against company-estimated revenue of $11 million in 2022, $27 million in 2023, and $72 million in 2024.
- Likewise, IonQ stated in its 10-Q financial filing for 3Q21 that its single largest expense was “research and development” for the nine-month period ending September 30, 2021. The company reported $15.3 million in research and development expenses, out of $28.3 million in total operational expenses, and against $451,000 in total revenue for the period.
Show me the money: VC funding is flowing into the quantum computing industry. Over 30 VC firms attended the recent Q2B 2021 conference in December 2021, as one signpost of VC interest in the sector. However, a VC panel at the event emphasized that quantum computing was a challenging area for VC investment because of its resemblance to biotech: high-risk, longtime horizons, and large capital requirements. Ultimately, venture capitalists want “liquidity events” (such as a public offering or acquisition) that return a high multiple for their investments. Liquidity events also reward and incentivize vendor staff; staffing in the quantum computing market is challenging due to the relatively limited number of people with the required scientific or technical expertise.
The easy money
SPACs have become a popular and high-profile path to the public equity markets for technology companies. Going public via a reverse merger with a SPAC investment company provides several benefits, compared to a more traditional initial public offering (IPO):
- Lower execution risk: The vendor only needs to negotiate with the SPAC principals, which generally leads to a shorter, more streamlined, and less risky process than going on roadshows to generate interest among various public investors in the wider market. This also means that a deal may be possible even if there is volatility in the wider financial markets since the SPAC principals have already raised the fund.
- Shorter timeline to public status: 3–5 months for a SPAC deal compared with 6–12 months (or more) for a traditional IPO.
On the other hand, SPACs entail two key challenges that will constrain many software and consulting firms in the quantum computing market (which tend to be small organizations when private) from going this route in the near term. These are:
- The 80% rule: The fair market value of the vendor (i.e., the company that will merge with the SPAC) must be at least 80% of the SPAC fund amount. These funds are generally raised on the scale of $100 million or more. This scale presents a high threshold that removes many quantum computing software providers and consulting firms from consideration for a SPAC reverse merger.
- Shorter timeline to public status: The flip side of getting access to the funds quicker is that the vendor must also rush to be ready for public scrutiny. For example, within 3–5 months of signing the letter of intent with the SPAC principals, the vendor must have a public company-appropriate financial control organization in place.
Who might be next to announce a SPAC deal? Of the 185 quantum computing vendors listed in Omdia’s upcoming Quantum Computing Intelligence Service Market Tracker – 2Q22 edition, 75 are private hardware companies, and of these, eleven companies employ more than 50 staff (one of the eleven companies is D-Wave Systems). We focus on companies with more than 50 staff on the assumption that companies with fewer than 50 staff are unlikely to be able to show an $80 million fair market valuation or be prepared to stand up a public-company-ready financial control organization quickly.
Looking at the ten vendors as defined above, four are providers of components and sub-systems, not full-stack vendors. Why is this distinction important? These vendors (Bluefors, HRL Labs, M Squared Lasers, and Zurich Instruments) have operated as private companies for over a decade each, at least. They show little sign of wanting access to public equity markets, though this situation could always change in the future.
Six full-stack vendors remain:
- ColdQuanta announced in January 2022 that it had closed an “explosive year of growth achieving over 140% bookings increase and nearly doubling headcount.” This seems particularly like a company positioning itself to draw SPAC interest.
- DishaNitish Technologies appears to be at a very early stage of technology development and more focused on consulting work at present. It seems unlikely to fit the profile of a SPAC target soon.
- IQM has raised €71 million in funding since starting in 2018. It may have less need for a near-term SPAC deal but also fits the profile of a company that could be a SPAC target.
- Quantinuum started in 2021 as the combination of Cambridge Quantum Computing’s software and Honeywell’s trapped ion hardware. It seems likely that if Honeywell wanted to divest its quantum hardware to the public equity markets, it would already have done so, rather than going through the partnering effort to create Quantinuum.
- PsiQuantum raised a huge $450 million financing round in July 2021. This might make the company too valuable for many SPAC funds and make it likely to have little near-term need for public equity market access.
- Xanadu raised $100 million in Series B funding in May 2021. Like IQM, it may have less need for a near-term SPAC deal but also fits the profile of a company that could be a SPAC target.
In short, the likeliest candidates for a SPAC deal in the next 36–48 months are ColdQuanta, IQM, and Xanadu.
Sam Lucero, Chief Analyst, Quantum Computing