This is Part 5 of a 5 Part “rough guide” to psychedelics. Read this series if you want to deepen your understanding of the subject across a variety of sub-topics.

Part 5 is about the industry of psychedelics. For the rest of the series, read Part 1: What are psychedelics and a short history; Part 2: The psychedelic experience; Part 3: The science of psychedelics; Part 4: The safety of psychedelics.

Read the Chinese translation of this article here:

My DMs are open for continued conversations and learning, whether you’re a startup, investor, activist, researcher, healer. I welcome hearing from people who are active in this area. You can find me on my personal website, Twitter, IG, LinkedIn.

PART 5: THE BUSINESS OF PSYCHEDELICS

Investment in the business of psychedelics is growing exponentially, described by the likes of Business Insider as the “booming psychedelics industry”. This raises important questions and challenges around the ethics of psychedelic capitalism, which is where I’ll start this section.

The ethics of psychedelic capitalism

Liana Sananda Gillooly and Kat Conour wrote a beautiful essay on the MAPS blog in which they paint a picture of the quandary of psychedelic capitalism.

“The psychedelics movement is grappling with what it means to birth a new industry and field of medicine, not in the sanctity of the underground or lab, but into the very system that has contributed to the underlying traumas psychedelics so effectively treat. The side effects of the dominant operating systems are being felt across the world, as income and racial inequality, environmental degradation, climate crisis, mass consumption, and diseases of despair all continue to trend upward, unmitigated. Capitalism marches on, these symptoms rippling outward in its wake.”

They go on to share the example of Spravato, an antidepressant ketamine nasal spray, patented and sold by Johnson & Johnson. A dose of generic ketamine is roughly $1.50-$2.00; a dose of Spravato can be $750+. There is no evidence that Spravato is more effective than the generic, and yet, it is 50,000% more expensive and intended for long-term use.

Theirs is not an anti-capitalist stance, rather an attempt to identify new models of working to address some of the risks inherent in the system.

Risks that the system will not offer affordable access to the widest possible number of people who are in need of these interventions. Risks that important voices are marginalised: there is a rich history of experience and knowledge of these substances in indigenous communities who have much to offer; and there are many who have suffered the war on drugs who deserve to be included and not excluded. Risks of exploitation of natural plants and animal species that are already endangered or near extinction (including peyote, ibogaine, 5-MeO-DTM, Kambo). Risks of a growth at-all-costs mindset with expectations of the venture returns model; which ironically drove the success of companies like Facebook who contribute to the very problems these medicines are helping to address.

Gillooly and Conour, alongside a consortium of people across the industry, came together to create the North Star Ethics Pledge, designed to help tackle some of these risks head on. Their mission:

North Star is a nonprofit committed to a future of worldwide psychedelic healing delivered ethically, equitably, and accessibly within and outside of commercial models. North Star’s mission is to center psychedelic wisdom into psychedelic business, to not only radically improve mental health, but to develop the business practices that can serve as guiding lights in the needed transformation of business as a whole.

Capital is needed to bring these medicines to market. Only around 5% of clinical trials in the sector are run by not-for-profits; the rest require substantial fundraising through commercial models. The question is how these companies will behave as they grow, what cultures they build (inclusive vs exclusive), and what alternative financing and operating models they explore (baked in philanthropy by donating carry or equity, cooperative funds, B-corps, socially responsible investing).

On a personal note, I have signed the North Star Pledge and I have committed to proactively raising these conversations around ethics wherever I have a voice to do so.

Industry overview

At a high level, the industry can be broken down into 3 broad pillars:

1. Drug development:

• New biotech companies developing therapies from existing psychedelic compounds as well as new synthetic compounds, for a myriad of applications.
• Examples in this category are the list of biotech companies referenced in Part 3: The science of psychedelics.

2. Delivery (from clinics to retreats):

• An essential component of the ecosystem are places to deliver the interventions to end patients, spanning a spectrum of medicinal (clinics) through to intentional (retreats)
• Examples in this category include Synthesis (Amsterdam), Nushama (NYC), Awakn (Toronto/Bristol)

3. Platform/Ancillary:

• Companies building the supporting infrastructure such as data platforms, education, training, services, distribution, dispensing.
• Examples include Journey (training/infrastructure for psychedelic assisted therapists), Clerkenwell Health (building the infrastructure to deliver clinical trials) Maya Health (SaaS/data platform for psychedelic practitioners), Wavepaths (music for psychedelic therapy), Alta Flora (data tool for patients with a b2b component to help accelerate clinical trials)

Venture Capital interest in the space

There are a growing number of psychedelics-focused VCs, and their portfolio pages are a good place to see a cross section of the kinds of startups being founded in this space. Some of the funds I’ve come across who seem to be approaching this from a place of depth and patience include Neo Kuma (London), Noetic (Toronto), Palo Santo VC (USA).

