How I Built This with Guy Raz - Insomnia Cookies: Seth Berkowitz

Episode Date: August 26, 2024

When Seth Berkowitz was in college, he was the cookie guy on campus. He’d grown frustrated that the only food he could get delivered late at night were standards like pizza or Chinese food. He had a sweet tooth, and he craved warm, homemade chocolate chip cookies. So he took matters into his own hands and started making and delivering cookies to students at his school. The operation soon went from a silly side hustle to a real business - and then an all-consuming struggle. But today, after decades of detours, long-shot decisions, and near-bankruptcies, Insomnia Cookies is now a $350 million dollar business.This episode was produced by Alex Cheng with music composed by Ramtin Arablouei. It was edited by Andrea Bruce with research help from Katherine Sypher. Our audio engineers were Robert Rodriguez and Maggie Luthar.You can follow HIBT on Twitter & Instagram and sign up for Guy's free newsletter at guyraz.com.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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Airbnb.ca.ca. slash host. Hey, really quick before we start the show, we have an announcement about a really exciting new thing we're launching. A newsletter. And like our show, the newsletter is designed to be interesting, informative, inspiring, and most importantly, fun. It's 100% free. And to sign up, just visit guyraz.com. That's g-u-y-r-a-z.com. I went to the investors as I'd been doing for the last three or four years and like, here's what our loss is for the year. It's less than last year, but it's still a loss.

You know, I'm hoping to raise a half a million dollars. And they're like, checkbooks closed. We have no idea what the future holds that the checkbook is closed. Like, figure out what you're going to do. And so I ended up cutting my team. And I stopped paying myself for 18 months. Yeah. It was crazy.

I mean, honest, I was hard. I decontaparmentalized that time. Like, I don't really think about it too much. It was so very hard. Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how Seth Berkowitz turned his late-night cookie cravings in college into a 350. million dollar business. Some ideas seem really great at the beginning. You tell a friend about it and your

friend says, I love that idea. You should totally do that. And then you do it, only to realize that, well, maybe it's not such a great idea after all because you just keep losing money. So you pivot. You try out new initiatives. You model out new revenue streams. You throw everything at the wall. And all that does is put you in a deeper hole. At some point, your business partner quits because he doesn't see a path forward, and frankly, neither do you. But you stick with it and you keep trying things out. Until eventually, you get back to the basics, the fundamentals, the reason why you started the business in the first place. And then it starts to turn around.

This is the story you are about to hear today. It's the story of a cookie company, Insomnia, that should have never succeeded, but it did. And today, it has close to 300 locations. Insomnia cookies, and no, the cookies do not keep you up all night, it basically delivers fresh-baked, warm cookies to homes and offices. The whole concept started in a dorm room at the University of Pennsylvania in 2001. Seth Berkowitz was a sophomore, and one night he wanted something. sweet delivered to his door. At the time, the only delivery options were pizza and Chinese food.

So Seth started to make cookies and post flyers around campus offering late-night deliveries. That idea would turn into a business that, as I briefly mentioned, would suffer through years of crisis and struggle before it actually started to gain traction. Today, insomnia is valued at around $350 million and partially owned by Krispy Kreme and two private equity groups. Seth is still the CEO and still running the operation he started nearly a quarter of a century ago. Seth Berkowitz grew up in Rockland County, New York, about 45 minutes from Manhattan. His dad worked in the garment industry and his mom ran a small decorating business. As a kid, Seth was sports crazy, especially for baseball and his beloved

Mets. I say I'm the least successful sports fan that exists. So I root for losers. And you can root for the right teams in New York. You can root for the Yankees. I root for the Mets. You can root for the Giants. I root for the Jets. You can root for the Rangers. I root for the Islanders. And we're all Knicks fans. It's really the primary option. I've never watched my team win a title in 43 years on this planet. The Mets won, but I was sleeping when I was five. All right. So growing up, were you pretty academic, pretty good student? Not in my elementary school days. Like, I really struggled,

wasn't incredibly focused on it. That's normal. Yeah, but just for me, it took until like ninth or tenth grade to really, for academics to settle in. I know eventually you went into University of Pennsylvania because that's really where your story begins, but do you remember what you wanted to do?

