“Like a pressure kitchen, COVID blew the lid off what had been a simmering mental health crisis for over a decade,” VC 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 the available treatment options showed their limits, both the general public and regulators were more willing to look at alternatives, including psychedelics.
Drugs like ketamine, MDMA (commonly known as ecstasy), and psilocybin, which were previously relegated to underground communities and rave culture, are now being studied to develop therapies that treat everything from PTSD to headaches in bunches
“Today, there are more than 400 ketamine clinics in the US, and more than $200 million has been raised in the last two years to open even more,” said Dina Burkitbayeva, founder of PsyMed Ventures. “Many of these clinics will be sites for MDMA- and psilocybin-assisted therapies, if approved, and treatments derived from other molecules as they become available.”
A more favorable regulatory and social landscape is helping psychedelic startups gain a foothold, but they still have to walk a tightrope that is susceptible to the vagaries of market sentiment. “While much attention has been paid to mental health and the promise of psychedelics to be truly disruptive, not all of the hype is warranted or justified. In fact, there are many investors who have been hurt by the first hype-driven public markets,” said Sa’ad Shah, managing partner of Noetic Fund.
Burkitbayeva, Shah and Schlidt are three of the five investors we interviewed for this deep dive. Each of them has a reversal thesis that overlaps heavily with applications of psychedelics.
Indeed, investor interest in psychedelic startups has skyrocketed in recent years, attracting the interest of mainstream investors. But as public market sentiment fluctuates, it seems more likely that specialist venture capitalists will stick around for the whole ride.
Ready for the trip? Meet our interviewees:
- Tim Schlidt, Co-Founder and Partner, Palo Santo
- Ryan ZurrerFounder, Vine Ventures
- Dina Burkitbayeva, Founder, PsyMed Ventures
- Clara Burtenshaw, Partner, Neo Kuma Ventures
- Sa’ad Shah, Managing Partner, Noetic Fund
Tim Schlidt, Co-Founder and Partner, Palo Santo
What applications of psychedelics are you most excited about, both in and outside of mental health?
Outside of depression, anxiety, and PTSD (the standard mood disorders we see being targeted by psychedelics), the application of psychedelics for OCD is pretty compelling. Based on Yale’s work, it appears that little or no psychotherapy is needed, as severe manifestations of OCD appear to be more of a motor disorder than one with a psychological basis.
Additionally, psychedelic therapies for a variety of substance use disorders are showing great promise. In particular, there has been compelling data on psilocybin for smoking cessation and even alcohol use disorder. While not considered a classic psychedelic, ibogaine has been effective in eradicating all symptoms of Opioid Use Disorder after one session. So we’re pretty sure psychedelics will emerge as effective therapies to treat a variety of addictions.
Outside of mental health, what fascinates me most is the application of psychedelics for inflammatory disorders. According to the seminal work of Charles Nichols, certain psychedelic compounds appear to be potent anti-inflammatories at very low doses.
In addition to having wide applications in a variety of inflammatory disorders, it also opens up a new mechanism underlying inflammatory pathways. Given how low doses are required to achieve anti-inflammatory endpoints, the commercial viability of anti-inflammatories is dramatically increased, as they could be administered in subhallucinogenic doses.
Another field of research outside of mental health is neuropathic pain. We are seeing some exploration of psychedelics for fibromyalgia, as well as uses for cluster headaches and migraines.
What are you more optimistic about: companies directly involved in the development and/or supply of psychedelics, or ancillary and infrastructure companies?
We are most excited about drug developers. We believe that current psychedelics have many shortcomings, such as neurotoxicity, potential cardiac liability, inconsistent subjective experiences, and long durations. Next-generation drugs will improve on these qualities to make better, more commercially viable drugs.
Also, the IP around these opportunities will be much more defensible as they will be New Chemical Entities (NCEs). Psychedelic research stalled for decades due to DEA programming, but capabilities in the fields of pharmacology and medicinal chemistry advanced significantly during this “dark age.” As these molecules begin to see the light of day again, we expect modern techniques to be applied to produce drugs that haven’t changed much since the 1960s.
