Irvine, California-based Petalfast is a multistate sales and marketing agency for the cannabis industry, sort of. On its website, the company refers to itself as a “full spectrum growth agency, part cannabis launch pad, part cannabis accelerator, a canna-launcherator, if you will,” but that only begins to tell the story. Co-founded in 2020 by former KushCo Holdings executives Jason Vegotsky and Arun Kurichety – who now serve as CEO and COO/General Counsel, respectively – Petalfast is in a sense positioning itself as a corrective to a vertical integration model that took hold in the cannabis industry, but which will eventually disappear as limited-license markets become competitive markets. Petalfast, clearly recognizing this, has honed a sales model that excels in markets where competition flourishes, and where, as CEO Jason Vegotsky explained to Cannabis Business Executive during a recent call, “true brand builders will win the day.”

Before he even had a professional career, Vegotsky was immersed in a world of brands. “I grew up around a wine and liquor distributor in New Jersey called Fenway Associates, so big alcohol distribution is the backbone of who I am and what I understand; how brands are built and go-to-market strategies,” he explained. “So, I’ve always thought about how cannabis is going to be distributed and how is it going to take shape.”

His early career also helped form concepts around brand development and market distribution that he would eventually bring into the cannabis industry. “I worked at that alcohol distributor a couple years after college, and then went into the food space,” he recalled. He built a beef jerky company called Lawless Jerky. “I started to understand that food brands are built differently than alcohol brands, and distribution is built differently than with the alcohol brands. In that space, the way you service a Whole Foods versus a liquor store is totally different. So, the experience of building that company nationally was very helpful. Then I got into cannabis. My first company was successful, we sold that to KushCo Holdings, and I was the president of KushCo Holdings.”

The company Vegotsky sold was Summit Innovations, subsequently renamed KushCo Energy. “We were the first national distributor of hazmat gases to cannabis labs – butane, propane, ethanol,” he said.

KushCo, which merged last year with Greenlane, provided Vegotsky a decidedly new experience. “I was the president of KushCo and ran that company for about two and a half years with Nick Kovacevich, and that was totally different,” he explained. “I had never sold packaging or vape in my life, but I got to meet all the brands. I started to meet all the companies across the country, whether it was Canopy Growth or GTI or Acreage, small guy, big guy, whatever state, we knew them all. And I was always asking them, how do you take your brands to market, what is your go-to-market strategy, how are you building this?

“I quickly realized that there were major deficiencies in comparison to what I was used to in alcohol, beverage, and food and beverage,” he continued. “That’s when I started to say, you know what, there is a better way than everybody doing it themselves. If there is a good partner out there, it’s a better financial model for everybody and it’s a better way of doing business. Petalfast was born from all those conversations. I left KushCo about three years ago.”

Regarding his time there, Vegotsky said it was an experience he does not regret. “KushCo Holdings was the most growth that I’ve ever had in my professional career and came from the ups and downs of running KushCo,” he said. “The success and extreme growth, the markets turning, the raising of hundreds of million dollars, understanding analysts and how that all works, and how hard it is to run a public company, the humility and vulnerability you have to show when markets turn, and you have to break it all down.

“Now, I was out of there a long time ago,” he added, “so I haven’t been on this last leg, and I was gone long before the Greenlane merger. But I certainly don’t consider it a failure. I consider it an unbelievable learning experience that changed my life financially, and I’m more successful now because of it. But it certainly was stressful and had its ups and downs.”

Beyond KushCo specifically, I wondered if there were any lessons from that experience about what to do and not to do in the future. “Yes,” said Vegotsky. “You might have a nice bull market and a little bit of a run, but at some point it will always come back to the fundamentals of business. At the end of the day, you’ve got to make money, and you’ve got to have margin. And I don’t care how fast your top line grows; if you don’t have those two things, eventually that will catch up to you. I think a lot of cannabis companies have just talked about growth and growth and growth and top line, top line, top line, and just haven’t done the things to shore up the bottom line, and eventually that will bite you.

“It certainly hurt KushCo, and many others,” he added. “And now you’re seeing a marketplace where there is no capital available. So, bumping up your top line and your growth is not going to do anything for you, because there are no investors to go get money from, and now you’re seeing a massive shift to being sustainable on your own. And usually when you’re sustainable on your own, although it makes no sense, that’s when investors want to invest in you. So, this is not a cannabis recession in my mind; it is simply a correction, the forces of capitalism at work, and unfortunately it’s going to put a lot of people out of business.”

Putting the Disruptive into Petalfast

If Petalfast was borne out of the ashes of KushCo, it was with a clear vision of what was needed. “One of the big differentiators for us is that we saw that, yes, some form of distribution would take place just like every other industry out there,” explained Vegotsky. “Vertical integration will break down, it is breaking down, it is not a long-term strategy. It doesn’t work anywhere because you need too much money. So, whether it’s created by regulation or just happens over time naturally, we believe that that distributor lane will be formed.