I mean, you're 18, most people don't know what they want to do, but did you have a sense when you went to college, to have an idea of which you thought you might? I do? Really not. I mean, I grew up in a small kind of insular community. Going to Penn was a big change for me. And honestly, I was just so excited and attracted to opportunity in general, like what there could be out there. Sophomore year, I joined the school newspaper. And I started dating somebody who was in Boston. So I was traveling quite a bit. This is your now wife, I believe, right? Yeah, that's correct. And how did you guys meet? So we had mutual friends at Penn. And

Rebecca would come visit, and we hit it off at one point, and I went up to Boston to hang out with her one weekend, and we just started dating. Wow. And I guess around the beginning of your second year, you start to think about delivering cookies. Tell me how the idea even came to you. So I moved off campus with eight of my good friends, and we lived in this fairly dilapidated college house on 41st Street. And it was like until five o'clock in the morning, video game and food ordering kind of haven, right? We were ordering product all night long, and there were so few options. There was a hoagy place, there was a Chinese restaurant that delivered, there were two pizza shops, and that was it. And I used to walk five blocks to the Wawa to get like any tasty cakes of Philly Special, and I'd get like licorice and Ben and Jerry's. I always had a sweet tooth.

Wawa, it's a gas station. It's like a gas station convenience store. Yeah. It was open all hours of the night. night. And I kind of married those two, which is like, all right, we're ordering food. I love sweets. Really sick and tired of these options. I actually had this moment where I opened the door and there was a delivery driver. The door was the same delivery driver who'd been there two or three times that evening, like the same guy with the same pizza. And I was just saying to my friends, like,

what's happening here? Like, we're ordering Papa John's for the third time. In one night, like, I think we have a bit of a problem. We need to expand what the options are here. And that was really the beginnings of the Insomnia Cookie inspiration. You know, let's just pause for a moment and appreciate the world we live in because I think many people listening don't realize that just barely 20, 25 years ago, you could only order like four things on the phone. I'm getting a little nostalgia because I remember this time in college. And there was something incredibly satisfying about that pizza arriving.

It was the only thing you could get. I mean, you couldn't just get a burrito, but it was still, I can taste that. Papa John's pizza right now. It was delicious. Well, I think the premise used to be, if you were going to deliver, it had to be something that you could deliver really well. Yeah. Pizza delivers well.

If it's not great, you can heat it up. Chinese food, same story. Sandwiches, it didn't matter. And so cookies really lent to that really effectively. Like, warm cookies, you can be done well, can be done quickly. We can get to your door very fast. It fit into that effectively. Yeah.

All right. So you're like, God, I'm just sick at this same old thing. Why can't I get cookies delivered? And, but why cookies? Like, do you remember why you went? I know you like sweet things, but do you remember why you went to cookies? I think there's an emotional reason why I went to cookies. Yeah.

But I think the natural piece was, it was cold. Oh, it was cold outside. It was cold out. And I'm like, I don't want to walk to Wawa. That was where the warm came from. I think a warm cookie on an emotional level really reminded me of home. So there was an element of being 20 and being away from home for the first time in my life, even if it was year two, and thinking,

you know what, reminds me a little bit of my childhood, a warm cookie. Yeah. And I think that'll resonate with others. But just saying that, right, how does that lead you to then saying, you know what, I'm going to make warm cookies and start delivering them? Oh, that's such a good question. Like, well, what went from here's something? Because we all have a million ideas, right?

Wouldn't this be awesome? If someone else in this? Yeah, right. I think I looked around in my sophomore year, I'm traveling back and forth up to Boston. and life starts to seem like I'm at this point in time where adulthood is here and professionally I'm going to be there at some point in the near future. I'm going to need to make a choice in life. And just in that moment, I was like, I'm going to go for this. I think it's a good enough idea. I think it's definitely niche enough. And I think it's going to resonate. And so I kind of was,

I tested it a fair amount. Like I was baking cookies and mixing doughs for a few months. I was handing cookies out on the thoroughfare of the Penn campus, seeing if people like them. So I was working on a recipe and the concept and even a small business plan through my second semester and into the summer. Right. But I really thought it would resonate because it just seemed, it just stuck with me. But did you pursue this because it just seemed fun like, or was it like, no, this can actually be a real business? In the beginning and for the first month or two that it was open, it really was like, this is just fun. Like, I was the cookie guy on campus. People knew. knew of me. And if it worked out, great. If it didn't, you know, I was 20. What's the harm?

