3 important questions for psychedelics due diligence
...and you better be performing your own due diligence
Part of my advisory work with family offices and angel investors is to help them evaluate investment pitches in this Wild West industry. I counsel investors should be mindful of the old investment banking trick: always lie or exaggerate on unverifiable facts. Lying or its slightly milder cousin not telling the entire truth, is very common in psychedelics pitches.
To avoid unwanted surprises post funding, I ask the pitchers 3 fundamental questions (jn person if possible), carefully considering their answers as well as their body language during replies:
1. How involved is your talent? Often, many of the executives and advisors are in the deck as window dressing to lend credibility and pizzaz. As an aside, If you pay attention you’ll often see the same names popping up in multiple decks. Ultimately, investors are betting on the jockey as much as the horse so you really need to understand the commitment of the people teed up to drive value and perform the grunt work.
2. How real and defensible is the IP? Filed patent applications are often bogus and lack supporting evidence or link to a potential product. Here you need to engage with expert scientific and legal support. Moreover, you need to gage whether the firm is prepared to (or can) defend their IP. If they can't, they will be discounting potential shareholder value.
3. What assumptions underlie the market sizing? In almost every case, market size estimates are overstated due to unrealistic time to market (too quick), pricing (too high) and patient & physician adoption expectations (too optimistic). These fudges are crucial as they impact cash flow & profitability timing, marketing requirements and future funding needs.
I expect every investment presentation to contain a bit of puffery. However, gratuitous embellishing or trying to slip through some little white lies in an early stage pitch could be an indication that larger ethical challenges are likely elsewhere in the company. Caveat emptor.
#psychedelics #duediligence #strategy #IP #valuation #management