Venture capital fund Palo Santo is closing its oversubscribed debut fund with $50 million of commitments in what the two-year-old firm describes as the largest pure-play venture capital pool dedicated to developing FDA-approved psychedelic drugs, MarketWatch has learned.
While $50 million would be considered a smaller-sized venture capital fund compared to others in the broad technology or biotech sectors, Palo Alto is playing in a tiny industry thus far.
But with MDMA, also known as Molly or ecstasy, as well as magic mushrooms, or psilocybin, gaining traction as a potential medicine, Palo Santo sees an opportunity to back development of new medicines.
“This is becoming a biotech business [and] it needs to take a sophisticated, life sciences approach to make sure these compounds get through the FDA and hopefully reimbursed by insurance,” Daniel Goldberg, co-founder and partner at Palo Santo, told MarketWatch. “It’s been crucial that we’re playing in that sandbox.”
Goldberg said he’s benefitted from MDMA to treat his post-traumatic stress from living in the community exposed to the bloodshed in the July, 2021, Highland Park Shooting in Illinois that killed seven and wounded 30 people.
“I was lucky to have access and to be able to work with psychedelics and it was helpful,” Goldberg said. “It made me realize that we have to move this along as fast as possible. Our work is…making sure we get medicines that can help people and are safe and make them accessible. It’s a great thing for a lot of people but it’s not regulated.”
The firm raised the majority of its $50 million debut fund prior to the financial markets downturn of 2022, but it drew in about 40% of the fund this year. Palo Santo has already deployed $25 million of the fund in in 20 core portfolio companies including Tactogen, Beckley Psytech, Bexson Biomedical, Delix Therapeutics, Fluence, Ksana Health, Gilgamesh Pharmaceuticals, and Journey Clinical.
Valuations of target companies got richer in 2021 amid bullish private market conditions and as other firms saw the positive research. While some institutional investors threw money at the sector, some of the companies that won funding weren’t ready to grow successfully.
“We’re proud to have taken passes on companies that are now penny stocks,” Goldberg said. “We can show investors not only are we doing well in a very tough market, we’ve also avoided disasters from a frothy market.”
Goldberg traced his interest in the field to about five years ago when he attended a lecture by Michael Pollan, author of “How to Change Your Mind”. He realized there was a deep bench of scientists and researchers working to achieve wider acceptance and use of psychedelics to treat addiction, depression, PTSD and other ills, but with little ethical or scalable investment in the space.
“We thought we stumbled upon a real secret,” said Goldberg, who decided to bring to bear his experience to the budding space as co-founder and principal of Bridge Venture Fund and Bridge Investments since 1998.
For his part, Tim Schlidt, co-founder and partner at Palo Santo, had been doing life sciences and healthcare services work at private equity firm Madison Dearborn partners and noticed favorable academic studies on psychedelics at Johns Hopkins and other places as well, starting about four years ago and started talking to his friend Goldberg about it.
“When we looked at the data, we said, ‘This is a game changer’,” Schlidt said. “That began a long exploration of meeting people and getting to know the academics. We saw the COVID-19 pandemic as a mental illness wave. That’s panned out and you’re seeing a renewed focus on mental health care.”
Unlike anti-depressants and other medications that patients must take every day, MDMA has been proposed as a vehicle for a fixed set of therapy sessions with trained professionals in the room.
Multidisciplinary Association for Psychedelic Studies, or MAPS, has been conducting Phase 3 trials of MDMA, which may be out in the market for therapeutic uses by 2024 or 2025. MAPS data has shown that 67% of participants no longer have PTSD after three sessions in the Phase 3 trials.
Besides the founder’s combined pool of experience in private equity and venture capital, its roster of advisors including Charles D. Nichols, John D. McCorvy, Dr. Julie Holland, Dr. John F. Greden, and Dr. Stephen Wright, Gretchen Temeles and David Sherman.
Nichols is a professor at the LSU School of Medicine who has conducted research and given speeches on on psychedelic medicine and Holland is a medical advisor on clinical studies on MDMA-assisted psychotherapy for treatment of post traumatic stress disorder and an advisor to MAPS.
“A big differentiator was having Chuck Nichols, Julie Holland and our other advisors, so we carved out a name for ourselves as a validator in the space,” Schlidt said.
Palo Santo is closing its fund amid healthy activity in the psychedelic drug space.
The FDA under the Biden administration has fast-tracked MDMA treatment for potential approval. MAPS continues to conduct Phase 3 trials for the medicine.
While psilocybin (psychedelic mushrooms) are becoming legal for adult use consumers in states such as Oregon, Palo Santo is focused on treatments approved by the FDA that can then tap the existing distribution ecosystem for government-approved, regulated medicines.
Small cap company MindMed
has held a Phase 2 placebo-controlled, investigator-initiated trial of LSD as a treatment for anxiety and and published a paper on the study in the peer-reviewed Biological Psychiatry.
MindMed has received backing from Jake Freeman, a 20-year-old investor who made $110 million by purchasing shares of Meme stock Bed, Bath & Beyond
over the summer.