Yeah. I mean, how much money did you spend on equipment? Like, 100 bucks? I think I spent $100 on like everything. Like the first mixer, it was like $30 and like the first ingredients. It was effectively no investment. And the idea was that you would make cookies and you would deliver them to people warm to their dorm room. That was the premise, yeah. So let's break this down a little bit. Okay, the cookie part to me seems pretty easy because, you know, it's not that. that hard to make cookies. And warm cookies, even if you screw up the recipe, are always pretty good. But to me, really, this is before a lot of people even had cell phones. So tell me how logistically you were going to do this. I mean, so I think to your point on the recipe, I think you're right

to some extent. There's tons of good cookies. And it took me a little while to develop a recipe that worked. But that particularly worked for warm, because the premise was always, I want to get it to you in 20 or 30 minutes. When you eat it, that's going to be optimal. That moment in time is going to be optimal. And if we can execute against that, you're going to order again. That was really like the whole business model to some extent. I had a cell phone and I had a car and I had a notebook. That was like literally the whole story.

People had my cell phone. I had to change it eventually because people called it for years and years and years. That's how I took orders. I wrote it down a notebook. I baked and off I went. Okay, but how did you advertise? Like, did you just put flyers all over the bulletin boards and dorm rooms? Like, hey, Seth's selling cookies.

give me a call. Yeah, I mean, I still have that flyer. I took a piece of paper, cut it into force, and had these quarter sheets, yellow, blue, like orange, pretty neon colors. And really started handing out those flyers in September of 2000. And I went to the top of each high-rise. There were three high-rises of pen. There were like 30 stories each.

I go to the top, and I would just post it on each floor. I'd walk down. And then I'd do it, you know, two or three days a week. I'd stand on the main campus with a tray of cookies. And it started to pick up. I mean, it wasn't, you know, from the beginnings of the business, if I got five or six deliveries a night, that felt like, all right, making progress, not overly taxing, can still get my work done. And that was really just kind of the first few weeks. And did the flyers say call between the hours of 8 and 11, or did it say call whenever and leave a message?

It was 9 to 2. Okay, 9.2 a.m. Yeah. And so since I was traveling every other weekend, the first semester was Monday through Thursday only. Friday, Saturday, Sunday we were closed, which is ironic because Friday, Saturday, Saturday, Sunday are absolutely our busiest days now by, like, a tremendous margin. But it fit into my lifestyle. Yeah. And it said insomnia cookies, phone number, order, you know, warm, delicious cookies to your door.

That was pretty much the entire flyer. And the name was the name from the beginning, insomnia cookies. It literally was like late night cookies, and that was the name you gave it. Yep. Well, in all fairness, my wife named it. She's an insomnia act herself. She struggles with sleep at times. And she's like, how do you feel about insomnia cookies?

And we're like, maybe you'd drop one of those Cs, but insomnia cookies. And the name has always been really strong. It just captures the business really well. And by the way, the kinds of cookies you were making were like, what, oatmeal, raisin, chocolate chip, sugar, those kinds of standard cookies? So the first semester, I was a little bit more ambitious. And I had this premise that any insomniac could customize any product that they wanted. And so, like, people used to order gummy bears and Oreos and Andy's mints were very popular at the time. But even until today, chocolate chunk, right, was number one.

Everyone goes for, like, that kind of classic cookie that they're used to. Yeah. I saw somewhere that people used to request marijuana cookies. Like, they call and say, can you guys add marijuana to the cookie? People used to call, and they thought there's, like, a code word to have cookies delivered with marijuana. them. So they would call and they'd say, can I have six cookies? I'll make them chocolate chunk, double chocolate, and then they'd say anomalous. And we'd say anomalous. And they'd be like, yeah, yeah, yeah, yeah, anomalous. Like, there's no code word. They're like, we totally get it. There's no

code. It got it. Anomalous. Like, no, really, it's just cookies. So I think people made assumptions that were not accurate. Yeah, you could price charge a lot of money for those cookies for that that mix in. But I, you know, I mentioned to you previously, it was really critical that. that the warm cookie that showed up at your door be the hallmark of the business. And the customization couldn't lead to that. And so I dropped the customization. I really focused more on the classics.

Okay. So you basically have these flyers up. And you're getting, what, three to five orders a night? Yeah. And you're just baking these in the kitchen of the group house. Okay. And how are you, you were just like packaging them in like, what? You'd buy little boxes and fold them up or something, like pizza boxes?

Yeah. So it was always delivered in a pizza box. They would say pizza on the top because I didn't have a custom box. But yeah, just kind of a simple approach, which is I'm going to bake them to order, make sure they're warm, put them in this pizza box, put them in a pizza bag to keep them warm. An insulated bag. Yeah, and just delivering my car as fast as possible. And you were selling them for, for what, a dollar, $2 a cookie? First year was $0.89.

