At least three quantum computing start-ups have gone public since the beginning of 2021 via the non-traditional method of merging with a privately-funded special purpose acquisition company (SPAC), and a fourth such deal is in the works.
But after all three currently public firms–Arqit, IonQ and Rigetti Computing–reported modest earnings this month, each amid their own controversies, the young and much-hyped quantum computing sector might need to question if SPACs are the right route to funding, and if the sector is due for a period of belt-tightening before its revolution can resume.
SPAC mergers have been used to initiate IPOs in many industries, but increasingly have come under heavy criticism over misguided valuations and the problematic trend of SPAC shareholders redeeming their shares too early, which results in lower proceeds than ex[ected for the company that the SPAC fund ultimately merges with, according to a Reuters story from earlier this year.
Rigetti Computing
That appears to have been what happened to Rigetti Computing. In reporting the company’s first quarter earnings this week, Rigetti Founder and CEO Chad Rigetti acknowledged that his company was facing challenges that in part resulted from not having as much working capital as it expected to have following its recent merger with SPAC Supernova Partners Acquisition Company II, and its subsequent IPO.
The result for Rigetti will be a somewhat slower long-term product roadmap than it had hoped for.
“We now plan to introduce our 1,000-plus qubit system in late 2025 and our 4,000-plus qubit system in or after 2027,” Rigetti said, according to the Seeking Alpha earnings transcript. “This updated timeline and roadmap is based on several factors, which include the following considerations: First, higher than anticipated labor, equipment, and system component costs are leading to increases in the cost associated with system development. Second, market and supply chain conditions have hampered the timely availability of input materials for our machines. Third, our valuable working capital coming out of our business combination closing was lower than anticipated, which has limited our ability to absorb these increased costs and timing factors.”
Rigetti achieved $2.1 million in revenue for the first quarter, slightly lower than the $2.4 million it said it earned during the same period last year long before it went public in March of this year. Rigetti’s operating expenses also jumped year-over-year, coming in at $25.5 million for the first quarter this year, compared to $9.8 million for the same quarter last year. The increase was mainly due to higher research and development expenses and general and administrative expenses, the company said.
Despite gaining lower proceeds from its SPAC deal than it expected, Rigetti is in a tough position. In the rapidly evolving quantum computing space, it needs to stay aggressive releasing new computers, processors with more qubits and improved platform capabilities like higher fidelity rates, if it wants to stay competitive with the rest of the sector, but that requires major investment. In the short-term, the company is planning to launch a next-generation single-chip 84-qubit quantum computer expected in 2023, which Rigetti said will feature a “next-generation architecture designed for higher fidelity and higher connectivity.” Also next year, Rigetti said it will launch a 336-qubit multi-chip processor.
IonQ
IonQ, which announced its own SPAC merger in the spring of 2021, and went public last fall. This week, the company reported $2 million in revenue for the first quarter, in line with its previous projection for the quarter, while also announcing plans for its newest quantum computer, Forte, which will launch with limited availability later this year.
But the report came after a tumultuous couple of weeks for the firm, during which its stock price plummeted following short-seller Scorpion Capital’s 183-page report criticizing IonQ’s technology and its leadership. The report has been roundly mocked in the quantum computing sector for its temper-tantrum tone and for misunderstanding how quantum computers work, but going public via a SPAC merger and subsequently soaring to a stock value of $35 per share in the weeks afterward before falling sharply amid a broader stock market deflation made IonQ a target for such reports.
Also, whether the report was valid or not, IonQ during its earnings call was still forced to respond to some of the criticism, including an allegation that its quantum computer can’t solve the problem of 1+1.
IonQ CEO Peter Chapman said during the call, “Quantum computing is designed to solve certain differential equations, and at the same time not designed for simple math,” Chapman said. “It's hard to kind of wrap your head around, but adding 1 +1 isn't what quantum computers are designed for. That’s simple math, and there's an app for that on your phone. Today we're working on problems like general object recognition that look to rival the best classical technology of today. We've never said that quantum computers are going to be good at everything. They’re going to be very good, we believe, against a certain set of problems that also happen to be commercially interesting.”
IonQ, like Rigetti, acknowledged that its R&D expenses continue to grow as it invests in next-generation systems, but Chapman characterized the growing investment as necessary for IonQ to meet its goals.
Arqit
U.K.-based Arqit, a cybersecurity company that gets some of its revenue from so-called quantum-safe encryption, went public through a SPAC merger long before IonQ and Rigetti did. The company in early May posted $5.3 million in revenue from its quantum security product, QuantumCloud, for the first six months of its 2022 fiscal year.
The earnings report came amid claims for multiple shareholder rights law firms that they were investigating Arqit after The Wall Street Journal in a report questioned statements the company previously made about its growth prospects. During its earnings call, the company touted the positive results of what it called an independent review of its technology by the University of Surrey, a review whose timing appeared to pose it as an answer to the WSJ report.
D-Wave Systems
D-Wave is the most recent quantum computing company to announce plans to go public in a SPAC merger. In February, it said it expected to raise as much as $340 million from its business combination with DPCM Capital.
The parties still plan to pursue their deal, but last week in an interview with IPO Edge, DPCM CEO Emil Michael said DPCM changed its policy around early redemption as a result of redemption activity that limited the proceeds of other SPAC deals. “We’re realists, and there has been a fundamental change in the SPAC market relatives [to] six to nine months ago, and so now the game on the ground is to make sure that there [are] as few redemptions as possible. The difficulty is I think people aren't making redemption decisions based on the fundamental value or view of the company.”
DPCM’s new policy is to create a “pool of shares that are split pro rata by any shareholder that… does not redeem, so effectively it looks like a discount to them, relative to the valuation of the company. And that, we thought, would make some of these investors think twice [about redeeming before the SPAC merger occurs],” he said, adding, “We think we will have a better result relative to companies that are not thinking creatively about about the redemption issue that's that's in the happening in the SPAC industry these days.”
The business combination of D-Wave and DPCM is expected to close during the current quarter, though an eventual IPO date has not been determined.
Quantum Funding Crash?
The challenges faced by quantum computing firms that have gone public via SPAC deals are happening amid an environment in which billions of dollars have been invested in quantum start-ups in recent years–as much as $3.2 billion last year alone, $1 billion of which came in the final quarter of the year.
The abundance of start-up funding is now running headlong into a broader series of issues that includes the SPAC criticisms, but also extends to the growing understanding among investors that much about quantum computing remains unknown. The companies in the sector are rapidly evolving to more powerful systems, but it is not clear how soon they will provide clear enough advantages over existing classical computing systems that will drive a large number of corporate enterprises to invest in an entirely new computing paradigm. At the same time, advancing their capabilities requires huge amounts of money, meaning quantum firms could quickly run through existing funds and eventually need more money. Yet, broader market and recession concerns may limit the willingness of existing investors to continue investing in quantum in the short-term. It all adds up to a possible reckoning.
“I believe that by 2030 quantum computing will change computing... but we have to be realistic when it comes to financing,” said William Hurley, who in quantum circles goes by “Whurley,” and is the founder and CEO of quantum firm Strangeworks.
Whurley, speaking at last week’s Inside Quantum Technology Quantum Enterprise event in San Diego, added that he expects funding in quantum to shrink heading into next year, and that some companies may fail as a result, while others get acquired. “Be aware that we will have, because the market is kind of crashing because of the funding running out for companies, a moment in time where large companies acquire some of these quantum companies.”