We’re approaching the cusp of a psychedelic revolution.
But, this one is different. Backed by decades of research, psychedelics are poised to revolutionize entire sectors of the pharmaceutical and natural health industries. Large public companies are raising vast amounts of money to fund these big ideas. Another big difference is that the 2020 psychedelic revolution has the legalization of medical and recreational cannabis to use as a template.
But why would we want to use the cannabis industry as a template for psychedelics?
The real value for psychedelics is to learn from the mistakes that were made in the cannabis industry during legalization, and use that learning to build a better model and grow a sustainable industry that is not reliant on speculatory money, but on companies that have a clear and quick path to revenue.
The mistakes made in the cannabis industry were numerous, and to list them all would be a long and challenging task. Instead, I’ll explore five of the big ones.
1. Telling a unique story
I have worked with many companies and discussed projects with hundreds more. The single most common business pitch for cannabis companies was: “We will grow the highest quality cannabis for the lowest cost.” I classify these as “website and a dream” companies, because that is exactly what they were.
After the first two or three companies with that pitch failed to deliver on what they said they would (for the record, no company has delivered on it yet), why would we believe the fifth or 20th company pitching the same idea? To differentiate, you have to tell a unique story. There are amazing cannabis companies that have told such stories, and they are thriving now, in spite of the industry-wide downturn.
If you closely analyze the psychedelics companies that have either gone public or are planning to this year, there are two basic business models. First, clinics as a service. Second, the development of a pharmaceutical application. These same models were tried in the early days of the cannabis industry.
Cannabis clinics as a service
Several companies have attempted to create patient clinic networks across Canada. However, the initial cost, licensing, and subsequent operational expenses made this model difficult when it came to generating revenue. Some online clinics did better, taking the overhead of brick and mortar clinics out of the equation. In the end, most “clinics as a service” companies ended up selling their client list to large cannabis producers.
Pharma “Drug Discovery”
The pharmaceutical playbook is very common for “drug discovery” and it goes like this: The company raises money, does animal trials, and one or two phases of clinical trials. If the results are favourable, it is sold to a large pharma company with the resources to produce and market the drug. GW Pharmaceuticals is an example of this play in the cannabis industry, with one exception: they never managed to sell to a pharma company.
There are a multitude of reasons for this; unlike pharmaceutical R&D, cannabis could not be patented, so instead, GW Pharmaceuticals had to patent their delivery system, a metered spray. GW still operates in the UK but never managed to reach the valuation predictions that were made when the company started.
Where are the unique stories being told by companies that want to change the world, not just recycle the same old, tired playbooks that look new because “psychedelic” is now in the copy? As this year unfolds and more companies go public and start operating, the successful ones will be those with a unique value proposition that radically alters the way humanity thinks about and solves problems.
2. Capital market money
One of the main reasons for the financial difficulties of most cannabis companies is lack of revenue, one of the most important indicators of the health of a company. In the cannabis industry, licencing was a critical delay for companies. But instead of developing other paths to revenue, they just waited.
Early cannabis companies were overvalued, and the stock promoters made a lot of money and left a considerable sum in the war chest of the cannabis companies they promoted – certainly enough money to develop strong revenue and growth for several years.
Money was squandered; “experts” were overpaid. The corporate promotion took precedent over solid management, and too many people were hired.
Cycles repeat. Not even a few months into the year of the “Psychedelic Public Company,” we are seeing it all happen again. Stock promoters have successfully overvalued two prominent psychedelic companies with the same smoke and mirrors that were used not so long ago in the cannabis industry. Neither of these companies has a clear path to revenue in the short or midterm, or the team to take action and develop a company that is sustainable for decades.
If we want a successful psychedelic industry out of the gate, we need to remember that capital market money is only a means to an end. It allows great ideas to be funded and create a successful company with solid fundamentals. The more money a company raises, the more runway it has to become successful and generate revenue. Unfortunately, too many cannabis companies lost sight of this and spent money on private jets, overpriced equipment, and so-called “experts.”
3. Management is key
One of the singular failings of all the cannabis companies struggling at the moment is management. A focused leader and dedicated management team is key to a successful business. So much so that the team is more important than the project, and every team needs the best leader possible.
What most cannabis companies failed to realize is that there is a difference between a founder and what a company needs for long term sustained growth. In his book, Good to Great, Jim Collins talks about the five levels of leadership necessary to be a truly great company.
