“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.

In Pot’s Footsteps
As with marijuana, there’s already a thriving black market for psychedelics that speaks to their popularity. And attitudes are changing, thanks in part to Michael Pollan’s 2018 book on micro-dosing and a designation from the Food and Drug Administration the same year that fast-tracked a psilocybin-based treatment for depression from Compass Pathways based on preliminary clinical evidence. Investors noticed. When Compass, also backed by Thiel, went public this September, its shares jumped 71% in the first day of trading.

Another similarity: Dozens of psychedelics companies have gone public just like early cannabis companies did -- in Canada using reverse takeovers, mostly of mining companies. Around 25 companies on the Canadian Stock Exchange are in the psychedelics business, according to the exchange. While such substances are federally illegal in Canada, companies can seek government authority for research, and a recent citizen’s petition has called to decriminalize so-called “entheogenic” or spiritual, plants and fungi, citing their potential for therapy and personal growth.

While cannabis is chasing widespread recreational use -- a path that hinges more on changes to the federal laws -- the narrower medical path that most psychedelics companies are taking makes investing in them more like investing in biotech, said Simeon Schnapper. His JLS Fund has invested around $10 million in 12 psychedelics companies and is currently raising another $50 million.

The long history of indigenous and black market use make it easier to predict success compared to novel drugs, he said. “Sometimes there’s a drug where indigenous forest cultures have been using it for centuries. We know these molecules can work. We just need to get them through FDA trials.”

Schedule 1
So far, there haven’t been any high-profile investor run-ins with the law, though companies continue to warn in registration statements about the risks of being in a federally illegal industry. For example, even if a drug like psilocybin wins FDA approval for use in a certain drug, the DEA would still need to “deschedule” or “reschedule” it, removing it from Schedule 1 under the Controlled Substances Act, for it to be commercially marketed.

The long history of psychedelics also means intellectual property needs to be scrutinized. Investors in the space caution about companies that are all smoke and mirrors, and say it may take the discovery of novel molecules, synthetically derived hallucinogens or other creative business models for companies to distinguish themselves in a field dominated by natural products -- which can’t be directly patented.

Meanwhile, hopes for medical breakthroughs are high. Whereas cannabis aims to treat things like depression, addiction, anxiety and PTSD, psychedelics investors say many substances show the promise of actually curing them by resetting the brain -- with some claiming it takes a single use. Research at universities like Johns Hopkins University, Imperial College London and King’s College London have created excitement around such prospects for a range of drugs -- like ketamine, a horse tranquilizer that’s now legally prescribed off-label at some U.S. and German clinics; MDMA, also known as Ecstasy or Molly; and 5-MEO, which is found in plants, and the Sonoran Desert toad.

“The possibilities for psychedelics to be a new medicine and replace antidepressants is 100 times greater than cannabis,” said JLS Fund’s Schnapper.