Vertical Pot Startup

Vertical Cos., a medical and adult-use cannabis brand and distribution business, is living up to its name with a straight shot up in its funding trajectory. The Agoura Hills-based company has raised $65 million so far, with $58 million coming from a Series A funding round that ended in March. Funds will be used to expand multi-state infrastructure and bring its brand to market, according to Courtney Dorne, president of Vertical Brands. Vertical also has a robust investor count at 150-plus, and 35 partnerships. “It’s hard to believe, looking back, but we’re in our most explosive stage right now. We can move just about as fast as money flows at this point,” added Drew Milburn, chief operating officer at Vertical. “As the investment capital comes in and allows you to do greater things, you do greater things. Plus, our own sales as we’re coming online helps push things along as well,” he said. Vertical staff attributes the company’s success so far to its hiring of entrepreneurs, starting with Todd Kaplan, the chief executive. Kaplan has 35-plus years of experience in health care services and became involved in the cannabis industry after learning more at a Young Presidents’ Organization function five years ago. Comprehensive strategy The company’s name refers to its strategy to become a vertically integrated pot grower, processor, distributor and brand marketer through a network of subsidiaries. Vertical MSO is the operations arm. It expects to have more than 1.9 million square feet under cultivation this year. Currently, the team has a site in Santa Rita Hills called “The Ranch,” near wine country in Santa Barbara County. Vertical MSO handles growing and packaging. Then comes Vertical Distribution, patterned after large-scale liquor distribution, especially on the recreational side of the business. “What we believe is it mimics, on a large scale, the same marketing values as alcohol, the same distribution model that California has is very indicative of the alcohol world,” added Milburn. Vertical is selling to licensed retailers and they’re not crossing state lines – a similar structure to liquor distribution – for products that have intoxicating properties, otherwise known as THC cannabis. Teams for this arm of the company use delivery fleet vehicles to pick up product from growers or processors and drop it off at warehouses for storage. Vertical MSO coordinates state-mandated testing, manages order collection, billing, government compliance and delivery to dispensaries. Finally, Vertical Brands aims to reach the growing “multi-faceted” demographic group that would use Vertical’s variety products. The company currently has 30-plus in-house brands and partner brands, including JSLV CBD, Divios Suncare, Deviant Dabs and Inhayl. “Technically we’re a brands company, and everything else we do is to support the supply chain of our brands,” said Dorne. “That’s how we have to do it, because in order to be a Starbucks or a McDonald’s, we have to know where our product is coming from to be able to support those brands.” The brands target specific demographics of potential customers. Campaigns for each brand, led by marketing teams that have worked with the likes of Coca-Cola Co. and Anheuser-Busch Cos., will have a full suite of services including analysis, design, messaging, promotional materials, online and social media marketing, experiential marketing and in-store promotions. Kurt Van Keppel, chief executive of Xikar, a cigar accessory brand owned by Quality Importers Trading Co. in Weston, Fla., said that while a vertical approach allows a company to ensure product quality, it also requires far more invested capital. Because there is more capital at stake, there is less flexibility in what comes next. Horizonal companies generally have less invested capital and greater flexibility; they can focus on that one thing and do it really well. “The vertical play in the cannabis business is a smart move, as companies can right now fill the voids,” said Van Keppel. “Any time a large, new product category emerges that presents an opportunity based on the basic product, the vertical play creates a very attractive opportunity.  Here, the inflexibility of one product category matters much less, and high margins, large market easily overcomes the invested capital hurdle.” Vertical also has a separate operation, called Vertical Wellness, that focuses on the medical marijuana market. Dorne, who comes from 20 years in the food manufacturing and distribution world, had a personal drive to join Vertical. “I had my first medical recommendation (for cannabis) in 1996. I’ve had three spine surgeries, six fused vertebrates and I’m allergic to narcotics,” said Dorne. “I felt it was my calling to put a voice to this industry and really help take the stigma out of it.” Although the company is private for now, its medical branch, Vertical Wellness, is expected to go public by the end of this year and trading on Nasdaq. Operating Issues The biggest issues Vertical faces right now include the banking industry – which categorizes pot a federally banned substance – and efforts to educate the public and government officials about a misunderstood industry. “It becomes some jockeying of the situation to force the fit, where it would have been pretty easy had we been able to go to one of the major banking establishments,” said Milburn of the company’s banking challenges. “I love being a pioneer, but there were a lot of pioneers that had arrows in their back. We managed the chaos a lot better than most and we’re helping to drive a better understanding of the industry, in general,” he added, speaking of regulatory hurdles.