“Now, currently in cannabis,” he added, “and obviously I have some PTSD from KushCo, I don’t see companies in cannabis dying because of margin. I see companies dying in cannabis because of cash flow. Typically, that comes from accounts receivable problems, as has been well documented in California and getting paid, and inventory problems. People build too much inventory, the market drops by 30 percent, and then they’re stuck.

“So, we have built a business model where we can reap all the value of a distributor; meaning, we have great retail relationships, we have a sales force, we have a great portfolio, and we’re in multiple states,” he added. “But we focus simply on the front of the house activity, on the sales, the customer service, the brand management, the brand strategy, and then we partner with Nabis in California, others in other states, where they handle the logistics, the warehousing, and a lot of the fixed costs and infrastructure, which allows us to focus solely on what we believe is the most important part – the selling organization – and not have to deal with the heavy lift of those fixed costs. We’ve benefited from that, because we don’t necessarily have the exposure to all of the challenges in California that these other folks have.”

It’s a model melded from two other industries to serve one. “This is the model used in the natural food space,” explained Vegotsky. “Because one size does not fit all, you can’t overlay alcohol beverage in the cannabis space, and you can’t overlay the natural food space in cannabis, but our business model looks very similar to that of Acosta, CA Fortune, Advantage Sales Solutions, all multibillion dollar companies that represent natural food brands. But the way that we manage our people, the way that we handle supplier distributor relationships, the way that our technology is set up, is very much like an alcohol beverage company, and that’s why I like to go through my background, because we’ve kind of morphed the two pieces together.”

It occurred to me that the model had a disruptive element to it, and asked Vegotsky if that was so. “Absolutely,” he said. “We’ve disrupted the California industry dramatically. We went from zero to the third largest player in the state, and with how things are moving we feel like we’ll be the largest player in the state by the end of this year.”

He explained the current Cali distro playing field. “There are really four players left in California cannabis,” he said. “You have Herbl, which is your traditional full-service distribution model, you have Kiva, or KSS, which is also your traditional full-service distribution model, and then you have Nabis, which is a more of a 3PL (third-party logistics) firm, where they do the logistics, and you do all your sales.

“Then you have the Nabis plus Petalfast combination,” he added, “where we basically have full service, and we’re very aligned to compete against Herbl and KSS and those two balance sheets. Being able to focus on each one separately has allowed us to execute and gain market share over the course of our two and a half years.”

He elaborated on the benefits that accrue from the combined forces. “Nabis is strong with their technology, they’re strong with their warehousing, they’re strong with their cash collections, but they don’t do any sales,” he said. “It’s on the brand to handle that, so when Petalfast handles that and you combine it with Nabis’ strength and allow each group to simply focus and on exactly what they’re doing – because it’s hard enough to do one thing right, let alone do 100 things right – we believe that less is more in cannabis. The more focus you can have, the more success you’re going to have, and it has proven to be successful for us and for Nabis.”

Why would brands would leave other distributors to come with Petalfast? “Every distributor needs to have multiple brands, or the distributor model would never be successful,” replied Vegotsky. “You have to have a portfolio, and every brand wants you to not focus on everybody else and just focus on them. The special sauce is really that relationship with the brand, how you do brand management, how you push and pull focus levels to provide the service levels that you need for your entire portfolio, and that’s what we take directly from alcohol beverage. It’s a combination of our management style from alcohol beverage, our technology platform, and also training the brands to understand how to use us, and it has worked out extremely well.”

Just a few of the many brands included in the Petalfast portfolio are CANN, Bloom, Wonderbrett, and Yummi Karma. The company makes its money via percentage of sales and other streams. “We take a percentage of revenue,” said Vegotsky. “On top of that – and this is another differentiator – what we found was, in order to support the retailer and in order to have success, you need to be able to support your product once it gets in the stores. What I mean by that is provide a demo, do a pop-up, do budtender training, and as margins have declined, brands have struggled to do that more and more, because they just don’t have the money. We have a full-service trade marketing agency where we do more brand ambassador training and demos than anybody in the entire state, so once we get you into stores we also follow up with that. It is another revenue stream for us that has proven to be successful.”

Leveling Out the Vertical

I was curious about Vegotsky’s reaction to Curaleaf exiting three of the states that more or less meet the Petalfast definition of competitive. “I think it proves that vertical integration is not going to be successful as states become more and more competitive,” he stated unequivocally. “The MSOs love to tout their profitability, they love to talk about how big they are, but they don’t necessarily talk publicly about the monopoly that they have for now.

“As that breaks down, you’re just okay at everything, and you need to get specialized and be the best,” he continued, “and I would imagine there are a lot of competing priorities for focus at an MSO. Brand building is a specific talent that needs to be focused on and executed on, and just throwing money at something is not just going to work. So, for me, it just proves that vertical integration is not going to work in a competitive market, the most money is not going to work in a competitive market, and true brand builders will win the day.

