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Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: The future’s not just about the disruptive potential of artificial intelligence; the quantum era is coming. With it, arises the potential to take on any problem at a vastly accelerated speed, resulting in significant efficiency gains. Many blue-chip businesses across finance, healthcare and energy are already trialling quantum solutions. While quantum computers are unlikely to replace traditional computers any time soon, they will be able to work effectively in tandem. One in five businesses say they are budgeting for quantum investments this year and momentum should only build as both the hardware and software improves. At stake is an addressable market which could be worth up to $120bn by the end of this decade. The winners of the quantum race will likely produce the successor to the silicon microchip and its supporting infrastructure. The quantum ecosystem is necessarily large, and investors can participate across the value chain in both public and private opportunities. IBM arguably leads the industry at present. Listed pure plays have emerged (even if they are typically small-caps and unprofitable) and we only expect the space to grow from here.

Computing is one of the greatest of all human inventions. It’s so ubiquitous that it’s almost taken for granted. Exponential progress in computer design combined with rapid increases in processing power, have allowed for major advances in all areas: information processing, communication, energy, transportation, biotechnology, life sciences, agriculture, industry and more. Recent developments in artificial intelligence are elevating computing’s potential even further.

Nonetheless, however game-changing computing has been, it still can’t solve all our problems. As we have consistently argued, the number-one challenge the world faces is how to allocate scarce resource efficiently in the face of a growing global population. Against this background, we need to figure out better how to live sustainably, cure diseases, and move efficiently people and goods.

Quantum computing may provide the answer. Ask Satya Nadella, the CEO of Microsoft, and he will tell you that quantum computing is “one of the technologies that will radically reshape the world.” We first wrote about it in 2017 and for decades, quantum computing has been viewed as a futuristic technology. Optimists assert that it could alter everything. Sceptics, by contrast, argue that the technology remains the preserve of academics and theorists, too arcane and far-off for practical application.

Much has changed in the six years since we last discussed the topic. We see more evidence of ‘if’ turning to ‘when.’ Consider that over 4,000 academic papers were published on quantum in 2022, more than double levels at the start of the prior decade (per Elsevier). Crucially, nearly every major quantum computing technology provider has released a roadmap setting out the critical milestones along the path to quantum advantage over the next decade. While most of the action in quantum computing may be limited to laboratories and research problems, the barriers continue to come down, with programming interfaces such as IBM’s Qiskit already available over the cloud, capable of exploring potential future applications.

At the same time, in a fashion not dissimilar to how the cloud industry evolved, an emerging ecosystem of quantum start-ups is developing, targeting different aspects of the future quantum stack. While only 1% of companies actively budgeted for quantum computing investments in 2018, Gartner estimates c20% will do so this year. A more optimistic study suggests that 48% of UK businesses expect quantum computing to play a significant role in their industry sector by 2025 and up to 80% by 2030 (per EY).

As a reminder, quantum technology is not new. The concept dates from the 1940s where the rules of quantum mechanics were outlined, defining what happens at an atomic scale. In the 1980s, academics at MIT began applying these principles to computing. Think of quantum as an advanced form of computing that is immensely complicated but effectively has the potential to make calculations deemed impossible today suddenly doable in seconds. Quantum processors can calculate a range of possible answers simultaneously rather than being limited to handle each step of a calculation in turn.

Classical computers speak in the language of bits, which take values of zero and one. Quantum computers use qubits, which can take a value of zero or one, and also a complex combination of zero and one at the same time. Qubits are thus exponentially more powerful than bits, able to perform calculations that normal bits can’t. However, because of this elemental change, everything must be redeveloped: the hardware, the software, the programming languages, and so on.

Against this background, the winner(s) of the quantum race will likely produce the successor to the silicon microchip and its supporting infrastructure. Governments and companies globally are forecast to invest over $16bn in quantum development during the next five years. Meanwhile, quantum technology funding and investment activity surpassed $1.4bn in 2021 (data from IDC and McKinsey respectively). At stake is a sizeable prize: a $60-120bn addressable market by 2030 (per forecasts from Prescient and Strategic Intelligence and Precedence Research) with at least $450bn in value possible by 2050 (per BCG).

