A few years ago, if you brought up the word "psychedelic" to me in conversation, well I'm sorry, you were bound to get hit with a simply awful Austin Powers impression in return (forgive me, I'm from the 1990's).
Grooviest stock image
As someone in the law and venture eco-system however, I've been observing the evolution of psychedelics as a product category with great interest. Before my eyes, it switched gears from prohibition to regulation to a future of commercialization.
Its potential crystallized for me when I saw that psychedelic wellness company Mindmed had charted its way to public company status in Canada on the NEO Exchange, and during the Covid-19 pandemic no less. It had been preceded by an $8.5MM Series A raise from Field Trip Health and an $80MM Series B raise by Compass Pathways.
Venture capitalists, stock exchanges, pharmaceutical companies and government agencies are now lending momentum (and growth capital) to psychedelics as a therapeutic treatment for depression, addictions, anxieties and other applications that have the potential to impact millions of people worldwide.
And much like how Canada was home to the nascent, but subsequently explosive growth of the cannabis industry, might it soon be home to another stigmatized product that investors are just beginning to wrap their heads around?
That's something I wanted to write about.
What Are Psychedelics?
Psychedelics are drugs used to change and enhance sensory perceptions, thought processes and energy levels. The term "psychedelic" was coined by British psychiatrist Humphry Osmond (a friend of Aldous Huxley no less, of Brave New World acclaim) while he was working in Canada in the 1950s.
For decades, wellness was conceived only in terms of physical health. Industry and the public alike are now awakening to a more fulsome understanding of mental wellness. Here, psychedelics could play an expansive role.
Across Canada and the United States, psychedelics remain illegal. However, promising clinical trials at Johns Hopkins and New York University are exploring medical and therapeutic use cases for patients that have thus far revealed promising results.
In October 2019, the industry reached a zenith when the Food and Drug Administration granted the psychedelic drug psilocybin (found in mushrooms) "breakthrough therapy" status, which expedites the government's development and review process of the drug and its potential as a wide-spread therapeutic.
Half-baked fungi.
Investors and venture capital firms are beginning to take note, and the first wave of psychedelic companies are just now beginning to reach the public market.
On a webinar recently presented by Jos Schmitt, President & CEO of the NEO Exchange (one of the fastest growing stock exchanges in Canada), I listened as he took time to highlight his view on key success factors for would-be psychedelic companies.
I wanted to share some of his points, as well as provide some of my own commentary.
What's in a Business?
First off, the majority of the psychedelic community has yet to make contact with the world of venture capital. In order to build a company of scale, I believe that members of the industry will absolutely need to. Previously, I wrote a post on signing your first seed round.
Unlike a SaaS business, or other types of low capital intensive businesses, a credible psychedelic and bio-tech platform will require significant capital (for R&D investment, hiring scientists and medical professionals, and initiating clinical trials and other activities), as well as an investor base that not only provides capital but i) can add value to your outlook on an industry that has yet to emerge and ii) has the patience to see you through its evolution.
What this portends is a number of number of capital raising events for a would-be psychedelic company, each step evolving its platform in a number of ways:
An example of the road ahead
In light of the above, 3 key success factors were brought up on the webinar that I couldn't help but agree with.
First, wellness companies will need to spend time raising significant amounts of private capital to first build out critical "assets" far in advance of any public offering. These initial assets will include the initial team, funding for its research, intellectual property and the initiation of clinical trials with leading hospitals or universities. The result of any data, compounds or patents, and the team members that will credibly analyze and communicate these results, will form the backbone of any credible psychedelic company.
Indeed such trials were the genesis for MindMed's successful public listing.Your investor base will be the initial source of capital for these activities, and it will be essential to select investors in it for the long game (vs. quick wins).
Second, wellness companies will need to establish professional, legitimate and credible legal and corporate governance structures in order to attract investment. At the Series A stage and beyond, institutional investors will expect a high degree of professionalism in the corporate and legal governance of the organization.
Do you have sound financial reporting and accounting? An excel sheet tracking expenses won't do.
Do you have an audit committee? A credible independent board member/advisor?
An up-to-date capitalization table?
Are your key personnel employed by the firm? Are they under confidentiality or non-competes?
Are all shares properly created, transferred, vested and held by the appropriate parties?
Do shareholders have an up-to-date shareholders agreement?
Do the corporate minutes and resolutions record key events and transactions undertaken by the directors and officers?
In my experience, these are certainly things that can be fixed and patched as the company grows, but are so much easier (and cheaper) to address upfront with market-friendly documentation. Good governance will give investors the confidence to provide further growth equity, and ultimately set the company up for the more stringent governance requirements that stock exchanges will ultimately demand.
Lastly, wellness companies will need to identify the right advisors, who will be part of the team from incorporation through to IPO/exit, who will give clear advice towards capital raising and business strategy, and will not "over-sell" the company on quick wins. If there was something to be learned from the initial wave of cannabis industry growth, my impression is that there were a lot of transactionally-focused parties focusing on getting rich quick, even in situations where it didn't mesh with the best interests of the founders and management team.
Instead, seek advisors who have experience working with nascent companies, who have connections or capabilities in technology and life sciences, who will not look to extract maximum financial value from your business at an early-stage, and who have the courage to tell you how difficult the journey may be.
What's Next?
Canada is uniquely positioned to be a home market for businesses to evolve and flourish. The outlook is bright. In particular, there are several inherent advantages in Toronto that fit well with the industry:
An Abundance of Hospitals and Medical Research Centres: Hospitals and research facilities pack Toronto's University Avenue corridor (Mount Sinai, Toronto General Hospital, Toronto Rehabilitation Institute, Princess Margaret Cancer Centre, Hospital for Sick Children) and nearby areas (CAMH). The eco-system is lively as a hub for healthcare start-ups due to availability of partnerships, the chance to launch and contribute to clinical trials, and to hire and consult relevant professionals in medicine and research.
Active VC Investors, Angels, and "Cannabis" Industry Veterans: The seed and Series A/B eco-system is strong in Toronto. VC's and angels are active in seeking out good Canadian companies to grow. Moreover, we are a venture eco-system that has lived the rise of cannabis, and many good investors are familiar with the opportunities and tribulations that come with investing in a heavily regulated industry that needed time to evolve into commercialization.
Venture Friendly Stock Exchanges (NEO, CSE, TSX-V): Other than the TSX exchange, Toronto is home to the NEO, CSE and TSX-V exchanges that have more venture friendly listing requirements for when companies do decide to go public. Moreover, there are many different avenues to list, whether that is being acquired by a public traded capital-pool company (paired with a private placement of shares), via a reverse-takeover listing, or a traditional IPO listing. Factors that advisors can discuss in more detail include disclosure requirements, timing, cost, complexity, marketing rules and certainty of closing.
Entrepreneurial Underwriters Who Are Willing to Lead the Charge (Canaccord, Eight Capital, Bloom Burton, Clarus): In the infancy of the cannabis boom, Big-5 Canadian banks were reluctant to participate in underwriting activities. However, smaller and leading mid-sized banks were eager and capable of jumping into the fray to represent early players. This will be the case for psychedelics as they gain momentum. Underwriters help place and market securities in your company, and raise capital via their wide retail and institutional investor base. As the company grows, finding the right bank to represent your business may be critical.
The industry is poised for growth. I'm curious to see what comes of it.
Scott
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