“On the other hand,” he added, “it is not a good thing for the investment community to see a big player like that not be successful and pull out of the states where it’s very challenging to win. It’s going to continue to scare off investors in the space. While there are some positives, there are definitely some negatives. For us, we’re excited to take that market share and get our portfolio in the holes that will be left behind.”

I noted conversations with other MSOs that are similarly scaling back in what some called growth by contraction. “Or you can call it we can’t win in a competitive market, and we need to go back to the monopolistic, limited-license markets,” responded Vegotsky. “The problem for me is, if you look at the long term, I think we all agree at some point all of these markets will become competitive. It’s just a matter of time for licensing to come out. So that to me proves that the current vertical integrated MSO model will not work as markets become competitive. That is the biggest risk to the MSO community, and they’re smart, I think they know this, and they’re probably going to be changing strategy as things continue to change.”

And what does that mean in terms of which states Petalfast has its eye on? “A limited license state where it’s still monopolistic by nature is not a good state for us because you don’t need us,” he said. “It’s more of a capital allocation and supply chain business. When we start to see prices decline, as soon as that starts, the end is near for the MSOs. In our opinion, you’re seeing that in Massachusetts, you’re seeing that in Michigan, and just being vertical is not going to help you win. So, once we see prices start declining, supply outreaching demand, that is when we come in, because that is when you’re going to need more muscle, you’re going to need to be more focused, more strategic, and an organization like Petalfast will have success.”

Does it take a long time for Petalfast to establish a presence in a state? “No,” said Vegotsky. “When we go into a state, we hire the best salespeople in the state, and obviously they will bring relationships with them. And our initial brand portfolio typically will bring relationships as well. Not to mention, we do know the MSOs, and we know a lot of the retailers. I don’t care if you’re a huge MSO or a small guy, like a lot of people are in multiple states.”

So, which states are they considering? “We are currently in California, Arizona, Massachusetts,” he said. “You certainly have the legacy markets, like Oregon, Washington and Colorado, that are already super competitive and can use help for sure. But when you look at the Midwest and the East Coast, Illinois is at that tipping point right now and is one we’re looking at very closely. As more and more licenses come on board, it will get more and more competitive, and there will be more and more supply.

“We also think New Jersey is primed for our model, and over the next 12 to 24 months will become very competitive as far more retail will be available,” he added. “We’re very interested in Missouri and Maryland as they flip to recreational; nice store count, nice markets, and they can be competitive. We also like Michigan, which provides challenges because they’re going through a correction of their own, but it is certainly one we have our eye on to enter as well.”

I noted that neither New York nor Florida was mentioned. “New York is overhyped,” he said. “We’ll be in New York, but there’s still a ton of infrastructure left that needs to be built. I don’t think there’s any activity there for us to do in 2023, but we believe New York is on a 2024-type of trajectory for us. There still needs to be a ton of canopy built, and there needs to be a ton of retail built. The licensing process, like every other state, is still trying to figure itself out, so we will let the noise settle before we go there. But certainly, we will be in New York in a big way.

“Florida is a great market as well,” he added. “And as much as vertical integration in my mind is not a long-term success story, you can argue that the stability that the vertical nature of Florida has given that market, and people can actually make money there, is great for the consumer. We would enter Florida once it turns recreational, but a medical market is not something where we’re going to see a lot of brand building activity.”

Our time about up, I asked Vegotsky if, at the end of the day, Petalfast is a marketing specialist. “I think we’re sales specialists,” he corrected me. “Petalfast is going to get you into stores, and you’re going to be in the right place in that store. We can execute on your marketing plans because of our ground team and our ability to scale with our field marketing organization, which is nationwide. We provide suggestions on marketing, and we certainly want to push you in the right direction on how to market. But you as a brand need to come with your brand plan and we kind of tweak it along with you.”

Do cannabis retailers also need their methods tweaked at times? “Retail isn’t mature,” said Vegotsky. “Retailers do need to get better. They need to have a handle on what products they want, what they want their store to feel like, and yeah, we like to think that we help retailers mature. But we have to have great relationships with retailers, because if we don’t have great relationships with retailers, what brand is going to want to use us?”

Interestingly, other than California, competition for Petalfast comes from an unlikely place. “We don’t have too much,” said Vegotsky. “In fact, I would say self-distribution is our competitor across the country. In California, it’s Herbl and Kiva Sales & Service.”

As margins and money get tight, Vegotsky has seen companies slash their budgets to the benefit of Petalfast. “Yes, they’re cutting back,” he said. “They have to. Prices drop, margins drop, time to cut. As a result, we’re having an easier time signing people up, because when they cut internally, they still need to look for an outsourced solution.”

That increase in work translates into employment. “We’re adding states and we’re continuing to add to our portfolio, but most importantly, we’re looking for the best people, because what we do is a people business,” stressed Vegotsky. “It’s relationships and execution. We’re not creating a new form of heart surgery here. We are simply just selling weed better than other folks, and to do that you need the best folks, so we’re always looking for the best talent.”