From a market capitalization standpoint, cannabis companies are a gateway drug for many investors who are more recently seeking higher returns in psychedelics.
Individual and family office investors who rode up early cannabis booms are steadily reallocating the capital to a psychedelic sector that is not as great an unknown as its reputation belies. The Food and Drug Administration, for instance, has a lot more research on the impacts of psilocybin (mushrooms), MDMA (ecstasy/molly) and Ketamine (Special K) on our bodies and minds than it has on cannabis.
Longtime technology and consumer products investor Daniel Goldberg recently co-founded the Chicago-based Palo Santo investment fund to focus on companies developing medical treatments and therapeutic delivery systems predicated on psychedelic medicine. To date, the fund has raised $35 million in capital and has invested in more than 20 companies.
Goldberg, who is co-hosting a virtual gathering on October 14 titled The End in Mind to discuss the future of psychedelics, recently spoke with Grown In about his personal and professional motivations for psychedelic investments, doing due diligence in this new drug space, and why universities are out of their minds if they don’t seek federal funding for research projects.
This interview was edited for grammar and clarity.
Grown In: What economic and societal factors inspired you and your partners to launch a fund exclusively focused on psychedelic therapeutics?
Daniel Goldberg: We like to think of ourselves as investing across the psychedelic ecosystem. Right now that ecosystem is primarily drug development.
When I got into this industry right around four years ago, my partner Tim Schlidt and I had no clue how fast things would move. We were very fortunate with our timing and the seeds we planted.
It started with a personal exploration after I read Michael Polan’s book How to Change Your Mind. This was a major catalyst for somebody like me who had no experience with psychedelics at the time. Reading the first chapter of Polan’s book, I began to realize that everything I thought I knew about drugs was wrong.
I was fortunate to meet someone from the underground movement who was an experienced guide who I felt comfortable going forward with after not trying any of these things in the first 46 years of my life. From a mental health perspective, I began seeing mental health as part of a spectrum and not something that needs to be so pathologized.
Three and a half years ago I had my first experience with psychedelics and it was life changing. Shortly thereafter I was in New York for a conference, unrelated to psychedelics, and I noticed a few days later there happened to be a psychedelics conference that was taking place. We can get into the coincidental and the mystical, I don’t know, but I sure wasn’t going to miss that opportunity. This was probably a week or two after my first experience and I was so open.
My feeling at the time was this was an amazing movement, the research was very clear and the people behind the movement were very inspiring. There were not a lot of business people at the conference. I was hiding my business card, and didn’t want to be perceived as injecting capitalism into the movement and being perceived as a white patriarch.
I originally thought I would be supporting the space with philanthropy, but when I looked at what was going on, I was intrigued with the inefficiency of how capital was flowing into clinical opportunities. We took a scientific-based approach to investing in psychedelics.
Grown In: Compare the due diligence process, including assessing management, market, and product, in psychedelics compared to technology, consumer products, and other sectors where you’ve invested.
Daniel Goldberg: There are incredibly different processes for most of our companies. Maybe there is a 20 percent overlap, in terms of due diligence, with companies in other sectors where we invest in terms of looking at and better understanding their technology and services.
At Palo Santo we made a very concerted effort to put together an advisory board that was going to have a very meaningful role in the fund. There are a lot of fancy names and celebrities in the space on investment decks. We knew to be successful that we would have to have a lot of scientific-based partners that have equity in the fund and are part of our team. We wanted to wait to announce what Palo Santo was about until we had that core team.
It started with Charles Nichols of LSU, who is one of the OGs of psychedelic science and one of the leading researchers in the space. Then we added Julie Holland in New York who has been very involved in maps and the psychedelic movement in general.
It started with having Chuck and Julie really helping us vet the science behind these deals. There are a lot of late-stage companies in the space that are sexy brand names that are going public soon with frothy valuations. And there are a lot of early-stage companies with preclinical assets out there that aren’t getting the same attention. So it starts with science. Management team is a huge factor as well.
The other component is access to downstream capital. With psychedelics, there is going to be a reckoning. A lot of these companies that are going to get early funding because of the hype around psychedelics are going to struggle when their milestones are not being hit quite as early and often. You need to raise $100 million to $200 million for clinical trials in order to be able to fund these opportunities, so that can be an issue.
