A magical journey: how we raised $260m for ‘magic mushrooms’
Reflections from the private (and public) fundraising frontlines at a start-up investigating the use of psychedelics (like psilocybin, an active ingredient in so-called ‘magic mushrooms’) to transform mental health care at scale.
Until October last year, I was VP of Operations at COMPASS Pathways, a mental health care company dedicated to accelerating patient access to evidence-based innovation. As part of my role, I spent a significant amount of time raising capital from private and so-called ‘crossover’ private-public investors. The company currently focuses on developing psilocybin (an active ingredient in so-called ‘magic mushrooms’) therapy for the 100 million patients worldwide who suffer with treatment-resistant depression. The team is working hard to answer long-held scientific and business questions that matter to patients, their loved ones, and health systems. One question summons the team’s efforts: Is psilocybin therapy a safe, efficacious, and cost-effective option for patients who suffer with depression and other mental health illnesses?
To answer this question, the company is running the world’s largest government-sanctioned clinical trial in psychedelic research, with over 20 sites in North America and Europe. Funding this and other studies requires significant capital, which is typical in life sciences. This article retraces the recent (2017–2020) evolution of the fundraising environment for companies in the psychedelics research space. Since 2017, raising money for serious psychedelics research was, in turn: hard at first, then easier, and now getting competitive again. In this period, our team raised more than $260m over three private funding rounds and a public listing. We did this by sticking to the scientific evidence and achieving significant milestones quickly. Eventually, this was key to getting through to some of the world’s best-performing life sciences investors. Last year, we closed our Series B of $80m and raised $146m in a Nasdaq IPO (ticker CMPS), in the midst of the current health and economic crisis.
2017–2018: The Grind
Like other psychedelics, psilocybin can have a profound — ‘magical’, some would say — impact on patients who suffer with mental health illness. This is no longer the product of long-standing anecdotal evidence. A myriad of clinical trials has shown impressive early-stage signals, at renowned research universities such as Johns Hopkins University (2016), New York University (2016), and Imperial College London (2016, 2017). Mental health is also an area of high unmet medical need. This level of evidence, as well as the overall safety of the substance, would typically attract significant interest from investment funds focused on life sciences innovation.
Au contraire. In the early days, our company and others were generally not able to get ‘traditional’ investors over the line. Ahead of closing our Series A, we had constructive pitch meetings with more than 150 such institutional investors and corporate venture arms of pharmaceutical companies, in the US and Europe. Ultimately, all but one passed on the opportunity due to concerns broadly categorized around 3 areas:
- Nature of the substance: Some investors simply cannot invest in research with substances that are illicit recreational drugs. Their agreements with their own funders (or limited partners, LPs) exclude investments in ‘drugs and alcohol’. This is the case, for example, of many funds who count Middle Eastern Sovereign Wealth Funds as LPs. (Side note: as someone with Middle Eastern origins, that put a sad end to dreams of involving regional investors.) Other investors prefer not being associated with scheduled substances due to reputational or perceived regulatory risk.
- Business model: Psilocybin isn’t administered in a one-pill-a-day model. It is taken episodically (one or a few doses) alongside psychological support. This means a relatively more complex business model, which most funds aren’t used to. If psilocybin gets approval from the FDA and other pharmaceutical Regulators, companies developing it and other substances like it will have to work with health systems to create new treatment pathways. This creates scalability challenges that scared away several funds, which focus on ‘plain vanilla’ small-molecule innovation.
- Intellectual Property (IP): As psilocybin is a natural compound with a significant history, defensible IP has to be earned to protect innovation and incentivize the significant investments required. Though these concerns could be dealt with through technical due diligence of our approach, it was outside of the wheelhouse of several non-specialist investment teams. Funds were used to invest in companies with a more ‘typical’ IP position.
For our Seed Round, co-founders counted on the enthusiasm (or foresight?) of successful entrepreneurs-investors such as Christian Angermayer and Peter Thiel. Similarly, they and high-net-worth families (and one Italian healthcare fund) invested in our Series A of $35m. We are grateful for their belief in our approach, often buoyed by a personal connection with mental health suffering in their communities and experience with the shortcomings of the currently available treatments.