Yeah. A cookie. So you were, I mean, this was not a money-making venture. This was just like at least initially because, I mean, five orders a night, you can maybe make $20. 25 bucks. So people were ordering about $10 each, but things, this went really quickly. So it went from three to five orders a night for about a month in like September and then one day the school newspaper.

I had worked there, so it's possible that that connection held. But the Daily Pennsylvania reached out and like, you know, we want to run an article on insomnia. And it's like, great. I love some earned media. Let's go. By the way, you didn't say at that time, I love unearned media because you did not know it.

You did not know what that meant at 20. Keep going. I just want to fact check here. He's 43 now. I don't know. You know, there's just words that are burdened to your brain. I said, wow, the school newspaper is interested.

That's so cool. So they came over to my house. They took a bunch of photos. And I thought it would be buried. You know, so that's not a nothing newspaper. I thought it would be buried. They put it on the front page. And the top of the fold,

Rudy Giuliani apparently was coming to the campus. So it said, like, America's mayor comes to campus. And then at the bottom, third, is a picture of me in this backwards baseball cap. And a hand mixer. I honestly don't remember the words. It could have said like college idiots starts cookie business or something. I don't know.

It didn't say that. It didn't say that. No. No. I think it said, you know, college student starts cooking business. Yep. Yeah. And the phone started ringing.

I mean, it started ringing at a different pace, let's say. And from three to five orders to 80 orders that night. Wow. Wait, how did you handle that many orders by yourself? I didn't. So I think I executed 60 of them, maybe. I put cookies in the oven. And then I went to deliver cookies that I had with the intent of getting back before they baked.

It was so crazy that I couldn't sequence it effectively. It was such a change. I mean, whatever that percentage increases is pretty outrageous. And so I was trying to do everything. I was taking calls while driving on speakerphone, taking notes at the light. Obviously, no one should ever do this. This is not recommended. Dangerous, terrible idea.

But really, in Sound Cookies was born that evening. That's the moment where it became real. And now tell me what does that mean. I mean, you're a student taking classes and then when you have time, you're buying ingredients and what, you're baking cookies all night and then sleeping a couple hours and starting again the next day? Basically, yes. You know, it was, I'd go to class. I'd run to the Costco and King of Prussian Mall, like 30 minutes from campus. I'd pick up ingredients.

I'd come back. I'd mix them often in advance. And then I'd refrigerate the dough. Sometimes I'd go back to class. Sometimes I'd study. Sometimes there were tests. I mean, it just depends on the demands of the day. But yeah, there were times where I'd stay up till 2 o'clock delivering.

I'd come back and then I'd work on a project like till 5 in the morning or study for a test. You know, it was really hectic for many, many months there. Okay, I guess at a certain point you got approached by a friend Jared Barnett who wanted to kind of partner up with you. Tell me about that. So Jared and I lived together on the same hall freshman year in the quad, and we're good friends through college.

And he said, you know, it's interesting where you're doing it insomnia. You knew me well enough to know, I was dating Rebecca and was up in Boston every other weekend or so. He's like, this is a four-day business. I could be the other three days when you're out of town. And I was like, all right. I mean, I'm pretty bullish on what insomnia has done so far and really excited to see what it looks like senior year. Let's give it a shot. And so he joined in September of 2003. So that is your final year of college. And when you launch, when you sort of start the business up again, you know, your student. But it's still at this point just delivering to Penn students, right? Yes.

Yeah, we started expanding outside of the Penn campus in the beginning of 2004. Yeah. And then by the time 2004 rolled around, we moved the baking outside of the college house to a small commissary, and we started hiring people. Tell me how much money were you making at the time, like a week in sales? At that point, we're probably doing 500 orders a week. 20 grand at most? A week? No, no, no, no, a month.

A month. I'm sorry. Still, that's a lot of money. Once you start hiring people and you have two founders and all of a sudden, there's not a lot of money. It's different. But so you expand beyond Penn. Like now you're going to other campuses, colleges in the Philly in Philadelphia? Yeah.

