“How pressure stove, COVID has lifted the lid on what has been a simmering mental health crisis for more than a decade,” venture capitalist Tim Schlidt told TechCrunch.
According to the World Health Organization, the global prevalence of anxiety and depression increased by 25% in the first year of the pandemic. And when treatment options are available showed their limitsboth the general public and regulators became more willing to consider alternatives, including psychedelics.
Drugs such as ketamine, MDMA (commonly known as ecstasy) and psilocybin, once relegated to underground communities and rave culture, are now being explored to develop treatments for everything from post-traumatic stress disorder to cluster headaches.
“There are over 400 ketamine clinics in the US today, and over $200 million has been raised in the last two years to open more,” said Dina Burkitbayeva, founder of PsyMed Ventures. “Many of these clinics will be the place for MDMA and psilocybin therapies, if approved, and treatments based on other molecules when they become available.”
A more supportive regulatory and social landscape helps psychedelic startups gain a foothold, but they still have to navigate a tightrope susceptible to the vagaries of market sentiment. “While there is a lot of attention given to mental health and psychedelics promise to be truly devastating, not all the hype is justified. In fact, there are many investors who were hurt by the first open markets,” said Saad Shah, managing partner at Noetic Fund.
Burkitbayeva, Shah and Schlidt are three of the five investors we interviewed for this in-depth review. They each have an investment thesis that overlaps heavily with the use of psychedelics.
Indeed, in recent years, investor interest in psychedelic startups has skyrocketed, attracting the interest of generalist investors. But as market sentiment fluctuates, specialized venture capitalists are likely to remain throughout the journey.
Ready to ride? Meet our interlocutors:
- Tim Schlidtco-founder and partner, Palo Santo
- Ryan Zurrerfounder, Grape enterprises
- Dina Burkitbaevafounder, PsiMed Ventures
- Clara Bertenshawpartner, Neo Kuma Ventures
- Saad Shahmanaging partner, Noetic Foundation
Tim Schlidt, co-founder and partner of Palo Santo
What use of psychedelics excites you the most, both in and outside of mental health?
Beyond depression, anxiety, and post-traumatic stress disorder (the standard mood disorders targeted by psychedelics), the use of psychedelics in OCD is highly compelling. Based on Yale’s work, there seems to be little to no need for psychotherapy, as severe OCD is more like a movement disorder than a psychological disorder.
In addition, psychedelic therapy for a number of substance use disorders shows great promise. In particular, there has been strong evidence for psilocybin for smoking cessation and even alcohol use disorder. While not considered a classic psychedelic, ibogaine is effective in eradicating all symptoms of an opioid use disorder in a single session. Therefore, we are quite confident that psychedelics will be effective treatments for a range of addictions.
Outside of mental health, what I am most fascinated by is the use of psychedelics for inflammatory conditions. Based on the original work of Charles Nichols, certain psychedelic compounds have powerful anti-inflammatory effects at very low doses.
In addition to being widely used in a number of inflammatory diseases, it also opens up a new mechanism underlying inflammatory pathways. Considering how low doses must be to achieve anti-inflammatory endpoints, the commercial viability of anti-inflammatory drugs is significantly higher because they can be administered at sub-hallucinogenic doses.
Another area of research that goes beyond mental health is neuropathic pain. We’re seeing some research into psychedelics for fibromyalgia, as well as cluster headaches and migraines.
Which are you more optimistic about: companies directly involved in the development and/or supply of psychedelics, or support and infrastructure companies?
We are most concerned about drug developers. We believe that modern psychedelics have many disadvantages, such as neurotoxicity, potential heart failure, conflicting subjective sensations, and long duration of action. Next-generation drugs will improve on these qualities to make them more effective and commercially viable.
In addition, the IP around these opportunities will be much more secure, as they will be new chemical entities (NCEs). Psychedelic research was put on hold for decades due to DEA planning, but opportunities in pharmacology and medicinal chemistry expanded greatly during this “dark age”. As these molecules begin to see the light again, we look forward to applying modern technology to drug production that hasn’t changed much since the 1960s.
