May 10, 2024

A New Funding Innovation Can Help Scale Quantum Computing Startups Forbes Technology Council Sam Mugel


No matter how brilliant the application, commercializing quantum technologies and reaching scale in a nascent market requires enormous resources. Quantum startups are having to find and develop a list of paying customers at a time when R&D costs still outweigh revenues by a significant ratio and margins are extremely tight.

As with most maturing technology markets, access to capital is critical to resolving these barriers to scaling. The anticipated growth of the emerging quantum marketplace—projected to be worth $106 billion by 2040—continues to buoy investor interest. Private investors channeled $1.5 billion (mostly through SPACs) into quantum startups in 2023 alone, while cumulative public sector investment to date has exceeded an estimated $38 billion globally.

Those public funds have done a great job in providing the capital needed to develop startup talent and technology. It has even been the main driver for disruptive R&D in some regions. Yet as the ecosystem starts to consolidate, and funding rounds get larger, it is becoming clear that public investment schemes need to turn their attention to the pain points faced specifically during the transition to scaleup. One of the most significant challenges is access to annual recurring revenue (ARR).

Governments and funding agencies should look to the province of Gipuzkoa in northeastern Spain, where the government is addressing this particular challenge with a novel approach to public investment: It is offering financial incentives for collaborations between quantum startups and potential customers.

Missing The Mark For Scaleups

Government investment programs provide essential capital for equity and R&D. And as previously discussed, we know that current funding schemes have their limitations—including, for example, a reluctance by a government to take on the lead investor role. These funding schemes unfortunately don’t 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 rate of startup success—at no extra cost to the public purse.

The Gipuzkoa government’s program is designed to incentivize local companies to partner with quantum startups by mitigating their commercial risk. Its program creates those commercial relationships that are so essential for startups in generating AAR, providing that essential proof of market performance and a robust incentive for mid-to-late-stage investment.

Funding Model Supports Commercialization

Launched in 2022, the Gipuzkoa government’s Quantum Program pays established, local industrial companies to collaborate with startups for the purposes of industrial research and the development of commercial quantum products and services.

The program funds much-needed collaboration between quantum startups and end users in the development and real-world deployment of commercial applications. It creates a completely new vector for scaling, one based on building B2B relationships. And by laying the groundwork for sales, the subsidies help generate the ARR that will attract the venture capital funding needed for startups to scale.

Another of the program’s benefits is that it places quantum solutions into the hands of industrial users, ensuring an extremely short R&D feedback cycle. This approach is markedly different from the approach of many players in the ecosystem, like IBM Q and AWS Bracket, which target users mainly from academia or corporations’ innovation departments.

On a broader level, the program is an investment in the entire value chain for quantum technology. Not only does it validate and encourage engagements with technology providers by potential local and regional business customers, but it also strengthens vital local talent pools.

Subsidies Generate Benefits Across The Value Chain

Government funding typically injects capital used for equity and R&D. It provides the liquidity particularly needed in deep tech fields like quantum technology, with its long R&D horizons. Increasing liquidity is, however, not the primary challenge for post-revenue companies looking to grow their revenues and attract late-stage investment.

What the Gipuzkoa program gets right is that it subsidizes the development of B2B relationships that will drive repeated and scalable product sales. As an added value, the impacts of every dollar of investment will ripple beyond paying for local salaries and work their way through the entire local or regional value chain. These benefits will mount up without spending a dollar more of scarce public resources.

Building a support structure for product sales is only one policy tool available to public funding institutions. Yet the subsidies have been so successful in Gipuzkoa that governments elsewhere are likely to adopt similar funding schemes. By helping create the commercial traction needed to scale operations and generate ARR, governments will be taking concrete action toward protecting the economic and strategic values of the maturing quantum ecosystem in which they have already invested so much public capital.

Publsihed in Forbes Technology Council