One of the most prominent investors in this sector is Christian Angermayer who has used his Apeiron Investments vehicle to not only invest but also incubate their own “platform companies”, including ATAI Life Sciences (NASDAQ: ATAI), a notable example in psychedelics. He has also launched a smaller fund called re.Mind which is focused on earlier stage mental wellbeing companies, with psychedelics as a big theme.

To give you a flavour of a portfolio approach (and without giving too much confidential information away), one of the psychedelics VCs I spoke to described their strategy as heavily focused on the first pillar of drug development, making up the large majority of their fund (75%+). Referring back to the progress of clinical trials in Part 3 of this series, this makes sense. We’re still a few years away from approval for most of these compounds so drug development is an important and sensible area of focus for now, with delivery and platform businesses coming down the line after that. Whilst they anticipate the share of biotech decreasing over time, I was surprised just how slowly they see this shifting.

Another interesting point they made is that traditional tech VCs have less understanding of the biotech funding model and don’t have the expertise in place to do proper due diligence on, for example, cutting edge compound development. So with the right scientific advisory team, these sector-focused VCs can have an edge over all the other capital flooding into the space. My guess is that these sector specific investors are also better suited to help catalyse a more ethical industry since they can spot the bandwagon jumpers more easily than generalised investors.

Assessing value

A simple heuristic for assessing the valuations of these biotech companies is the clinical trial process.

• How many trials are they running? (the higher the n, the higher the chance of success)
• At what stage are each of the trials? (with each stage of progress, the probability of failure decreases)
• And how novel vs generic are the compounds they have in trial? (generic compounds have a higher certainty of approval but weaker IP positions; novel or alternative compounds are riskier but have stronger IP positions and so potentially higher returns).

Sean McLintock from Neo Kuma Ventures added some nuance to this assessment:

“It’s not just about how many trials they are running, we look for whether they are running lead optimisation programs. Are they taking their best possible drugs to clinical trials, or are they just taking the easiest drug through trials [in order to raise capital], which won’t necessarily result in a drug that can go to market”.

Public market activity

Psilocybin Alpha is a useful resource to track industry activity in this sector. On their “Psychedelic Stocks & Companies” page they list 31 public companies in the space — the so-called ‘shroom stocks’. The majority of these are listed on the Canadian exchanges (Canadian Securities Exchange, TSX Venture Exchange).

And with the growth in listed companies comes the growth is psychedelics ETFs, of which there are now 3 available:

• The Horizons Psychedelic Stock Index (PSYK) is an index fund of leading North American psychedelics stocks listed in the U.S. or Canada, with just 10 stocks in the ETF.
• The Defiance Next Gen Altered Experiences ETF (PSY) is a combination psychedelics/cannabis ETF, with roughly half of the 20 holdings in cannabis companies.
• The newest of the three is the AdvisorShares Psychedelics ETF (PSIL), which holds 16 companies with a much greater concentration than the others in small cap companies.

Coming from the tech world, I was initially baffled by the dynamic of these companies going public very early, often at the equivalent of Series A stage, but my understanding is that this is more typical in pharmaceutical businesses given the large amount of capital needed to take a drug through phase 3 trials. I’ve also heard that early on in the industry, companies were finding it harder to raise private investment rounds with institutional investors who weren’t comfortable with the regulations, so going public was a shortcut to legitimacy.

My investments in the space

I have become an active angel investor in this sector as it is in the extreme top right of the 2x2 matrix for positive social impact and strong financial returns. The only other sector that I think is comparable is the climate change/net zero sector. I have strong conviction that this is a new frontier of healthtech that will change the world, and capital flowing into the sector is important to fund the trials, build the data stack, and peripheral businesses needed to bring these medicines to market as quickly as possible and to as many people as possible. And in doing so, many of these businesses will generate meaningful returns to their early backers.

So far I have made 5 angel investments. Two biotech companies (ATAI Life Sciences, Bright Minds); a psychedelics fund as an LP (Neo Kuma); a clinical research platform (Clerkenwell Health); and a consumer product business at the intersection of psychedelics and functional mushrooms (Gwella). I also hold long positions in a couple of public biotech companies — MindMed and Numinus.

Going back to the ethics, whilst I consider myself pretty good at reading founders, as an angel investor it’s hard to assess what kind of founder someone will be and the culture of the company they will build from a couple of conversations. Therefore the best signal I’ve found is to dig into whether someone is jumping on the bandwagon of this sector, or whether they have demonstrated a real connection to the medicine, and an authentic reason that brings them to the industry that is beyond financial returns.

I’ve really enjoyed putting this guide together and I hope it brings clarity, knowledge and inspiration to more seekers out there.

And as I said at the top, my DMs are open for continued conversations, learning, inspiration and opportunities.

With thanks to Sean McLintock, Tom McDonald, Alastair Moore, Dr Henry Fisher, Sjir Hoeijmakers and Andre Marmot for contributing or reading drafts of these posts.