The bursting of the psychedelic therapy bubble was a long time coming. It’s been six years since the FDA declared psilocybin a “breakthrough therapy” for depression in 2018—a groundbreaking event that helped usher in a new era of psychedelic optimism. Sunny media coverage in leading publications like The New York Times touted psilocybin and MDMA as “the hottest new therapeutics since Prozac,” and academic institutions resumed psychedelic research after decades of a scientific moratorium. A nascent industry of startups flourished thanks to unbridled investor enthusiasm, but there was one small problem: Psychedelic therapy is not yet federally legal—and the future is rife with unknowns around how the market will unfold.
Yet, these uncertainties did not seem to slow the roll of companies rushing to gain an early market advantage: Psychedelics-focused biotech companies debuted on the stock market to multi-billion-dollar valuations. Training programs enrolled thousands of students eager to offer psychedelic therapy to future patients. Ketamine clinics resembling high-end spas sprouted up all over the country, some taking advantage of lax pandemic-era telehealth laws to make the treatments accessible to nearly anyone with a computer and credit card. It was a climate that seemed to reward bold and risky behavior—to the winner goes the spoils.
Then, with widespread fears of a recession casting a pallid squall on the economic horizon, the money spigot that had been flooding the space began to slow down, with total investments in psychedelics dropping from $1.8 billion in 2021 to $520 million in 2022, according to Psychedelic Alpha. Concerns began to build within the industry that popular perceptions of psychedelics’ therapeutic potential were overblown. Scientists called for caution while sounding the alarm that misinformation and conflicts of interests were eclipsing rigorous research; “my own optimism might prove to become part of the problem rather than the solution,” wrote top researcher Rosalind Watts in a Medium post.
Last March, the other shoe finally dropped. One after another, psychedelic companies started to contract or collapse. Cybin and Peter Thiel-backed Atai Life Sciences slashed their workforces by 15 and 30 percent respectively, citing the need to extend their cash runways in the face of hostile economic headwinds. Mindcure—a biotech company identifying and investigating psychedelics for mental health—shut down their operations entirely, while Silo Wellness—an Oregon-based company offering psilocybin retreats in Jamaica—temporarily suspended trading and went into debt restructuring. Even MindMed—a biopharmaceutical company that made headlines for its clinical research into LSD for depression—went from being a memestock in 2022 to reporting a net loss of $24.8 million for the first quarter this year, and is now facing a board coup. The timing of these implosions signaled something larger was going on: the frothy, early-stage psychedelics market was over, and the time had arrived for the industry’s sobering come-down.
Investors claim they anticipated this long-overdue market correction. “A shakeout was a long time coming,” says Daniel Goldberg, co-founder of psychedelic investment fund Palo Santo. “It’s a very complex thing that the psychedelic movement is trying to pull off, and it was looking a little too easy for too long.”
Part of the problem, a number of investors interviewed by DoubleBlind say, was that startups were getting indiscriminately bankrolled by investors eager to cash into the “shroom boom.”
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“You’d get a deck with an Amanita mushroom on the cover page, and somehow that company would raise money without a business model,” laughs Simeon Schnapper, managing partner of JLS Fund. “There was this Cannabis 2.0 mentality, where the presumption was, if you’re investing in psychedelics, you’re going to get some kind of return.”
Like Goldberg, Schnapper views the current downturn as a healthy counterbalance to previously overblown expectations. A model called the Gartner hype cycle, invented in 1995 by marketing analyst Jackie Fenn, has become a popular way for many psychedelic insiders to explain what’s going on: every new innovation has a life cycle, the theory goes. As excitement builds, expectations become inflated, surpassing the technology’s actual capacities at that moment. What follows is a collective drop into disillusionment, when investor interest wanes, companies go bust, and bad press abounds. This appears to be the stage that the industry is currently wallowing in. “The presumption was there would obviously be a contraction,” Goldberg adds. “But for psychedelics, that boom to bust happened so fast.”
A big reason why psychedelic startups are having a hard time raising capital is a wider downturn in the biotech market, insiders said. Biotech and life sciences companies are a major driving force behind psychedelic research, and these sectors have been experiencing widespread layoffs and shutdowns for the past two years. Developing a new drug for the market is a notoriously capital-intensive process, and the collapse last March of Silicon Valley Bank, the biotech sector’s lender-of-choice, marked the end of a biotech boom that followed the COVID-19 pandemic. “It’s pretty unusual for a biotech or a life sciences company to go public as quickly as many of these companies did,” noted Luke Pustejovsky, COO of Tactogen, a public-benefit corporation focused on researching MDMA-like molecules. “Going public is a way for early investors to make a profit, have an exit, and essentially transfer the risk of the company’s success or failure to the public marketplace.”
The medical and health care sectors are among the most highly-regulated industries in the United States, Pustejovsky added. “Just having a good idea or a good molecule doesn’t mean you’re going to succeed.”