So from that commissary space, it was kind of more central to the city. We're delivering to Penn's campus and Drexel's campus, which are right next to each other. And to Temple's campus, as well as into the written, house area, which is kind of like the main area of Philly. Yeah. And were do you, was it still call your cell number or and put in an order? Like, was that how you were doing it? Yeah. And we also started working with campus food at the time, which is kind of like an early grubhub, seamless web, Uber Eats concept that was on college campuses. Hmm. And so at what point, I mean, at this point already that your second semester of your senior year, it sounds like you thought this is what

I'm going to do when I graduate. I was positive. Like generally, I'm pretty resolute. Like I met my wife in college, and I was very confident we were going to get married within a few months. I knew once that school newspaper article I was mentioning earlier, once that came out and the Daily Pennsylvania, it said, like, great college business potentially here in front of us, I was 100% sure that's what I wanted to do. And really, since that day, what I want to do for the rest of my life. When we come back in just a moment, Seth tries everything he can think of to turn insomnia cookies, into a national chain, including food trucks and partnering up with a frozen yogurt business that might just be a fad. Stay with us, I'm Guy Raz, and you're listening to How I Built This.

Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2004, and even though Seth's still a senior at the University of Pennsylvania, he and his friend Jared are already planning to grow insomnia cookies in a serious way. We started looking for capital at that point. It wasn't just a matter of this two of us, are going to muscle through this forever, we knew we were going to need to raise some funds to make sure that insomnia could scale. So by the time you're getting ready to graduate, you're starting to look around for some

potential investors to do what, to open one store in Philadelphia? No, so the premise was how do we expand into the college market outside of Philly? Right, I got you. And honestly, the hope was to open a few campuses as close to Philadelphia as practical. I mean, who were you talking to? Were we talking to mainly like friends and family to put in some money? Well, it was entirely friends and family. I mean, this is a, you know, 2004.

First of all, venture wasn't touching food at that point. And so it was entirely friends and family we were looking for it. And did you raise any money? We raised a few hundred thousand dollars from a gentleman in Atlanta and his family that I met through Jared. So you guys graduate in May of 2004 and your first, the first location, you work through the summer. You're still, yeah, I mean, what happened in the summer of 2004 because the students go home and your business was mainly students? So at Penn, we basically shut it down. Maybe we did minimal hours.

Yeah. It felt pretty safe to shut it down with, you know, pretty minimal expenses and figure out how to relaunch in the fall of each year. So, but really that entire summer was about real estate, trying to find locations. Looking around. Okay. Yeah, we were basically driving around the Northeast and a little bit of the Midwest. Did you have a specific plan? Like, first we're going to go to Boston and then we're going to go to specific college towns. Did you know what the plan was going to be? I don't think we had anything close to a comprehensive plan as we needed. I mean, honestly, like, the premise was let's stay close. We still have to distribute the product. We need to make sure that the ingredients get to the stores, that the cookies that you taste in the Philly store is going to be what you taste elsewhere. So we looked all around that area. You know, we looked in Villanova. We went up to Boston.

We went over to NYU. We headed down to Baltimore, like Penn State and State College area, and there just wasn't the right type of real estate available. Like we were trying to find kind of middle of the campus, clearly successful late-night options, and there just weren't that many. And so we ended up picking University of Maryland, Syracuse University, and University of Illinois as the first three stores after Penn. And I didn't think about bringing in the broader community.

I mean, Syracuse is in a small town. Yeah. And College Park has very strong population. Right, there was an opportunity to try to reach out and branch out beyond the college market, but it was still kind of in a college mindset. And so I didn't do that. Okay. So the first, and the first store you had, which was, this is after the commissary kitchen, or was that the, do you consider that the first store? I think the first retail store was Syracuse.

With Syracuse. So that was where you could actually walk in. There was a sign that said insomnia cookies and you could order there in the store. Yeah, so that first location, there's this a little bit of a, not to take us off track a little bit, but I was really nervous about cookies and how they related to the retail environment. Like there had been not tremendous amounts of success in cookies, you know, for that, at that point in 10 years preceding it, Mrs. Fields had struggled, great American cookie had struggled, regional players were struggling. I believed in the delivery element because that's where kind of the essence of the business was, like warm delivered cookies. But I was scared of the retail. And so what we ended up doing, and it was like really linear thinking, the idea was we're going to open up a frozen yogurt shop that would be good for the summer.

And we'll open up a cookie shop that'll be good for the winter. And we'll put them together into this one co-op space. And so we opened up our Syracuse location in December, late December 2004, that was both a frozen yogurt concept called Tasty Delight and Insomnia Cookies in the back of the house. So even that first location in Syracuse, you couldn't walk in and order cookies? You could, but what you basically walked into was a frozen yogurt shop. It had a cookie blade sign in the window, and there was a small little display of cookies, but it wasn't a cookie shop. It was a frozen yogurt shop. I see, but still called Insomnia Cookies.

