EXCLUSIVE: Insider's Peek At Mammoth Of Psychedelics VCs, Palo Santo's Investment Fundamentals & Specificities

(Part one of a four-part series)

Daniel Goldberg and Tim Schlidt are co-founders and partners behind Palo Santo, one of the most remarkable VC funds investing in psychedelics today. The company recently closed a capital round of $50 million for investment in a diverse portfolio of psychedelic medicines and therapy businesses across biopharma, drug development, digital therapeutics, healthcare services and tech-enabled solutions.

Launched a year-and-a-half ago, the Palo Santo Fund is invested in over 20 portfolio companies across the psychedelic ecosystem including Beckley Psytech, Tactogen, Bexson Biomedical, Ksana Health, Gilgamesh Pharmaceuticals, Delix Therapeutics, Journey Clinical and Fluence. 

With reportedly nearly 50% of it still available to deploy, the founders say they are well-positioned to put the money to work in a more favorable investment environment while fostering innovation in the mental health field.

In addition to Schlidt’s prior knowledge in the life sciences and healthcare services sectors and Goldberg’s as an investor, Palo Santo has an extensive expert advisory board composed of Drs. Charles D. Nichols, John D. McCorvy, Julie Holland, John F. Greden, Stephen Wright, Gretchen Temeles and David Sherman.

As anyone working in financing companies knows, schedules and agendas can be hectic. Nonetheless, Schlidt took some time to participate in the psychedelics public sphere with a presentation at the Horizons PBC conference and the upcoming Wonderland.

Benzinga had the good fortune to speak with both Palo Santo founders on what the present and future of the psychedelics space might hold for those already in it and those interested in participating.  

Psychedelics Investment Fundamentals & Specificities

First, a bit of context regarding the psychedelics investment landscape as a sector in itself. According to Schlidt, many of the opportunities they've seen emerge over the past few years have been largely biotech plays.

Less than two years ago, the space was in its infancy, overlooked by institutional investors and the mainstream with an ongoing residual stigma. “The space now is getting more traction than anyone thought, this really does seem to be a movement. And like other de-stigmatization waves, these go way quicker than people in the mainstream anticipate. I think this is just another proof point that psychedelics will be a mainstream psychiatric offering in the future,” Schlidt said.

When comparing psychedelics to cannabis investments, the first distinction is that the latter is more recreational –at least at the moment. In terms of business models, they're also different. “GPC, brands, brick and mortar establishments, MSOs are very much in vogue,” noted Schlidt. For cannabis, while in the biotech universe companies will be pre-revenue for quite a few years, given their drug development stage.

More upfront investment, but a potentially smashing success: if a compound is successful and the company holds a strong IP to it -that is, the effective monopoly power over the approved drug for some time before it goes generic-, that’s where great returns can be achieved.

“I’d say biotech is sort of its own beast, in a lot of ways. The way we evaluate opportunities is much more milestone-driven and data-driven in the absence of any financials. Of course, there’s a market sizing piece in terms of how of an opportunity you think a compound will be on the backend, but the way we make those assessments is very different, certainly from cannabis," explained Schlidt. "I can extrapolate that to many other industries where you sort of see proof-of-concept more from a financial standpoint earlier on, while our proof of concept will be generating on human data.”

Goldberg added that while other markets focus on location, with psychedelics it’s all about science. “The difference is, with psychedelics we’re starting with the science and the likely chances that these compounds are gonna be approved by the FDA, primarily for mental health indications right now, but what’s really fascinating about the psychedelics space and cannabis is far behind in terms of the science, is that ironically there are a lot of non-psychiatric indications as well that are being explored that don’t make it into the media so much.” 

The co-founder mentioned Charles Nichols’ work on discovering the anti-inflammatory properties of psychedelics, which he believes could lead to other advancements in turn. But, he admits, it’s early for that. “We know that certain psychedelics work for mental health –MDMA does treat PTSD-, and that’s a very biotech approach,” said Goldberg

“It’s not buying edibles in a dispensary to self-medicate. It’s getting a prescription from a doctor. And while it may not sound so sexy, it opens up a much bigger market of people that don’t want to fly somewhere to have an experience with a ‘mushroom teacher,’ this is coming from a medical, Western system, and hopefully, one day reimbursed by insurance. That’s the ultimate goal when these medicines become part of the standard of care, a situation we don’t think we’re far off from, for some,” Goldberg concluded.

How To Read And Act Upon Negative Results

One of the first, big investments Palo Santo decided upon to build their concept portfolio was Gilgamesh, then a seed investment and now a solid psychedelics company, Bexson Biomedical, which the co-founders were drawn to by its non-psychiatric use case model, Eleusis and Tactogen. All of these bets made between June and August 2020 have, says Schlidt, performed very well as the companies achieved milestones as investments provided early-movers advantages.

The fund has been fortunate with the exception of one early-stage case. Nor has it  experienced any major failures in its psychedelics business investments. In the case of an issue with a development pipeline comprising a sole compound, they would evaluate why the failure occurred, always recalling that drug development can produce a binary outcome.

A failure point on a drug can be a killer, at least around that indication. Occasionally, drugs can be repurposed and other indications can be evaluated. But, in Schlidt’s words, “there’s always that big decision...do you want to do an even larger investment into other indications?”

One way to de-risk that is to have a multi-asset pipeline, so that one failure point won’t pull down the entire company. But Schlidt believes that's the beauty of having a diversified approach.

“We know in venture that there will be failures, that’s just the nature of venture whether it’s impact or biotech. The bet on the space, when you look at the size of the antidepressant market or a variety of other markets around neuropsychiatric medications, if those can be subverted, and we think they can be since the standard of care is so lacking, we do think whoever hits it big will hit it really big in psychedelics.” 

Goldberg added: “I think the biggest part is, zooming out, we’re a fund and being diversified over a broad range of companies that are targeting different indications –psychiatric, non-psychiatric. They’re at different stages, with different risk profiles as regards IP. That’s really the key to the answer: failing one vs. failing internally in the company, that’s different. It’s a diversified portfolio, which I think is gonna be part of the key in the long term.”

Photo courtesy of Pexels.

Next up: EXCLUSIVE Insider’s Peek At The Mammoth Of Psychedelics VCs, Palo Santo: Public Market Valuations & The Private Investment Space