Not much is known about Sandbox, the quantum technology group operating under the Alphabet (GOOG, Financial)(GOOGL, Financial) umbrella. Launched in 2016 by Jack Hidary, it operates outside of Alphabet’s moonshot division and is separate from the Google quantum computing team, but the parent company has been mostly quiet on what exactly it does.
That’s about to change. On Tuesday, Alphabet announced that it has spun off Sandbox into an independent company.
What we know about Sandbox
Sandbox is reportedly working on "exploring the intersection of physics and AI," according to Business Insider. VentureBeat reports that the group is repurposing classical hardware designed for machine learning and artificial intelligence, like Google's tensor processing units (TPUs), to simulate quantum computing workloads.
According to Sandbox research scientist Guillaume Verdon, Sandbox’s Floq, a set of APIs that use TPUs to simulate quantum computing workloads, offer run speeds that are 10 to 100 times faster than the current market standard.
“The team has been experimenting with how to use Floq for physics, machine learning — all kinds of cool applications,” Verdon said. “And we’ve developed our own open source library for tensor networks that runs on TPUs… It’s [surprising] how good the chips are for quantum simulation. It’s almost like they were designed for this task.”
The spinoff
The company launched on March 22 as Sandbox AQ, with A standing for AI and Q standing for Quantum. It also announced that it raised “nine figures” in a funding round. Now that Alphabet has spun off Sandbox, the company has provided the market with a snapshot of its main goals.
Sandbox will start out with two major research objectives: 1) post-quantum cryptosystems and related privacy-enhancing technologies, and 2) a navigation system based on geophysical signals like local variations in the earth’s magnetic and gravitational fields.
The company will continue to be led by Hidary as CEO. Early investors include former Google CEO Eric Schmidt, Breyer Capital, Guggenheim Partners, Thomas Tull, Salesforce (CRM, Financial) co-founder Marc Benioff’s TIME Ventures and T. Rowe Price. Schmidt will take over as chairman of the board.
In terms of revenue structure, Sandbox will operate on a software-as-a-service (SaaS) model, offering enterprise artificial intelligence and quantum computing software as a service.
Sandbox reported that it counts Softbank (TSE:9984, Financial) Mobile, Vodafone (LSE:VOD, Financial), Mt. Sinai Health System and Wix (WIX, Financial) among its existing customers. Mount Sinai’s President, David Reich, told Reuters that Sandbox would assess the encryption in the health system's messaging tools and propose potential algorithm upgrades over the next year.
Better on its own
The move to spin off Sandbox may come as a surprise to investors. Alphabet is a conglomerate with a market cap of over $1.85 trillion, and it has been loath to give up anything that might increase that valuation, even as many other conglomerates have rushed to spin off parts of their businesses onto the public markets to take advantage of the bull market and rake in higher earnings multiples for their shareholders.
For example, Alphabet has famously been resistant to the idea of spinning off YouTube, even as Wall Street hyped up the prospect, claiming it would dramatically increase value for shareholders. In a 2019 research note, Needham analyst Laura Martin even speculated that Alphabet could gain as much as 50% in value if it were broken up into three separate businesses.
This means there are two main possibilities as to why Alphabet would decide to spin off Sandbox. One is that Alphabet may believe the company will be more successful on its own; perhaps management thinks the conglomerate structure does not have any unique benefits it can offer the fledgling business, so it might as well spin it off. Another possibility is that it believes Sandbox will grow rapidly enough to go public and command sky-high valuations that it would never receive as part of Alphabet.
One interesting thing to note is that Google will not be a shareholder in Sandbox. Hidary said he wants outside investors to help speed growth. It’s possible that the company felt Google wasn’t investing enough money in the business to help reach its full potential, or that it found better funding opportunities would be available if it struck out on its own.
Takeaway
Sandbox AQ, formerly of Alphabet, has made a quantum leap by spinning off from a company that is rather attached to its conglomerate status. In doing so, it has revealed its main research objectives to the public and opened its doors to outside funding so that it can speed up growth.
This situation goes to show that, even though Alphabet has a moonshot division, when it comes to truly growing these fledgling companies, the job could be handed off to outside investors. I will be keeping an eye on this fascinating quantum computing player; perhaps it will make the leap to the public market someday.