2019–2020: The Age of Reason
A confluence of external and internal factors enabled us and other companies to assuage investor concerns and turbocharge our ability to raise money for important research activities.
- [external] Nature of the substance: In May 2018, Michael Pollan published How to Change Your Mind. The book rehashes the history of psychedelic drugs, the recent resurgence in research in the field, and his own personal experiences when taking them. Across the US, efforts to legalize/decriminalize psychedelics were also making headway. Other macro-economic trends were also at play, including the West’s mental health crisis and an increasing number of reputable researchers starting to speak up. Psilocybin’s potential to demonstrate substantial improvement over available therapies in depression was eventually acknowledged by the FDA, who awarded our company its Breakthrough Therapy designation in late 2018 (and another company the following year). This brought the potential of psychedelics in mental health to the forefront and sparked inbound interest from many funds — some of which we had unsuccessfully pitched to a year prior.
- [external+internal] Business model: Our team continued to make progress towards showing that a sustainable business model is feasible with psychedelics. This is thanks to the large potential therapeutic benefit that patients can attain from just one or a few sessions. The health system equation is complex. However, once confirmed by late-stage clinical trials, patient improvements in well-being and reduced healthcare resource utilization could support the successful commercialization of psychedelics. Efforts by other teams such as MAPS have been and continue to be instrumental in driving that message home.
- [internal] IP: We have made significant headway in educating investors about our speciality pharma approach. This is similar to that of GW Pharma, who successfully commercialized Epidiolex (a drug product based on CBD, a cannabinoid in the cannabis plant) and was recently acquired by Jazz Pharma. We also obtained our first patent from the US patent office at the end of 2019.
Needless to say, our investor discussions in the latter half of 2019 were increasingly promising. Some of the world’s best-performing life sciences funds were now paying close attention to the psychedelics research field.
2020+: The Psychedelics Wild West
Over the last year, investor interest meant the number of teams working on the emerging psychedelics ‘value chain’ increased multifold. This significantly increases the potential for success for the field as a whole. It is worthwhile noting that the use of medical cannabis participated in making psychedelics more mainstream. Indeed, some cannabis investors showed an early interest in opportunities in the psychedelics space. In the short-term, though, there is more competition for investor dollars. Public databases (such as Fraqtal’s) now keep track of actors in this Wild West. Newsletters (such as Psychedelics Finance) report on recent developments.
Institutional investors are now excited to invest in psychedelics. In the first half of the year, we closed an oversubscribed Series B, raising $80m from a remarkable set of specialist investors:
- Existing investors, such as atai Life Sciences;
- New institutional investors, including Founders Fund, Able Partners, Catalio Partners, Perceptive Advisors, Skyviews Life Science, and Soleus Capital; and
- A pharmaceutical strategic: the McQuade Center for Strategic Research and Development, a member of the global Otsuka family of pharmaceutical companies.
We then followed in the footsteps of many life sciences companies and listed on the Nasdaq in New York. In a quick process culminating in a four-day all-virtual roadshow, we raised $146m in a significantly oversubscribed initial public offering. Coincidentally, the IPO was completed on my third birthday at the company. We were fortunate to add several long-term life sciences investors such as OrbiMed, RA Capital and others. We also welcomed interest from retail investors, who until then did not have alternative investment opportunities in the psychedelics research space other than companies that had listed on Canadian exchanges such as the TSX.
With these funds, the team will be able to further the development of psilocybin therapy as well as other innovative therapies. In the current health and economic climate, the team was especially grateful for the opportunity to secure the company’s activities for years to come. The timeliness of its vision certainly helped, with the COVID-19 pandemic further exacerbating our need for novel approaches towards mental well-being.
Recently after our IPO, I left COMPASS to start a new life sciences venture. I am grateful for the opportunity to have helped shape the early trajectory of COMPASS over its first few years. I am excited to build new companies for patients over the years to come.
This article is part of a series about my work, sharing insights into the intersection between scientific innovation and business enterprise, in this mushrooming space (pun intended) and others. The views I express are my own and do not represent those of COMPASS as a company.