So it was called Tasty Delight. Tasty Delight. Yeah, yeah, which was exceptionally popular at that point, especially in New York. I mean, New York it was crazily popular. And did you partner with a frozen yogurt person, or did you also own it? that you guys also own that side of it so we licensed the tasty delight name i see okay and we purchased product directly from them and it was similar to a franchise arrangement but like a little bit nuanced from that tasty delight is a chain okay yeah you know they've they've definitely declined quite a bit but

like in their heyday they like a lot of coverage on insects in the city at one point they were featured and it just it was a bit of a fad so really you open a frozen yogurt shop that also had the cookie kitchen in the back where you could do late-night deliveries, but that was kind of like a separate business. It was. I kept separate books. You know, they each paid rent, a portion of the rent. Like, it was a completely separate business. It was just a co-op business. Right. You know, I look back on the big mistakes I've made in the last 20 years. To me, that was like the biggest one. Because if we had set the course differently and it just focused on retail with delivery together, the business that we have today, it would have accelerated things dramatically. But I just, I thought if we were retail-centric or had retail as part of the business, it would be hard to differentiate. And I didn't know better. I honestly didn't know better. I mean, I was 21. So you opened this location in Syracuse and you moved there to Syracuse, New York.

I didn't. No, so I didn't. So I moved to Manhattan. So I graduated. I got engaged. And so New York became our kind of our headquarters. And we had a small office in New York. But we were doing everything from that area. So we were driving up to Syracuse. frequently. We were driving down to Philly frequently and then passed it to College Park, Maryland. We were flying out to Champaign, Illinois, which opened a little after the Syracuse location. But the center of operations was in Manhattan in 2004. How did you kind of manage those teams? I mean, would you go there, set it up, hire a manager, and then go back to New York and then check in every couple of months? Or, yeah, how did you do that?

So, you know, my management style even to the day, like I love visibility into data. I wanted clarity of how the business was performing, so we put in fairly good system, especially for 20 years ago, and we could see how the stores were doing on the hour, on the day. We were talking to management pretty consistently. I think the parts where I didn't have much expertise and wasn't investing enough was really in brand building and marketing, and also in the delivery system. Okay, and just to be clear, the location that you opened up at Syracuse was a tasty delight, but also made cookies in the kitchen, and you just delivered that to students.

Was it the same model that you did in College Park, Maryland and in Champaign, Illinois? Yeah, so the first three locations were that model. Tasty Delights. Tasty Delight locations with Insomnia Cookies, some branding and delivery service out of the back of the house. Got it. And how did the frozen yogurt side of the business do? At first, it was really strong at Syracuse. The frozen yogurt was very, very popular.

I think some of that had to do with the fact that there's a lot of New Yorkers on the Syracuse campus, and they just were aware of the brand. In Champaign, Illinois and in College Park, Maryland, University of Illinois, University of Maryland, respectively, it never took off. But the cookie business did okay. We were selling, we were doing deliveries. We had the same kind of guerrilla marketing campaigns that, you know, I described.

And also, I mean, you didn't own tasty delight. So, I mean, the incentives to me would have been to build up the insomnia brand. But if you went into those locations, it was a tasty delight. You wouldn't know that a company called Insomnia. Insomnia Cookies was also there? You just were a clued in because there was a sign in the window. We actually, it was interesting, we customized the sign to the campus colors. Huh.

So in Syracuse it was orange. In Maryland, I think it was red. I think in Illinois it was also kind of an orange. But what's interesting now is like, we don't deviate from purple, right? Insomnia's brand color is purple. Yes, right. Everything's about purple. It's insomnia purple.

And like, just not knowing what I was doing, I was literally giving away the brand in the absolutely wrong ways instead of building it, as you mentioned. Yeah, we certainly were not effectively conveying. Like, insomnia cookies is here and growing and we mean it. It's interesting. I mean, I understand that impulse, right? Especially when you're young, because you're thinking, okay, we need the backing of a big name, a bigger brand to help us create a sustainable model. And so it makes sense to me why you would have done that with sort of through tasty delight, because it was like, well, that's the safer route to be. building, you know, a sustainable business.

I think we were trying to get to self-sustaining. You know, I think the, even though we were raising small amounts of capital by today's standards, raising money is a full-time job. And I was clear from day one, like, I don't want to raise money every year for the rest of my life, which, by the way, I did from 2003 to 2011. So like, it was every year for eight years. I was just raising capital, raising capital. I wanted to get away from that.