Most ancillary services and technologies will not become mainstream until drugs are commercialized, so we see little immediate opportunity in other verticals anyway. In addition, there is skepticism as to why certain technologies should be “psychedelic”. For example, there is almost nothing in EMR/EHR or clinic management software that needs to be upgraded for psychedelic therapy, and we foresee that major players such as AdvancedMD will be able to expand existing offerings in the psychedelic space.
One technology that we find quite compelling is patient data collection, or what is often referred to as “digital phenotyping.” While the application of this may extend beyond psychedelic therapy, we think companies like Ksana will have a strong presence in clinical trials and post-market surveillance to track a range of psychedelic therapy outcomes.
Can you talk about the impact of the pandemic on the market prospects of psychedelic startups?
Like a pressure cooker, COVID has ripped the lid off a simmering mental health crisis for more than a decade. Isolation and uncertainty have dramatically increased the number of patients with various mood disorders – evidence suggests that diseases such as depression or anxiety have doubled or even tripled due to COVID. Post-traumatic stress disorder in nurses, as well as post-traumatic stress disorder from domestic violence, increased markedly during the pandemic.
Psychedelics are one of those rare cases where profit and effect work together synergistically. The large number of patients with mood disorders points to a real humanitarian crisis that psychedelics promise to solve.
In addition, these large targeted markets provide business opportunities for investors who previously ignored investment in central nervous system diseases for decades.
Are regulatory issues or public opinion issues a bigger hurdle for psychedelic companies today?
I would say regulatory because they have to go through the FDA approval process. So this is the main hurdle that psychedelic drugs will have to face. To a large extent, their promotion will depend on public sentiment.
R&D-oriented psychedelic companies typically need a lot of capital and are prone to early IPOs. Have the unstable conditions for listed companies and public exposures affected such companies more?
To some extent, yes. We believe we will see a washout of smaller caps that are primarily listed on the Canadian stock exchanges. However, we have seen that most high quality opportunities remain private as they can raise funds in private markets and do not need to be listed early.
Current market conditions have certainly widened the runway required for an IPO, but we hope that once Phase 2 hits, companies will be able to go public given how the Phase 2 study reduces investment risk.
On the positive side, public markets have had a subsequent impact, making private valuations much more reasonable than they were in 2021. With 55% of our fund left for rollout, we are very eager to invest in this new environment.
Has interest in mergers and acquisitions changed in recent months?
We have begun to notice that Big Pharma is showing some interest in psychedelics, with Otsuka being the most notable player investing in this area (Compass Pathways and Mindset Pharma). While no major M&A has taken place, we think we will see major acquisitions as individual drugs with strong intellectual property reach Phase 2 targets.
Cannabinoid biotechnology offers some glimpses of what could happen with psychedelics: Jazz Pharma acquires GW Pharma for $7.2 billion and Pfizer buys Arena Pharma for $6.7 billion in part because of their cannabinoid portfolios.
We believe the appetite has changed – psychedelic drug discovery ventures are now on the radar of Big Pharma and will become a more frequent topic of discussion at business development meetings at major pharmaceutical companies. We will likely begin to see an increase in M&A activity in 2026 as a number of compounds enter the clinic.
What characteristics should a founding team have before you consider supporting it?
We are looking for teams that are highly experienced in biotechnology, with a pedigree that includes successful IND and NDA filings with the FDA. In addition, experience with central nervous system disorders and orientation in the psychiatric and neurological departments of the FDA are required. Years of research and understanding of the mechanism underlying the classic psychedelics on the 5-HT2A receptor, or at least experience in research into the serotonin system, also helps a lot.
Should the founders expect to meet you in person before you invest?
Not necessarily, but a face-to-face meeting helps. When we are doing a deal and getting a significant package, face-to-face meetings are much more important. Venture partnerships last longer than many marriages, so it’s important to meet and make sure they’re a good match.
Ryan Zurrer, founder of Vine Ventures
What use of psychedelics excites you the most, both in and outside of mental health?
Credit: techcrunch.com /