One of the most spectacular failures of this era is Synthesis Institute. The Amsterdam-founded company—originally established as a psilocybin retreat center in the Netherlands—raised $7.25 million in Series A funding in 2021. That year, it bought a 124-acre property in Jackson County, Oregon for $3.6 million, with the intention of building a center for psychedelic retreats and facilitator training. In November of 2020, voters in Oregon passed Measure 109, a ballot initiative that legalized supported psilocybin sessions at licensed service centers. But when the state rolled out its regulatory framework this year, it turned out that Synthesis’ rural property was located in a county that had opted out of 109, and would not be allowed to operate.
Prior to this major fumble, Synthesis Institute had also been offering a 13-month online course for aspiring psychedelic practitioners, promising incoming students that the program, which cost a minimum of $9000, would make them eligible to work for its future retreat center. In February, the online program shut down suddenly, leaving students in the dark about how to continue their training. The following month, Synthesis CEO Rachel Aidan stepped down, confirming in an email that the company had declared bankruptcy after “reach[ing] the end of its financial runway.”
There was no doubt who got screwed by Synthesis’ bad bet: its students. Participants in the program were left feeling “defrauded” and “furious,” and many were forced to organize amongst themselves in order to seek restitution from the company. “I want to see accountability and justice,” trainee Claire Johnson told Oregon Live as she demanded refunds for herself and other students. Synthesis’ business partner, a Canadian company called Retreat Guru, eventually stepped in and took over the program in March.
The downfall of Synthesis Institute serves as a cautionary tale about the risks of rushing to get an early market advantage before legislation is fully in place. Sometimes, the Silicon Valley ethos of “move fast and break things” can also be a liability—particularly when it comes to the notoriously convoluted healthcare system. The same lesson can apply to the ketamine therapy industry, which experienced rapid growth over the past few years, but has since faced increasing government scrutiny and company cutbacks. In March, Field Trip Health, previously regarded as one of the brightest psychedelic startups, announced that it was facing bankruptcy and closing five of its high-end ketamine clinics. Around the same time, Ketamine Wellness Centers—a national chain of ketamine clinics acquired by parent company Delic in November 2021 for $10 million—shut down all of its operations nearly overnight.
“Part of the problem is timing,” says Brent Turnipseed, founder of an Austin-based mental health clinic called Roots Behavioral Health that offers ketamine-assisted therapy. Turnipseed says he has faced an uphill battle trying to get insurance companies to reimburse for ketamine treatments, which they consider to be experimental treatments. Thus far, Roots Behavioral Health only charges patients for the therapist’s services, and pays for the ketamine itself out of pocket. “Right now, there’s no mechanism for [ketamine clinics] to be profitable,” Turnipseed says.
Field Trip and Ketamine Wellness Centers were counting on the scalability of their clinics—a business model that depended on a steady flow of investments and consumer interest. Opening a bevy of clinics would also allow them to provide other psychedelics such as MDMA once they became legal, as both companies’ CEOs previously stated. However, this model proved to be challenging against current economic headwinds.
“The investors were wanting to scale everything, and it just did not seem to be a very sustainable practice,” says Anne*, a former Ketamine Wellness Centers salesperson who worked in the company’s corporate headquarters in 2022.
When Ketamine Wellness Centers shut down all 13 of their clinics in March, its patients were left in a lurch, unable to access the treatments that the company had sold to them. Due to the Centers’ partnership with the VA, many of these patients were also veterans who had relied on receiving ketamine infusions from the clinic for free or discounted prices. One such veteran was Adam Blazak, who told STAT News that he was left scrambling to find another clinic who accepts his insurance before the effects of the ketamine wear off. “I’m terrified that, without this treatment, the suicidal thoughts will just creep back,” he said.
The cost to patients and customers of psychedelic companies that have bitten the dust is clear. Yet despite these harrowing stories, companies continue to crop up and investors in the space claim they are optimistic that the psychedelics industry will soon enter a more mature era. “We had a very sobering year and a half,” says Schapper. “Now in 2023, we’re at the beginning of another cycle, and regardless of all the flameouts from some of the public companies, there’s so much progress moving forward.”
“This is the best time in the industry,” he continues. “[Company] valuations are [becoming] much more reasonable, and founders are a lot more experienced. We have a lot of ashes right now, and phoenixes will rise from it.”
Pustejovsky and his partner at Tactogen, Matthew Baggott, also pointed out that while the wider biotech market downturn still persists, certain drug development companies are still thriving in the face of current economic climate—Transcend Therapeutics, for example, raised $40 million in Series A funding last February for its research into methylone. “This is just to say that yes, MindMed looks miserable and Field Trip has gone out of business, et cetera. But there also is a whole burgeoning entactogen healthcare industry being born right now—and that’s an important story,” said Pustejovsky.
Finally, what’s notable is that excitement around psychedelics remains at an all-time high in wider society. “It’s worth noting that while the bubble has burst for some of us inside the space, the bubble is still expanding when it comes to the general public,” says Josh Hardman, founder of Psychedelic Alpha. “Excitement around psychedelics and their potential therapeutic applications is only becoming more prominent in the zeitgeist.”