So the premise in my mind was how does, how do we get to profitable? How do we get to something that's not only profitable, but allows us to build more locations out of those dollars? And I didn't see it right away in the cookie business. And so this, to me, was a bit of a cheat code. And how was business in general doing? I mean, from the outside, I'm thinking, God, look at these guys. I went to college with these guys. These guys just graduated like a year ago.

Look at them. They're crushing it. Were you crushing it? No. We were not crushing it. We really weren't crushing it. There just wasn't a lot of profit. I think Syracuse made a few dollars.

Champaign College Park lost a lot of money. Pence didn't make a ton of money when we stepped away. Why do you think that was the case? I think it stems from the seasonality mostly. Right? We do well in September, October. But then November would roll around and Thanksgiving would hit. And that week that the students left campus became a struggle. Right?

We'd have a great beginning of December when finals would be, and then everyone would leave for four weeks. And same thing would happen in the summer. So, like, it just was really challenging. to find success over the course of a year in a seasonal college business. And that's what we were. Like, we didn't have a city store. We didn't have a 12-month business

in New York and Chicago like we do today. And we didn't have the brand knowledge. There was still so much educating. Yeah. So many people are like, do I need a warm cookie late tonight? You absolutely do. You just have to try it. And getting people to take that leap

was really difficult and really costly in the beginning. Yeah. So, but like the critical flaw was that, frozen yogurt really does well in summers, and college students are not there in summers. Yeah. Right? So just by nature, you're putting on the masthead this warm weather business in effectively cold weather environment, and especially in Syracuse, by the way, which is really cold and snow is quite a bit.

It was a mismatch to the college market. And even today, I don't really see a tremendous amount of frozen yogurt on college campuses. So in your mind at the time, 2006, 2005, 2006, when you were kind of going over this in your mind, you're thinking, God, how can we crack this? How can we make this into something that's a year-round business? How do we, do you remember what you started to think about at the time? So we tried two things. So first, we looked at cities. I mean, this was like, to me, the obvious answer was, all right, well, we're not succeeding exactly in a 12-month business. Let's look at a city. And I'm in New York. So this shouldn't be so difficult. I

lived in the village. Yep. And so I walked around the market looking for locations. Didn't really find one until, you know, maybe 2006 time frame. We also doubled down on Tasty Delight. And we did it in a city environment. And so we licensed locations in Atlanta, which is where Jared was from. And the business had been struggling.

So he kind of lost, I would say favor, but like he was starting to get impatient. He saw elements of Tasty Delight that seemed like maybe they had more legs than the cookies. And so we opened up three locations in Atlanta in early 2006. And how much roughly would each store make a year, like three, four, five hundred thousand dollars a year or less? I think between the cookie and TastyLight Business, I think it peaked at four or five hundred thousand dollars at this point. Right. And that's tricky because probably your expenses may have been roughly the same or even higher. Yeah, I remember the rent in College Park at the space we rented was like 80,000 a year. So you're talking 20 or 30 percent, you know, occupancy costs, which is not great in the restaurant business.

Really a tough starting point. You use layer in labor and cost of goods and shipping and distributing product, especially with yogurt. You got to ship refrigerated. It gets very expensive. There was very little profit. And we had to, by the way, Jared and I needed to eat. So we also had to pay ourselves. And I had just gotten married.

You know, there was a lot of pressure financially for many years. So it sounds like Jared was really interested. in pursuing the yogurt side because he saw that as a path to maybe faster success. How did you feel about the yogurt? What do you remember feeling like, you know, I don't know if a yogurt thing is a way to go? After we opened up our second Atlanta location and we bought these frozen yogurt machines that were like, they were like 10,000 a pop. I remember writing that check and being like, God, this really needs to be a six, $700,000 store to make some money. Like, you know, we got to do $2,000 a day.

Wow. And a month in, we were doing like $400 a day. And I remember saying to Jared, I think we're in trouble. And by the way, I'm watching in New York, Tasty Delight, not Flame Out. It was still popular. But it was really being talked about all the time. And then you just stopped hearing about it. The Fed was starting to play out.

Yeah. So, I mean, this is a. around the time where I guess your vision and what Jared's vision is start to, they're no longer aligned. They're kind of fraying a little bit. Was that going on for a while already? Yeah, I mean, it started happening because we'd been friends, but not for so long, right? We met 2000. It'd only been a few years. And when you started working in a business as closely as we did, it was kind of like a marriage. And so I think when the business started to struggle and And it was clear to us that we were going to be raising money, being raising money.

