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“Like a pressure cooker, COVID blew the lid off what was a simmering mental health crisis for over a decade,” VC Tim Schlidt told TC.

According to the World Health Organization, the global prevalence of anxiety and depression increased by a massive 25% in the first year of the pandemic. And when available treatment options showed their limits, both the general public and regulators became more willing to look into alternatives – including psychedelics.

Previously relegated to underground communities and rave culture, drugs like ketamine, MDMA (commonly known as ecstasy) and psilocybin are now being studied to develop therapies to treat everything from PTSD to cluster headaches.

“Today, there are 400+ ketamine clinics in the U.S., and over $200m has been raised over the last two years to open even more,” Dina Burkitbayeva, founder of PsyMed Ventures, said. “Many of these clinics will be sites for MDMA- and psilocybin-assisted therapies, if they are approved, and treatments derived from other molecules as they become available.”

A more favorable regulatory and social landscape is helping psychedelic startups gain a foothold, but they still have to walk a tightrope that’s susceptible to the vagaries of market sentiment. “While there has been a lot of focus on mental health and the promise of psychedelics to be truly disruptive, not all the hype is warranted or justified. In fact, there are many investors who have been hurt by the early hype-driven public markets,” said Sa’ad Shah, managing partner of Noetic Fund.

Burkitbayeva, Shah, and Schlidt are three of the five investors we interviewed for this deep dive. Each of them has an investment thesis that strongly overlaps with applications of psychedelics.

Indeed, investor interest around psychedelic startups has mushroomed in recent years, attracting interest from generalist investors. But as public market sentiment fluctuates, specialized VCs seem more likely to stick around for the whole trip.

Ready for the trip? Meet our interviewees:

• Tim Schlidt, co-founder and partner, Palo Santo
• Ryan Zurrer, founder, Vine Ventures
• Dina Burkitbayeva, founder, PsyMed Ventures
• Clara Burtenshaw, partner, Neo Kuma Ventures
• Sa’ad Shah, managing partner, Noetic Fund

Tim Schlidt, co-founder and partner, Palo Santo

Which applications of psychedelics are you most excited about, both in mental health and outside of it?

Outside of depression, anxiety and PTSD (the standard mood disorders we see targeted by psychedelics), the application of psychedelics for OCD is quite compelling. Based on work out of Yale, there appears to be little to no psychotherapy needed, as severe manifestations of OCD appear to be more like a motor disorder than one with a psychological underpinning.

Additionally, psychedelics therapies for a range of substance use disorders are showing great promise. In particular, there has been compelling data around psilocybin for smoking cessation and even alcohol use disorder. While not considered a classic psychedelic, ibogaine has been effective in extirpating all symptoms of opioid use disorder after one session. So we are quite confident that psychedelics will emerge as effective therapies for treating a range of addictions.

Outside of mental health, I am most fascinated by the application of psychedelics for inflammatory disorders. Based on the seminal work of Charles Nichols, certain psychedelic compounds appear to be potently anti-inflammatory at very low doses.

Besides having broad applications across a range of inflammatory disorders, it also opens up a new mechanism underlying inflammatory pathways. Given how low the doses are required to be to achieve anti-inflammatory endpoints, the commercial viability of anti-inflammatories is dramatically higher, as they could be administered at subhallucinogenic doses.

Another field of inquiry outside mental health is neuropathic pain. We are seeing some exploration of psychedelics for fibromyalgia as well as uses for cluster headaches and migraines.

What are you more bullish about: Companies directly involved in developing and/or delivering psychedelics, or ancillary and infrastructure companies?

We are most excited by drug developers. We believe there are many shortcomings to current psychedelics, such as neurotoxicity, potential cardiac liability, inconsistent subjective experiences, and long durations. Next-generation drugs will improve on these qualities in order to make better, more commercially viable drugs.

Additionally, the IP around these opportunities will be far more defensible, as they will be new chemical entities (NCEs). Research on psychedelics was stalled for decades due to DEA scheduling, but capabilities in the fields of pharmacology and medicinal chemistry advanced significantly during this “dark age.” As these molecules begin to see light again, we look forward to modern techniques being applied to produce drugs that have not changed much since the 1960s.