Where might this value accrue? Put simply, quantum offers the potential to take on any problem at a vastly accelerated speed. Effective systems would have the ability to perform tasks with a high degree of accuracy, considering multitudes of possible answers simultaneously. The three main broad use cases for quantum would be in simulating nature, analysing data patterns and optimising search/ sampling. Major industries that would clearly benefit from quantum applications include life sciences, chemicals, finance, travel, logistics and automotive.

Consider that the average cost to develop a new drug is about $2.4bn. Pre-clinical research selects only about 0.1% of small molecules for clinical trials, and only about 10% of clinical trials result in a successful product (all data per BCG). Computer-aided drug discovery in the pharmaceutical industry is currently limited by the computing time and resources required to simulate a large enough chemical system with sufficient accuracy to be useful. Quantum computers, on the other hand, can efficiently model a practically complete set of possible molecular interactions. This could be game-changing not only for drug candidate selection, but also in identifying potential adverse effects via modelling (as opposed to having to wait for clinical trials) and even, in the long term, for creating personalised drugs.

Take the financial services industry as another promising use-case. More than $10tr of options and derivatives are exchanged globally (per the Bank of International Settlements). Many are currently priced using what are known as ‘Monte Carlo’ techniques, namely calculating complex functions with random samples according to a probability distribution. This approach is both inefficient and lacks accuracy as well as being time consuming. Quantum computers would be naturally well-suited to modelling such outcomes much more efficiently. Several financial institutions including Goldman Sachs, JP Morgan, Standard Chartered and NASDAQ are already working on the technology to improve options pricing.

Elsewhere, quantum computers could be used to develop biodegradable plastics, or carbon-free aviation fuel. Additionally, sectors that are reliant on making a high volume of complex calculations such as within transportation and logistics may also benefit. The world’s first quantum route optimisation pilot project is already underway in Lisbon, where a computer system (powered by D-Wave) is being used to calculate the fastest route for nine of the city’s buses between 26 stops. The quantum computer constantly monitors traffic conditions and other variables and generates individual routes for each of the nine vehicles in near-real-time between the stops. Longer-term, other applications for quantum could include navigation or even running brain simulations to attempt to explore the origins of consciousness.

Corporations in all the above diverse fields are able currently to work with vendors to begin testing applications on existing quantum hardware, comparing their performance with outcomes from classical computers to make sure the results are accurate. Logically, with each hardware upgrade, customers can try out more advanced algorithms. If the outcomes remain correct, that instils greater confidence that the machines are performing as intended. By way of example, in November 2022, IBM debuted its 434-qubit Osprey processor, more than three times as powerful as its Eagle processor (with 127 qubits) unveiled a year prior. The business says it aims to release a 1,121-qubit processor called Condor later this year. Other businesses such as Google have similar product roadmaps.

However, today’s machines are generally known in the industry as NISQ or Noisy Intermediate Scale Quantum systems. This means that the number of qubits is still limited, and the qubits are unable to hold their quantum states for more than a few microseconds, something that introduces errors or ‘noise’ into calculations. The reality is that successfully functioning quantum computers are difficult to build and operate because the physical system of qubits must be nearly perfectly isolated from its environment to store quantum information optimally. Further, quantum chips only work at temperatures typically 100th of a degree above absolute zero – far lower than outer space. Not only does this introduce additional complexity, but also much higher energy consumption for quantum versus classical computers. Some studies suggest the figure could be up to 50,000 times higher.

Although these are legitimate concerns, they are being addressed. Solving technical challenges requires deep, interdisciplinary expertise and systems engineering/ partnerships between industry and government. China has announced the most public funding of quantum to-date of any country ($15.3bn), more than double the size of the EU ($7.2bn) and over eight times US government investments. Correspondingly, the country has more patents in the field too than any other (all data per McKinsey). It will also be crucial to ensure that universities and other institutions provide adequate training and skills – there is little point in having a functioning quantum computer if no one knows how to programme it.

For context, it is important not to forget that quantum computers are unlikely to replace traditional computers any time soon. Instead, they will likely work in tandem to help solve computationally complex problems that classical computers can’t handle quickly enough by themselves.While new use cases are expected to become available as the technology matures, they are unlikely to emerge in a steady or linear manner.

