Why VC Fund Palo Santo Won’t Invest In Canadian Companies That Are Quick To Go Public

Curious about the strategies of venture capital (VC) funds with a psychedelic focus? I have been too, and recently had the opportunity to have some of my questions answered in an interview with Palo Santo co-founder and partner Tim Schildt

Palo Santo was founded by Schildt and partners Daniel Goldberg, Tony Eisenberg, and Zack Lomis and to date has raised $45 million, with $18 million currently deployed in the psychedelic sector. 

Schildt started his career in investment banking focused on the life sciences and healthcare sectors and says much of what he learned while working at firms like JP Morgan and Madison Dearborn Partners translates to his work in the emerging space.

 “Suffice to say my career has largely focused on the healthcare space, which I think has been really beneficial for psychedelics, since we’re seeing these [companies] go largely a healthcare and even biotech-type route.”

Schildt anticipates that many people invested in psychedelics will be “sorely disappointed” by how they are selecting companies and picking opportunities, especially if they are looking for short-term gains. 

“The way you vet these types of businesses is very, very different from most industries; definitely different from cannabis and crypto, especially,” he said.

The Need For A Focused VC Fund

Palo Santo comes out of the Bridge Investments ecosystem, a VC fund run by Daniel Goldberg for more than 10 years “with a successful track record.” Although Palo Santo is focused on a new industry, the level of experience among its partners is high, and it’s “not their first rodeo” when it comes to investing in early-stage companies, according to Schildt.

The decision to create a fund with a psychedelic focus stemmed from the idea that psychedelic therapy for mental health treatment would be too novel for more traditional VCs to get behind: “This is such a paradigm shift relative to what you’ve seen out there previously. I do think it makes sense to have a vertical-specific, industry-specific fund focused on the space… these are such novel mechanisms of action, especially at the receptor, that having deep domain knowledge around that makes a big difference.”

That domain knowledge is captured in Palo Santo’s advisory team of scientists, researchers, doctors, and psychiatrists including Dr. Julie Holland, Dr. Charles Nichols, Dr. David Sherman, and Dr. John Graden.

How Palo Santo Deploys Its Money

Across the various silos in the psychedelic industry, Palo Santo currently has about 80 percent of its money invested in biotech companies, but has a few other companies in the mix, like Doubleblind, a print magazine and media company, and Fluence, a company offering continuing education programs in psychedelic therapy. Companies with a tech focus also play an important part.

One characteristic Schildt said Palo Santo actively avoids when looking at potential portfolio companies are if they have been quick to go public in Canada: “One big thing we shifted away from in the early days of Palo Santo when the opportunity was much smaller—we didn’t love this trend—but there was certainly a trend to rapidly go public in Canada. Now, that’s kind of a non-negotiable for us.”

Schildt says it’s a play he’s seen many times: “They show a cap table, they quote the round in terms of price per share, and it’s like, ‘we’re going to go public.’ It’s an immediate no [for us]. I think that misaligns incentives, and I think a lot of companies get orphaned on Canadian stock exchange… I think they’re leaving a ton of value on the table.”

Watch the conversation in its entirety to learn more about how Palo Santo vets psychedelic companies before investing, and why it’s avoiding this trend. 

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