Most ancillary services and technology will not take off until drugs commercialize, so we see few near-term opportunities in other verticals anyway. Additionally, are skeptic of why certain tech has to be “psychedelic.” For example, there is little to nothing about EMR/EHR, or clinic management software, that needs to be retrofitted for psychedelic therapies, and we foresee large incumbents such as an AdvancedMD being able to expand existing offerings into the psychedelic space.

One piece of tech we do find quite compelling is patient data capture, or what is often called “digital phenotyping.” While the applications of this can be beyond psychedelic therapies, we think companies like Ksana will have a formidable presence in clinical trials and post-market surveillance to track a range of outcomes for psychedelic therapies.

Can you talk about the impact of the pandemic on market prospects for psychedelic startups?

Like a pressure cooker, COVID blew the lid off what was a simmering mental health crisis for over a decade. Isolation and uncertainty dramatically increased patient population sizes across a range of mood disorders — data suggests ailments such as depression or anxiety doubled or even tripled through COVID. Nurse PTSD as well as PTSD from domestic violence increased markedly through the pandemic.

Psychedelics are one of the rare cases where profit and impact work together synergistically. The large number of patients with mood disorders is indicative of a true humanitarian crisis that psychedelics hold the promise of addressing.

Additionally, these large addressable markets present a business opportunity for investors who previously ignored investment in central nervous system disorders for decades.

Are regulatory or public sentiment issues a greater obstacle for psychedelic companies today?

I’d say regulatory, as these have to go through an FDA approval process. So that is the main hurdle psychedelic drugs will have to face. In large part, their advancement will be agnostic of public sentiment.

R&D-driven psychedelic companies usually need a lot of capital and tend to IPO early. Has the volatile climate for listed companies and public exits affected such companies more?

To a degree, yes. We believe we will see a wash out of poorly capitalized companies that are primarily listed on Canadian stock exchanges. That said, we have seen most high-quality opportunities stay private, as they are able to fundraise in private markets and do not need to prematurely list.

Current market conditions have certainly extended the runway required to achieve an IPO, but we are hopeful that upon achievement of Phase 2 readouts, companies will be able to publicly list, given how much a Phase 2 study de-risks an investment.

The positive effect is that public markets have had a downstream effect of making private valuations much more reasonable than in 2021. With 55% of our fund left to deploy, we are quite eager to put money to work in this new environment.

Has M&A appetite evolved in recent months?

We have begun to see Big Pharma showing some interest in psychedelics, with Otsuka the most notable player to make investments in the space (Compass Pathways and Mindset Pharma). While no major M&A has occurred, we do think we will see large acquisitions once select drugs with strong IP achieve Phase 2 readouts.

Cannabinoid biotech offers some glimmers of what could occur in psychedelics, with Jazz Pharma acquiring GW Pharma for $7.2 billion, and Pfizer buying Arena Pharma for $6.7 billion in part due to their cannabinoid portfolios.

We believe appetite has evolved — psychedelic drug discovery businesses are now on Big Pharma’s radar and will begin to be a more frequent topic of discussion in business development meetings at large pharmaceutical companies. We’ll likely start seeing M&A activity pick up in 2026 as a range of compounds advance into the clinic.

What are the characteristics a founding team must have before you’d consider backing them?

We seek teams that have deep biotech experience, with pedigrees comprising successful IND and NDA filings with the FDA. Furthermore, experience within central nervous system disorders and navigating the FDA’s psychiatric and neurological divisions is a requirement. Years of research and understanding around the mechanism underlying classic psychedelics at the 5-HT2A receptor, or at minimum, background in research around the serotonin system helps a lot, too.

Should founders expect to meet you in person before you invest?

Not necessarily, but meeting in person does help. When we are leading a deal and taking a sizable stake, in-person meetings are of much greater importance. Venture partnerships last longer than many marriages, so it is important to meet and ensure it is a good match.

Ryan Zurrer, founder, Vine Ventures

Which applications of psychedelics are you most excited about, both in mental health and outside of it?