Psychedelics Replace Pot as the New Favorite Edgy Investment

Cannabis is only on the cusp of many investors’ comfort zones, but the family offices and high-net-worth individuals hungry for early stage, edgy investments have already moved on to psychedelics.

Marijuana’s legal headway in recent years has paved the way for new interest in remedies typically relegated to the black market. Companies that work with drugs like psilocybin, an ingredient in magic mushrooms, or Ibogaine, used in ayahuasca-style ceremonies, are proliferating, with early-stage investors predicting such substances have an even better shot than cannabis at disrupting the $70 billion market for mental health. The question now is whether such aims bear out -- and in time to catch up with all the money flowing in.

“People see this potentially as a get-rich-quick mechanism, just like you saw in the early stages of cannabis,” said Sa’ad Shah, who runs Grey House Partners GP Inc.’s Noetic Fund, which has invested in more than a dozen psychedelics companies. While Shah’s background is in asset management, he said lots of VCs in the psychedelics space have recently come from marijuana. “They feel they don’t want to have another FOMO situation here,” he said, referring to a “fear of missing out,” like they did with early-stage cannabis plays.

The overlap between the two sectors is clear. Both involve substances that are federally illegal in the U.S. and in many other countries around the world, putting off most institutional investors and leaving the playing field to high-net worth individuals and family offices.

Yet there are also huge differences. Psychedelics, which can involve intense, side-effect-plagued trips, aren’t predicted to have the widespread recreational appeal of marijuana. And with all the talk about micro-dosing as a productivity-booster or mood-hack -- which has little to do with the narrow regulatory pathways these psychedelics startups are treading -- there’s a fear the market could see a bubble just like cannabis did.

Still, the regulatory landscape is shifting fast, giving investors with a higher tolerance for risk a new potential growth area.

Peter Thiel, the Facebook and PayPal investor, and David Bronner, chief executive of Dr. Bronner’s Magic Soaps, both of whom were known names early in marijuana, are two high-profile players in the hot-but-edgy realm of hallucinogenic drugs.

Psychedelics have just recently been decriminalized in a handful of U.S. cities and one state, putting it way behind cannabis, which is now available in some form in 35 states and potentially track for federal legalization under President-Elect Joe Biden. Denver and Oakland both decriminalized psilocybin in 2019, and Washington, D.C., decriminalized mushrooms and other plant-based drugs like mescaline and ibogaine in November’s election.

Such changes don’t make the drugs legal -- just the lowest level of priority for police enforcement. Oregon took it a step further, voting in November to legalize psilocybin -- but only in a therapeutic setting. Exact rules on what that entails have yet to be worked out.

For risk-friendly investors, it’s these very ambiguities that makes psychedelics attractive.

“For cannabis in North America, I think we’re a little bit late to the game. There are already a few strong cannabis fund managers,” said Bek Muslimov, a co-founding partner at London-based venture firm Leafy Tunnel.

Muslimov is building a portfolio of around 15 companies, investing only in seed and Series A rounds with a 50-50 split on psychedelic and cannabis firms. Current investments include Atai Life Sciences AG, backed by Thiel, and Synthesis, a psychedelic retreat in the Netherlands. Psilocybin mushrooms are illegal there, but a loophole means that the root of the plant -- known as a “truffle” -- can be used.

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