In most instances, the founders of cannabis companies stayed in the CEO seat for way too long. When a company is under-performing is the time for a professional CEO to be brought on to run it. According to Collins, the majority of CEOs for founders are Level 3 leaders (this may be too generous), with a few Level 4s.
What the cannabis industry needs now, and a key takeaway for future psychedelic companies to integrate, is that if greatness is the ultimate goal, the right leader has to be at the helm. A founder has to recognize that they have to either gain the leadership skills necessary to grow the company, or get out of the way so someone else can.
Most people might not think there is any difference between a founder and a CEO, and in some instances, the roles are very similar. However, the company’s success relies heavily on a competent leadership team. If the founder is not up to the job, they need to step aside and let a professional executive step in to manage the company.
As we build the new psychedelic industry, we need to ensure the right people are doing the right job. While it is great for a founder to be CEO during the startup and go public phase, after the raise is done and the real work begins, a detailed and critical analysis has to be done of all executive staff to ensure they have the skills and focus to take the company forward to great success. Far too often, the founder hangs on to the CEO position for too long, stalling a company’s development.
4. IP should not be done at the expense of picking technology and adapting it.
When a company doesn’t have an interesting story to tell to the capital markets, a predominant strategy is to acquire or develop intellectual property, or IP. While IP certainly can be an important aspect of a cutting edge company, when it comes to growing a commodity crop like cannabis or the extraction of cannabis and edibles production, the majority of technology used has already been developed and adapted from other industries.
This means that while companies are selling a story to the capital markets and spending large amounts of money developing and acquiring IP, lean companies are focused on revenue and are winning by simply buying off the shelf equipment and adapting it for use in cannabis.
One could argue that all new companies, in some way or another, are unique IPs. It is important for companies to tell the story about their unique IP to the public to help differentiate themselves from other companies. What we need to avoid in the psychedelic industry – although it is already happening – is the development or acquisition of IP for IP’s sake.
Because psychedelic plant or fungus chemistry is, generally speaking, less complex than cannabis, processing and extraction will require little, if any “new” ways, of doing things.
5. Human resources as important capital
Because the large cannabis companies had so much money and the impetus to scale was so strong, most companies hired a large number of employees simply to get “bodies in seats.”
Fast forward to early 2020: a large majority of those people are now out of work because companies were focused on the number of people they hired, not the quality. Not to say that the people hired were not amazing employees, but to build an effective team, the people you hire and the way the team is crafted is important. Most companies did not have sufficient onboarding and training either, leaving entry-level workers to have to figure it out for themselves.
Human capital is the most important resource a company has. It takes time and systems to onboard, train and support employees, especially in an industry that didn’t even exist a few years ago.
As far as staffing new psychedelic companies, we will have an advantage over the cannabis industry primarily because operations will be less labour intensive, and less staff will be needed.
The difference – unlike a large number of entry-level jobs in the cannabis industry – is that the psychedelic industry will require higher educated and trained staff. This has the potential to cause a problem, because, like cannabis, psychedelics are new and little or no formal training exists for the science and other skills needed.
The majority of large cannabis producers tried to rapidly hire and fill positions in anticipation of the recreational windfall. For psychedelics, we would be best served by onboarding slower, and ensuring the people we do hire are trained and knowledgeable.
Mass hirings were not effective in the cannabis industry and, after the downturn in Q4 2019, many of these rapid, entry-level hires were let go. A company should not want to try to force its hiring practices into the plan to scale. Rather, scale at the rate at which you can onboard quality employees. Hire quality, not quantity.
We must seek out the lessons learned from the past to create a healthy thriving psychedelic industry.
The journey that the cannabis industry has taken from decades of prohibition to a legitimate industry has been extraordinary, and the development and maturation of this industry will be one of the key indicators of the times we live in.
Based on how the cannabis industry has developed around the world over the last few decades, think of the incredible potential that psychedelics have. Cannabis was only one plant, but there are numerous psychedelic compounds with a wide array of medical applications. Building an industry from the ground up based on formerly illegal substances is no easy task.
Just like cannabis, building the psychedelic industry from scratch won’t be easy. If you are in it, make sure there is a solid plan in place before a project begins. Remember that lean, efficient, and well-run companies will thrive.
Finally, embrace the cycle of “fail, learn, improve and repeat.” Failing is the most important part of success in a new industry, but, you need to fail fast and rapidly learn from your mistakes.