Nanalyze

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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  • RAM

    Like to buy a few shares in dwave. How do I buy?

    • Nanalyze

      Hi Ram. As a retail investor, the only way to get exposure to D-Wave at the moment would be to invest in shares of Harris & Harris Group (NASDAQ:TINY).

  • Steve

    What do you think is the probability of D-Wave becoming the next Intel?

    • Nanalyze

      Realistically? Low.

    • Khayyam

      D-Wave is in a superposition state of either making Intel and IBM look like a dwarf or disappear in oblivion.

  • Vanisle500

    Pender Growth fund, PTF on the Toronto Stock Exchange, holds about 1.2 million shares of D Wave.

    • Nanalyze

      Thank you for the comment Vanisle, that’s good to know. The latest Pender Growth Fund press release states they hold a position in D-Wave but no indication is given as to the size or valuation of the position. The market cap of that fund is just $1.95 million, even after the fund price increased +238% in the past 3 months. Strangely, the fund has a total NAV of over $12 million. Maybe SEDAR has some filings that can shine some light on that discrepancy. Are you familiar with this fund at all?

      • Vanisle500

        The latest news and financials for Pender Growth Fund can be found here;
        http://www.pendergrowthfund.com/documents. The fund has a dual share structure where the original fund was split into two; the privately held part that has a maximum share price and the publically traded shares that accrue the profits above the maximum share price of the privately held part. To my knowledge the privately held part is currently substantially paid out from the sale of Monexa shares so basically the D Wave shares increasingly accrue to just the publically traded PTF. Read up on the available documents for some more insight. I will disclose that I hold 10,000 shares of PTF. I am holding onto them until I see where the D Wave story goes. I think there is potential for a huge return.

  • Vanisle500

    D Wave chip proven to be 100 million times faster than optimized conventional computer!
    http://googleresearch.blogspot.ca/2015/12/when-can-quantum-annealing-win.html

    • Nanalyze

      Very interesting update Vanisle, thank you for posting!

  • Jack

    I think D-wave IPO is coming soon, see d-wave jobs: http://www.dwavesys.com/careers/chief-financial-officer-0

    Chief Financial Officer
    Develop and execute strategic financing plan for D-Wave, this will likely include an IPO and potentially include additional venture and strategic financing.
    Hands on experience leading an Initial Public Offering on the NYSE or NASDAQ stock exchanges as a CFO.

    I am not good with stock investments, but because I am interested d-wave technology what you think, should I buy Harris & harris or Pender Growth at this price?

    • Nanalyze

      Hi Jack. In short, you should never invest in things other people tell you to invest in. Always come to the conclusion yourself. The same people who tell you to buy, probably won’t be there to tell you to sell. We’re not invested in either company at the moment. TINY just had a senior management shakeup so we’re watching from the sidelines. They have done a poor job so far of showing how a publicly traded VC company can prove to be viable for investors. As for Pender Growth, we’re not liking the horrible liquidity and minuscule market cap. As the saying goes, do your own DD and make sure that only a small portion (< 10%) of your portfolio is dedicated to trying to find the next Microsoft.

  • Peter

    Very good pick of Pender Fund, Van Isle – it has doubled since the Fall. D-Wave has done a private placement through Paradigm in Canada. The shares were sold for $3.45 US. They also wrote a research report on D-Wave. Here are a few details….

    Resistance Is Futile

    We stand at the precipice of a computing revolution. Processing power is taking a
    huge leap forward thanks to ingenious innovations that leverage the counter-intuitive
    and unique properties of the quantum realm. Quantum mechanics, theorized many
    decades ago, is finally ready for prime time. Imagine, if we could go back to 1946 and
    have the same foresight with the ENIAC, the first electronic general-purpose computer.
    ENIAC’s pioneers created a new industry and opened up unimaginable possibilities.
    The same opportunity exists today with D-Wave Systems. D-Wave is the world’s first
    quantum computing company and represents the most unique and disruptive company
    that we have seen in our career.

     Quantum superposition, interference, entanglement and parallel universes —
    these strange-sounding phenomena, unavailable to conventional computers, can
    be created, exploited and manipulated within ultra-cold superconducting electronic
    circuits. This is what gives D-Wave’s quantum computers their extraordinary
    processing power. Google recently reported the latest-generation D-Wave system
    running quantum annealing was one hundred million times faster than a state-ofthe-art
    Intel processor running its closest classical counterpart. An incredible feat
    for a young company going head-to-head against a mature industry that has
    optimized hardware and software design over many decades.

     While the genesis of the company was Canadian, D-Wave systematically
    gathered the best quantum physicists and programmers from public and private
    institutions to create what is now the undisputed world leader in delivering
    commercial quantum computing to the market. D-Wave’s customers are
    positioned to gain extreme competitive advantage by being among the first to
    apply quantum computing to problems that are impossible or impractical for
    classical computers to solve.

     Quantum computers were first theorized in the 1980s as futuristic fantasy, and
    after decades of research competitors such as IBM, Microsoft, BBN and Google
    have shown only limited success. D-Wave has already designed and delivered
    multiple generations of quantum computers and, most importantly, has created
    and amassed the most comprehensive quantum IP portfolio on the planet.

     The company boasts a world-class management team and board with experience
    extending from: Goldman Sachs, Tesla, Cray, SGI and Northrop Grumman; tierone
    investors including DFJ, Goldman Sachs and Bezos Expeditions; and
    customers such as Lockheed Martin, Google and Los Alamos National Lab.

     Something this revolutionary has of course spawned many critics. However, as
    the company continues to hit its milestones the criticism has dissipated and the
    company is on a path to rapidly expanding its partnership ecosystem and adding
    to its already impressive list of customers.

    In this report, we demystify what quantum computing is and how exactly D-Wave’s
    quantum computers work. We also highlight the many applications that benefit from
    this unique processing power. D-Wave represents something truly extraordinary. It is
    the world leader in a technology that will change everything. In terms of peer valuation,
    we do not compare D-Wave’s value relative to companies such as IBM, SGI or Cray.
    That would be like comparing Tesla to GM or Ford. Rather we highlight the valuations
    of disruptive technology companies and other billion-dollar startups (please see side bar).

  • Vanisle500

    PTF net asset value just went from $1.65 to $2.39 likely due to D-Wave.

    • Peter

      QHR, their largest public holding, has also gone up strongly in the last month or so. Could be hidden value in other private co holdings as well – Tantalus, BasicGov, One45 Software.

      • Vanisle500

        PTF definately has a good base of companies that limit the downside and D Wave provides the potential for a large upside. It’s a pretty good investment in my opinion. I think economic hard times are again upon us and quantum computing will be one of the changes in the world that will bring us out of those hard times. I’m holding onto my investment .

  • Greg Bramley

    Please send new comments concerning D-Wave and Pender Growth Fund, I wish to learn more.
    Thankyou

  • Vanisle500

    PTF NAV just went from $2.52 up to $3.92. Financing announcement for D-Wave upcoming?

  • Vanisle500

    Here’s the explanation, it doesn’t say D-Wave but I would suspect that is the reason for the re-valuation of PTF.

    http://www.pendergrowthfund.com/sites/default/files/pdfs/Press%20Release%20-%20PGF%20Update%20-%2002082016.pdf

  • TVanish

    PTF shares went down, any idea?

    • Vanisle500

      PTF is thinly traded and therefore very volatile. The general trend has been strongly upwards since last year. PTF NAV now stands at $4.47.

  • TVanish

    TINY also went down, I don’t know if D-wave will be the next big guy.

  • Vanisle500

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