We also look at diversifying our portfolio over a range of compounds and indications. By compound we are saying psilocybin, ketamine, MDMA and are looking at a lot of second and third generation psychedelics. By indications, we are looking at the treatment of depression as a major market, but we are also looking at the central nervous system disorders including Alzheimer’s, and Parkinson’s.
Grown In: Identify the biggest regulatory barriers today from the federal and municipal levers prohibiting research of therapeutic psychedelics.
Daniel Goldberg: We’ve been incredibly lucky in psychedelics as the FDA has been incredibly accommodating. There is a chance for psychedelics to almost leapfrog cannabis on the regulatory side, which is crazy. I’m all for it and support both cannabis and psychedelics, it doesn’t need to be one or the other.
It appears that psychedelics are benefiting from a medicalization approach. When I say medicalization versus legalization, we’re really looking at these drugs and compounds becoming legal through the federal and FDA route. That does not at all discount them from becoming legal through the legalization route, and we fully support all of these city, state, county, national and international efforts to legalize psychedelics.
In our original investor deck we didn’t want to mention legalization because we thought it was completely speculative. We completely underestimated that. There are a lot of legalization efforts going on state-by-state. We are not dependent on that for a fund. We are looking at getting specific drugs for specific indications as we think that will create the widest range. We believe the drugs being developed right now are much more effective than the current slate of depression drugs and other things being developed.
We are seeing the FDA being very supportive with this breakthrough status they are giving MDMA and psilocybin, Ketomine is already legal. This is one area where regulation seems to be following the science.
Grown In: Correct me if I’m wrong, but isn’t there institutional memory in the FDA as it relates to psychedelics as it was researched for decades prior to Timothy Leary, the Acid Tests and other counter-cultural movements of the 60’s that spooked the government?
Daniel Goldberg: That is true. Psychedelics are much farther along in these trials for a lot of reasons. The safety profile is incredibly high for classic psychedelics like psilocybin and LSD. The FDA does recognize that. So, you do have a situation where you can very often fast forward to clinical trials if a compound is deemed to be safe. Nobody is making the argument that psilocybin has physiological danger. MDMA was a drug that was legal for a long time and studied pretty widely.
You also have the cultural aspect, people are more open-minded. This was impacted a lot by cannabis. There is not a doctor in the world who will tell you if you have cancer not to take edibles. Seven years ago you might have a tough time finding an oncologist that would advise you to take them for comfort. I think mushrooms kind of fit here too, because people see them as touchy-feely and natural. And that helps on the PR front.
Grown In: Do you foresee a market for recreational psychedelics?
Daniel Goldberg: What we are doing is not a trojan horse for rec. We are well positioned if there is a recreational market. People are beginning to read more about psychedelics and are realizing things like if you find out your kid took mushrooms in college, that it’s safer than doing 18 shots of vodka the morning of a football game.
But we are not focused on the rec market. We will have a few different tiers. We primarily pursue the medical market, which also includes drug-assisted therapy.
In 2-to-3 years we are looking at MDMA to be legalized, and it is very safe to use under supervision. This might be more akin to getting a prescription to Xanax or other things for general anxiety disorder.
We will have another market for the betterment of well people as Michael Pollan describes in his books, and this will be retreat centers and clinics. You will be able to go to Oregon in a year to legally mushroom through assisted therapy.
Mental health grabs a lot of headlines, but there is a lot of interesting research with Parkinsons, anti-inflammatory and other conditions. This is where the FDA says you are getting away from a story where you are just taking a seven hour trip .
Grown In: You are from Highland Park, Illinois, not Haight and Ashbury. Are there specific Midwest-based portfolio companies or innovations you can discuss?
Daniel Goldberg: We are a bit of a big fish in a small pond. The pockets are much more developed in California, Boston, Boulder, and Oregon.
In the Midwest, the research going on here is tremendous. You are starting to get universities, and we are kind of surrounded here. The University of Wisconsin recently on the front page of their alumni magazine talked about the launch of their psychedelics center. Two people on our board are from the University of Michigan.
There is not much going on in Chicago aside from Palo Santo and Wesana. I think Chicago will be like technology 10 or 15 years ago, we will catch up very quickly. I don’t think Northwestern, the University of Chicago, and the University of Illinois will want to be behind in this space because they can get funded.