Due Diligence Critical for Emerging Psychedelics Space
During an online forum, a group of experts went over what investors should evaluate before making a psychedelics investment.
As the potential of psychedelics continues to bring new investors to the sector, experts are emphasizing the amount of research that needs to be done before making a move.
Speaking at an online Psychedelic Capital event in 2020, expert panelists discussed the methods of due diligence they recommend for investors evaluating the psychedelics investment story.
The conversation was hosted by Richard Skaife, and the panelists were Cody Shandraw, director at Ambria Capital; Jayashree Mitra, partner at Zuber Lawler; Mitchell Osak, then business advisor with MNP; Michael Astone, then director of mergers and acquisitions at BDO Capital Advisors; and Michael Franks, venture capital investor with the Noetic Psychedelic Fund.
Skaife is a co-founding partner of the Conscious Fund, an investment group interested in advancing the conversation around the new age of psychedelics business.
While the panel featured venture capital types, the psychedelics sector has also entered the public markets in the pursuit of capital. Investors in Canada can find stocks across exchanges offering different takes on the emerging sector of psychedelics investment. Read on to learn tips from the panelists.
What do investors need to know about companies before making a psychedelics investment?
Astone said due diligence is especially critical for industries at the starting point of their cycles. He recommended that investors first look at the reputation of the people behind these companies.
"It's very important to be doing due diligence in early stage companies ... When you're getting involved in an early stage disruptive sector, the biggest due diligence you want to do is on the people," he said.
The executive suggested that investors should want to know about the credibility of the team they're intending on backing, and what management's track record in the industry amounts to.
Franks said he wants to see proven results from the folks behind any given company, but at heavily medical operations he particularly needs to see tech and science to back up claims.
"You're looking for people to have the experience in bringing molecules to market, getting through Phase 1 or Phase 2b, Phase 3 clinical trials eventually, and those that have the capability to work with the chemicals and the molecules and raise money," Franks said.
In a similar "prove it to me" fashion of evaluation, Shandraw explained he wants to see an understanding of the capital markets from the companies he pursues.
"A lot of the time, the companies that are going public don't understand that there are really two businesses. There's the public company side of the business, then there's the actual operations side of the business," he said during the discussion.
Share structure key to psychedelics investment due diligence
At one point in the conversation, Skaife asked Osak about the share structure of Canadian companies, which he noted can be vastly different from US and European companies.
While Osak was a bit reluctant at first to engage the question, the advisor went on to say that share structure is a "fundamentally important question" for investors, both in general and for those who are interested in the growing psychedelics space.
As he explained it, the average retail investor should spend a vast amount of time doing due diligence on companies — including looking into their share structure — before spending any money.
"What often happens is we tell investors, 'Don't end up getting those preferential shares and end up having less rights than other early stage investors,'" Osak said.
Franks recommended that investors look at the balance sheets of companies and evaluate their debt line. This includes reading through debt agreements and understanding company obligations.
In addition, prospective investors looking at any industry should ask to see companies' shareholder agreements and their bylaws for corporate governance, according to Franks, since this will give a better perspective on the type of management structure.
Osak offered three rules for investors to follow: know exactly what your money is buying you, consult with an advisor before investing and look at the company's capitalization table. He said this means looking at company ownership, including what types of shares individuals have and what the implications are from a governance perspective.
"You don't want to be in a situation where you invest a lot of money in a company and have very little control for that money," Osak said. He noted that voting shares can allow other investors to come into the picture with a stronger voice and less investment. "You'll be on the outside because you haven't done your homework," added the business advisor.
This is an updated version of an article first published by the Investing News Network in 2020.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.