Investing in Quantum Computing with TINY and D-Wave

We’ve talked before about disruptive technology venture capital fund Harris and Harris Group (NASDAQ:TINY) and their dismal share price performance over time. We’ve also highlighted that any single successful exit for one of TINY’s larger investments could be quite beneficial for TINY’s shareholders. Let’s take a look at an investment by Harris and Harris Group in D-Wave, a Canadian quantum computing company that has the potential to be truly disruptive.

Why Quantum Computing?

Quantum computing has always been thought of as the holy grail for technologists. Just why is this the case? Well, the simple explanation requires a bit of background. In computing, there is a rule we call Moore’s law which states that “computer chip performance doubles every 2 years”. Silicon chips, which are the foundation of computing today, will eventually reach their technological limit. Quantum computing promises a solution that would improve upon Moore’s Law not just marginally but exponentially. A problem that would take current computing systems billions of years to solve could be solved in seconds. One can only begin to imagine the problems the world could then begin solving with quantum computing and the impact that would have on the human race. If a company can successfully commercialize quantum computing, it really is some pretty exciting stuff for investors.

Click for company websiteFounded in 1999, D-Wave Systems claims to be the world’s first quantum computing company selling their flagship product, the D-Wave Two™ computer system. This 120 employee company has a customer list that includes Lockheed Martin, Google, and NASA. Investments in D-Wave total $136 million so far from notable investors including Jeff Bezos from Amazon, In-Q-Tel (the VC arm of the CIA), Draper Fisher Jurvetson, Goldman Sachs, and of course Harris and Harris Group. D-Wave has over 150 issued patents worldwide, with 11 new U.S. patents being granted in 2014. The company just announced a $22.7 million funding round from “a large institutional investor” among others bringing the total 2014 investments in D-Wave to $48.6 million.

How Can We Value D-Wave

TINY’s valuation can also tell us something about how we can value D-Wave. According to the Q3 2014 filing for  TINY, they currently hold 5.125 million shares of D-Wave which is TINY’s 6th largest equity-focused investment by value. The position was accumulated over 8 investment rounds and is valued at $8.27 million. We also know that since TINY owns between 2.5% and 5% of D-Wave, that the September 30, 2014 valuation for D-Wave would then be somewhere between $165 and $330 million according to Harris and Harris Group’s valuation of the shares they own. So let’s look at some hypothetical returns and their effect on TINY’s NAV (all things being constant):

D-Wave_Valuation

It’s reasonable to think that a 10X return might be feasible, but since it is often said that only 1 out of 10 VC investments has a positive return, it’s also possible that D-Wave could declare bankruptcy and the shares could be worthless. It’s also likely that TINY would sell their shares in a liquidation event at 3X to 10X valuation when in fact D-Wave becomes the next Intel (NASDAQ:INTC). That’s why we threw in the 500X return “Intel scenario”. If D-Wave actually achieves the market cap of Intel, then this would represent about a 500X return for TINY. It is highly unlikely Harris and Harris Group would hold D-Wave shares that long since diversification is an important part of their business model. It is also highly likely that D-Wave would be publicly traded by that time at which point quantum computing investors would just hold D-Wave shares instead of TINY. Therefore quantum computing investors can obtain a small amount of exposure to D-Wave through investing in TINY that will only provide meaningful returns if D-Wave has a very successful exit all things being equal.

Competitors for D-Wave?

According to an article by Fast Company in July 2014, the largest players in quantum computing today are IBM (NYSE:IBM) and D-Wave. In July of 2014, IBM unveiled a $3 billion R&D program over the next five years to develop non-silicon computer chips, quantum computing, computers that mimic the human brain, and even carbon nanotubes and graphene tools. IBM is a $154 billion company with 2013 revenues of $92.7 billion. While IBM has been discussed before as a possible play on nanotechnology, investors who want pure-play exposure to quantum computing will be hard pressed to find it by investing in IBM.

So isn’t it a no-brainer to invest in D-Wave? Not necessarily. There have been a host of skeptics who accuse D-Wave of not actually having a computing machine that would meet the definition of a quantum computer. This lengthy but excellent article by Wired titled “The Revolutionary Quantum Computer That May Not Be Quantum at All” discusses the controversy around D-Wave leaving the reader to decide for themselves. At any rate, investors who want a small exposure to D-Wave can certainly get it today by buying shares in Harris and Harris Group (NASDAQ:TINY).

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