It looks like the hype is over for psychedelics.
After four years of optimistic funding fueled by strong research from top-tier universities, the novelty surrounding startups in the psychedelics market has died down and funding isn’t as generous as it used to be.
Startups saw $131 million so far in 2022, a 61% dip from the same time period last year when funding was at an all-time high, and less than half of what startups saw in 2020.
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“There’s been this humongous overvaluation, and now [there’s] this economic downturn,” said Marik Hazan, who founded one of the earliest psychedelics-focused venture firms in 2018. “So that’s going to cause some issues.”
Drug development no longer rules the market
When Hazan launched venture firm Tabula Rasa in 2018, psychedelics had a grip on the scientific community.
“How To Change Your Mind,” Michael Pollan’s book on psychedelics and the human brain, quickly became staple reading among the health-conscious upper echelon of financiers and tech workers. The Food and Drug Administration granted psilocybin (street name: magic mushrooms) breakthrough therapy status, fast-tracking therapeutics that utilized those compounds. Controversial billionaire Peter Thiel launched ATAI Life Sciences, now one of the largest drug companies in this space.
Since then, the private market of psychedelics has bloomed. The space saw the introduction of MindMed, Cybin and Reunion Neuroscience (then known as Field Trip Health). All three were part of a big wave of IPOs in 2021 (though now, predictably, are trading much lower).
Back in 2017, only three companies received a meager $12.6 million in funding. By 2021, it reached a peak of $368 million (per Crunchbase data) thanks to research paper after promising research paper touting the efficacy of psychedelics on treatment-resistant PTSD, depression and anxiety.
“I think back in 2018, 2019, the assumption was that drug development would be the main part of this space and that this would be a completely drug development space,” Hazan said.
Gearing up for its first big test
But the game changed. Following a wave in 2021, public markets around the world began to tank, taking private markets with them. Biotech, once flush with cash, was suddenly forced to hunker down. Companies slashed research and development budgets and conserved in an attempt to extend the runway. Companies also reexamined their exit strategies—18 companies went public in 2021, and not a single one premiered so far this year.
That made fundraising difficult for a subset of companies whose primary bread-and-butter was still in the research and development phase. Early biotech is exceptionally capital-intensive without necessarily having a product to market.
“If you wanted to start a psychedelics company, there was so much hype that anyone could get together a half-assed team and make a pitch deck and they could probably raise some money,” said Brom Rector, founder of psychedelic venture company Empath Ventures. “But now investors are being much more discerning and there’s a lot more due diligence happening than there was before.”
The next generation of psychedelic drugs
By the time Dustin Robinson and Roberto Velarde founded Iter Investments in 2020 to bolster psychedelics startups, “we actually thought a lot of those companies were overvalued,” Robinson said. “And that’s why we decided to focus on some of the second wave of companies coming in.”
New drug companies will need to iterate beyond what psychedelics companies have promised so far. For example, California-based Delix Therapeutics looks to create treatments from psychedelics minus the hallucinogenic effects.
Rector said therapeutics-related startups must find clinical use cases beyond mental health, which is an oversaturated market, if they want to survive during this downturn.
“It’s going to be tough,” Rector said. “Especially for some of these companies that didn’t really have any real IP to begin with.”
Illustration: Dom Guzman
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