Psychedelics Fundraising Is A Science: Here’s What You Should Know

When the psychedelics market first kicked off in the late 2010s, there was huge excitement at the potential for these medicines to wholly disrupt the medical system as we know it. Between 2017 and 2021, investments grew year over year until they peaked in 2021.

The last few years have been tough for psychedelic investment. Psychedelicalpha estimated that exchange-traded funds (ETFs) were down by 50% or more in 2021 compared to 2020. But in comparison to 2022, 2021 was actually a good year for investments, with 2022 seeing one-third fewer deals overall.

Despite this, the same platform noted that seed funding remained consistent from 2020 through 2022, suggesting that there was something more complex happening with investments in psychedelics. The biggest areas of growth during these years were in drug development and discovery, an important note for emerging psychedelic companies.

Two companies that received large amounts of funding in 2022 were:

• Lusaris Therapeutics with a $60 million Series A fundraising for their sublingual pill formulation of 5-MeO-DMT for treatment-resistant depression
• Empyrean Neuroscience with a $22 million Series A fundraising for the development of genomic modifications for psilocybin-containing mushrooms.

Both of these deals are significant given that in 2023, Psychedelicapha reported a massive drop in the number of financing deals and the amount given, with a 49% reduction over 2022. The largest deal completed was Transcen Therapuetic’s Series A which raised $30 million, a number that no other deal came close to (the average investment deal was just $6 million in 2023.)

Like all investment trends, there are several dynamic factors that contributed to the slowdown in the psychedelic sector.

Macroeconomic Headwinds

The American economy has seen more stable days than in the last few years. The combination of rising interest rates, general inflation, and economic uncertainty makes investors more cautious about when and how they’re investing their money. When economic conditions are uncertain, many venture capital firms have reduced appetite for risk, making them more hesitant in investments across various sections, especially in new industries like psychedelics, where the potential is massive, but so is uncertainty.

Challenges in the Broader Biotech Sector:

There is potential and there are proven returns. The biotech sector is one of massive potential, as technological advances meet medicine. But this growth is not easy and biotech as an entire industry has faced many challenges in recent years. Increased regulatory scrutiny, failure to succeed at clinical trials, and mounting pressure to prove profitability mean biotech funding as a whole has slowed, which trickles down into the psychedelics space. It’s not that investors don’t believe in the possibility of psychedelics, but the trouble in the investment landscape and within the biotech sector creates a double-whammy of reduced investments for psychedelics companies.

Shift Towards Profitability

The biggest thing investors want to know about companies seeking funding is: how will you be profitable long-term? This is a question that the psychedelics industry is still grappling with — and one that needs a solid answer before investors will consider psychedelic fundraising.

Developing sustainable revenue models and demonstrating how investors will receive a strong return on their investment is crucial to finding success for psychedelic investment — potential simply isn’t enough.

However, the slowdown in venture capital funding for psychedelics should not be taken as a total lack of interest. This is not an industry that is going anywhere — it is one that is only beginning to make a difference in the lives of millions. Investors take potential in industries seriously – even if potential alone isn’t enough to invest in. Conservative estimates predict that by 2030, the psychedelics market will be worth $6 billion — and that’s a pie that investors want a piece of, so long as they feel confident in a company’s ability to be profitable and sustain long-term success.

Focus on Clinical Development

Psychedelics are still relatively new in their medical applications. What makes people more comfortable with new medicines? Clinical data proving its efficacy. Strong clinical data is also reassuring to investors: proof-positive that their investment is backed by scientific evidence.

This data is not easy to come by, but it is important for psychedelic companies setting up for long-term success. Rigorously conducted clinical trials are the best way to show that these medicines are safe and effective. These trials must be beyond reproach, conducted with the highest level of safety, and remove bias of any sort. Clinical trials are an investment, to be sure, but the reward can be tenfold when you’re able to reduce the risk for investors and more easily attract funding.

Clear Regulatory Pathway

Like the cannabis industry, the psychedelics industry has a myriad of red tape to navigate. It can be tedious and time-consuming, but it is never optional. Effectively complying with ongoing and evolving regulations is one of the best ways to remove risk for your investors. No investor wants to sink funds into a promising company only to have the doors shut in a matter of months due to non-compliance.

It is well worth the time and effort it takes to gain a clear understanding of regulatory requirements and to create a defined path to regulatory approval. This is not a one-time task, but an ongoing process for all psychedelic companies — and the ones who take this seriously will rise to the top over time.

Experienced Management Team

Effective management can make or break a company in even the most stable of industries – which psychedelics is surely not. Having a strong management team with experience in related industries like biotechnology and pharmaceuticals shows investors a forward-thinking approach with a clear understanding of how to succeed. It can be challenging to hire effectively in the psychedelics industry, given the lack of opportunities in years past, but that does not mean there are no effective leaders out there — it’s a matter of expanding your search to complementary industries.

Sustainable Business Model

Even a nascent and exciting industry like psychedelics must rely on business fundamentals to succeed — and there is nothing more fundamental than a well-written business plan. This plan must create a sustainable business model that is profitable and comprehensive, addressing everything from product and service pricing to distribution and the supply chain.

There are a lot of things that the psychedelics industry must figure out as it grows, but Business 101 is not one of them. Don’t reinvent the wheel — give investors the business plan they’re looking for.

Strong Intellectual Property

It is the early days of the psychedelic revolution, but someday soon this industry will be just as crowded as cannabis and alcoholic beverages. The companies that succeed will be those that took intellectual property protection seriously from the start. It is not enough to offer an exceptional service to your clients — companies must take action to protect their processes. Patents and trademarks over chemical formulation and proprietary processes will help set your company apart from the competition and maintain an advantage that helps you secure funding.

Protect Your Assets

Going back to Business 101, every company needs a safety net. Securing the proper umbrella of psychedelic insurance coverage is crucial for psychedelic companies. It helps mitigate risks across the board, from research and development to clinical trials, patient safety, and even potential future liabilities. Investors want to know that the companies they believe in have taken action to secure their bottom line, protecting their psychedelic investment and the future of the company itself. Insurance coverage is perhaps an unexciting task, but one that punches above its weight in terms of increasing investor confidence and facilitating business growth.

It takes a lot to attract investor attention in the psychedelic space, but innovative entrepreneurs know — this industry is one with massive potential to change the world as we know it over the course of the next several decades. Setting your company up for long-term success is no small task, but it’s also not one you need to try to do alone. Partners who understand the psychedelic industry and what it takes to succeed can help you protect your company long-term.

Protecting your psychedelics company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by email [email protected] or calling 646-854-1093 for a customized letter or learning more about your psychedelics insurance options.