The holy grail for the quantum industry – and that which would effectively herald the arrival of the quantum age – is the achievement of quantum supremacy. This is typically characterised as being when a programmable quantum device can solve a problem that no classical computer can solve in any feasible amount of time (irrespective of the usefulness of the problem). It likely requires both the effective functioning of hardware and software. Darío Gil, the Director of IBM Research believes that “the ability to demonstrate quantum advantage in the next two years is possible” even if several technical challenges remain to be overcome.

Reaching quantum supremacy, however, will open a new set of problems. Most pertinently, it could affect the global balance of political power, hence why the broad technology sector has, for many countries, become intertwined with the future of national security. We discussed this topic in detail in our 2023 outlook piece. The U.S. is clearly supporting quantum research (such as through its Chips Act). China’s progress on quantum is largely unknown, but China appears to be at a much more advanced stage. Several reports suggest that the government has put forward a clear directive that links the maturity of quantum to the country’s economic and national security future. There is the additional (related) question of how to regulate quantum. It remains a highly nascent technology, especially when compared to other emerging tech areas such as artificial intelligence, where the regulatory roadmap is still evolving. In reality, no one quite knows what successful quantum computers will look like.

The challenge for investors is to know how (and when) best to play the theme of quantum. Sceptics argue that we remain in a ‘quantum winter’ – perhaps not dissimilar to where the artificial intelligence industry stood a decade ago – where the promise of the technology has outgrown its potential. In this world view, quantum is little more than an impressive science experiment rather than a practical technology. Viewed conversely, now should be the time to be looking for more practical approaches rather than just simply theoretical ones. Might quantum computers today be where combustion automobiles were in the early 1900s? Ask IBM and we are in “the quantum decade”. Other players suggest that “the dawn of the quantum age is here” and “the time for quantum is now” (per IonQ and Rigetti respectively).

The quantum ecosystem is a necessarily large and diverse one embracing equipment and components, hardware, systems software, application software and services. Both public and private players are active across the space. As noted previously, visibility on China’s positioning in the space is low, but per McKinsey, North America commands over 60% of all start-up funding and has nearly 40% of all current market players.

IBM arguably leads the quantum industry. Per its website, it has over 20 of the most powerful current quantum systems in use and has created a community of over 210 of the Fortune 500 companies. Along with academic institutions, national labs and start-ups, its website summarises multiple case studies (including with Daimler and Exxon) where quantum is currently being trailed. IBM also recently announced a strategic partnership with EY whereby the latter organisation can trial IBM’s quantum tools to help explore solutions for clients. A pay-as-you-go quantum service (from $1.60 per runtime second) is available via IBM’s Cloud. The company claims over 400,000 registered users. Google is also strongly positioned within quantum and opened a dedicated campus in Santa Barbara in 2021. Among the other major US tech players, Microsoft, Intel and AWS also appear to be active in the field. One stage removed from the major big-tech business is Keysight Technologies. As a leading player within the field of network test equipment, the business has developed a portfolio of quantum solutions in conjunction with over 100 adjacent (often academic) institutions. Keysight believes quantum could be a “generational advantage” in terms of technological differentiation. Its solutions can help with error reduction and other related issues. Oxford Instruments is another business that could be well-placed within the broader quantum ecosystem.

None of the above is a pure-play business. However, within the last two years, several have listed (albeit in some cases utilising a SPAC structure). These include Arqit, D-Wave Quantum, IonQ and Rigetti. Many have over two decades of experience within quantum and have developed dedicated niches (Arqit, for example, in encryption and D-Wave in a specialised technology – quantum gates). At peak, this quartet of businesses was worth $12.5bn although their combined market capitalisation is currently less than $1.5bn (per Bloomberg). None has annual revenues of over $20m.

There is also a vibrant start-up system which plays across a range of niches and geographies. Beyond the US, Israel, Switzerland and the UK seem to be developing strong quantum ecosystems. A non-exhaustive list of interesting players would include: Alpine Quantum, Classiq, CloudQuanta, OxfordQuantumCircuits, PsiQuantum, Quantinuum, SandboxAQ, Terra Quantum, Xanadu Quantum Technologies and Zapata Computing. Quantum supremacy may still be some time away, but we expect interest in the sector only to build from here.

Alex Gunz, Fund Manager, Heptagon Capital


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