Most ancillary services and technology won’t take off until drugs are commercialized, so we see little short-term opportunity in other verticals anyway. Furthermore, they are skeptical as to why certain technology has to be “psychedelic”. For example, there is little to no EMR/EHR, or clinic management software, that needs to be adapted for psychedelic therapies, and we anticipate that big incumbents like AdvancedMD will be able to expand on existing offerings in the psychedelic space.
One piece of technology that we find quite compelling is patient data capture, or what is often called “digital phenotyping.” While the applications of this may go beyond psychedelic therapies, we believe that companies like Ksana will have a formidable presence in clinical trials and post-market surveillance to track a variety of outcomes of psychedelic therapies.
Can you talk about the impact of the pandemic on the market outlook for psychedelic startups?
Like a pressure cooker, COVID uncovered what had been a dormant mental health crisis for more than a decade. Isolation and uncertainty have dramatically increased the size of the patient population across a range of mood disorders – data suggest ailments such as depression or anxiety have doubled or even tripled through COVID. PTSD among nurses and PTSD due to domestic violence increased markedly during the pandemic.
Psychedelics are one of the rare cases where gain and impact work synergistically together. The large number of patients with mood disorders is indicative of a true humanitarian crisis that psychedelics promise to address.
Furthermore, these large addressable markets present a trading opportunity for investors who previously ignored investing in central nervous system disorders for decades.
Are regulatory or public opinion problems a major obstacle for psychedelic companies today?
I would say regulatory as these have to go through an FDA approval process. So that is the main obstacle that psychedelic drugs will have to face. To a large extent, its advance will be independent of public sentiment.
R&D-driven psychedelic companies are generally very capital intensive and tend to go public early. Has the volatile climate for listed companies and public exits affected those companies more?
To some extent, yes. We think we will see a laundering of poorly capitalized companies that trade primarily on Canadian stock exchanges. That said, we’ve seen most of the high-quality opportunities remain private, as they can raise funds on private markets and don’t need to list prematurely.
Current market conditions have certainly extended the runway needed to achieve an IPO, but we are hopeful that by achieving Phase 2 readings, companies will be able to go public, given the extent to which a Phase study 2 reduces the risk of an investment.
The positive effect is that the public markets have had a downward effect by making private valuations much more reasonable than in 2021. With 55% of our fund to deploy, we are eager to put money to work in this new environment.
Has the appetite for mergers and acquisitions evolved in recent months?
We have started to see Big Pharma showing some interest in psychedelics, with Otsuka the most notable player to make investments in the space (Compass Pathways and Mindset Pharma). While there have been no major mergers and acquisitions, we believe we will see large acquisitions once selected strong PI drugs reach Phase 2 readings.
Cannabinoid biotech offers some glimpses of what could happen to psychedelics, with Jazz Pharma acquiring GW Pharma for $7.2 billion and Pfizer buying Arena Pharma for $6.7 billion in part because of their cannabinoid portfolios.
We believe the appetite has evolved: psychedelic drug discovery businesses are now on Big Pharma’s radar and will start to be a more frequent topic of discussion in business development meetings at big pharmaceutical companies. We are likely to start seeing a surge in M&A activity in 2026 as a variety of compounds move into the clinic.
What are the characteristics that a founding team should have before considering endorsing it?
We seek teams that have deep biotech experience, with pedigrees that include successful IND and NDA filings with the FDA. In addition, experience in central nervous system disorders and navigating the FDA’s psychiatric and neurological divisions is required. Years of research and understanding of the mechanism underlying classic psychedelics at the 5-HT2A receptor or, at the very least, a background in serotonin system research also goes a long way.
Should founders expect to meet you in person before investing?
Not necessarily, but meeting in person helps. When we’re leading a deal and taking a sizable stake, in-person meetings are of much greater importance. Venture partnerships last longer than many marriages, so it’s important to get together and make sure you’re a good match.
Ryan Zurrer, Founder, Vine Ventures
What applications of psychedelics are you most excited about, both in and outside of mental health?