Psychedelics firms: Beware the coming investor sell off

Psychedelics valuations are in the doldrums, smack dab in the middle of the worst biotech downturn of the past 20 years. Yet, the odds are good that many company valuations will re-inflate because of positive results, rising market sentiments or even a ‘dead cat bounce’. 

Concerningly, many public and private psychedelics companies face a financial overhang they may not even realize exists.  Wily angel investors and VCs will take advantage of the valuation bump to sell their shares or push for a transaction (e.g., divestment, merger) that unlocks their returns. Of note, this behavior was rife in the early days of cannabis.

Standing at the precipice…
Deep share price declines make nascent, pre-revenue firms vulnerable, as it reduces their ability to raise money at favorable terms, execute their preferred M&A deals and retain key employees – and investors.  

The most exposed companies have cash in the bank, poor operating results, weak governance or onerous funding terms. 

…while a tiger lurks 
On the surface a share price rebound is always welcome.  This bump, however, could be a dangerous time for your business.  Some investors will see this as an opportunity to cash out or force a transaction of their choosing, stripping your company of scare cash and creating a major distraction not to mention sending negative signals to the market about your firm’s prospects. 

To be clear, this is a complex issue and not every liquidating investor or Board member would be acting in bad faith.  Many won’t (or can’t) sell, particularly those who are committed to long term investing and safeguarding their reputation.

What, me worry?
I would be mindful of two impatient investor types:  1) ‘pump n dumping’ angel investors who came in for pennies per share and now see an opportunity to capitalize on their gain and; 2) fledging, transactional VCs that need to put up better investment returns and provide exits for their limited partners.  

Protecting your business…
1. Know your investor – Analyze their past investing behavior and any current issues that could drive future actions.  You should be engaging them on a regular basis, plus their other portfolio companies and previous deal partners.
 
2. Do your homework - Understand your subscription and shareholder agreements.  Consider potential legal and financial scenarios so you know how to react.

3. Founders purchase more shares – A Founders recommitment sends positive signals internally as well as to the market.
 
4. Run a tighter ship – Prioritize your best strategies and R&D initiatives.  Prudently manage your cash.  Don’t antagonize key employees who may be thinking of leaving.
 
5. Always be engaging the capital markets – Securing badly needed investment is job one in this environment. Try to obtain other funding options.

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