And then the money stopped coming in. It started becoming more difficult to raise capital. I mean, there was real tension towards the end. I remember Jared and I, we drove up to Syracuse. And we were on a show with Mark Summers from Nickelodeon. I can now remember what it was called. Oh, he did a thing on you guys, on Food Network. Yeah, we did it together on the Food Network.

Oh, it was called Unwrapped, I think. Unwrapped, yes, thank you. Yeah, that was a show, yeah. So he wants to do something on the cookie thing in Syracuse. So you go up there, okay. We go up there and it's a very long couple of days shoot and, you know, we finished it up and we drove back. And Jared was like really excited about the experience and he had these like feelings like insomnia was going to be so grand and successful. And he was like, let's chat with everybody and have this meeting together.

It was like one o'clock in the morning. I was like, Jared, you know, the business is not really there yet. Like this is a fun moment. But like we need to be successful as a business to really let this thing, really. really get excited about this. And it was like a first fight. Like we got into like a real fight about it. He's like, I want to relish this. I want to really. And I was like, I'm just not there. And we're just in different places. And I think I was just really struggling with the present. Yeah. And we didn't want, you know, neither of us wanted to fail. And so trying to figure our way out of that, we just took different paths. So he, I guess around May or June of 2006, you guys decide to part ways. He basically, you buy him out more or less. I said to Jared and I don't remember who started it, but like we both recognized it was time to part ways on the insomnia business. So at that point, what happens to the yogurt business? Is it now you are the main shareholder here?

I mean, you got into investors or was he still involved in the yogurt side? So we were still both involved in the yogurt side. Right. But he was out of the operations of the insomnia business completely. Of the cookie business. Okay. So the cookie business was he was out. Yeah.

And then so now at this point, I think you have. probably six, seven locations. These are all frozen yogurt shops. Yeah, but some of them start to convert. So at this point, in kind of mid-2006, I convert insomnia in Champaign, Illinois, to a cookie-only store. Cookie-only? Yeah. And that meant that you could go in there and order cookies or you could order them and have them delivered to your house? Correct. So Insomnia Cookies was actually now had its logo on the signage, right? So like the principal signage, said Insomnia cookies and it was only the insomnia cookies brand being conveyed to the customer. So Champaign, Illinois really was the first only insomnia cookies location.

Yeah. How did it do? So it was doing pretty well as a cookie-only business. The cost of operating was cheaper and it started to perform really well. It was our first profitable location. What was going on with the yogurt businesses? Were you that was still just happening? Those still existed?

Maybe six months after, you know, Jared, and I parted ways on insomnia, the Tasty Light store has started to close one by one. I mean, this must have been really stressful because you're talking about now three, four years into the business, which started as a cookie business, but you kind of pivoted to cookies yogurt. The yogurt business isn't working, and the cookie business still unproven, you must, I mean, at this point, you guys are, you must be losing not an insignificant amount of money. On cookies, we weren't. Like, I think at the, at the store level, And I always looked at the store level because the intent was, can you replicate more of them? And if the stores are doing well and you can multiply that out,

eventually the math should work in your favor. When we isolated cookies from yogurt, there was some success at the store level. It started to happen at Syracuse as well. College Park ended up closing and working out a deal with the landlord because it was just a bad real estate choice. And I kind of right-sized the business and clarified the model. So I can do retail locations.

They just have to be small. And really, you just needed this, like, what, 500, 600, 700, 700 square feet? I mean, sometimes less. You know, I think the Champaign, Illinois location was 500. My first New York store in Greenwich Village, which opened in, in 08, was like 250 square feet. I mean, we were able to shoehorn into almost anything. So you continue to believe in this vision of cookies. Tell me what kept you going.

I mean, why were you believing in this vision when a lot of the evidence, suggested that maybe it might not work. I'm not 100% sure, honestly. The demand of warm cookies wasn't really sufficient to keep going, but people seemed to really love it. And so I was like, all right, there's an education element here. I haven't gotten the model right yet, but as we started to tweak it, I started to tweak it at this point.

There wasn't really anyone else. And we had this Illinois location and the Penn location. They were starting to make money. And I was opening in Cornell and Binghamton and kind of a small co-op location in New York. York, they were doing okay. And so okay for me was enough to keep going. It wasn't clear that it was all going to add up to something that was great in the end. But if there's some brand love, that's kind of hard to find. And so we're building it over time. And as you start to take away some of the distracting

elements, take away the yogurt, focus on the core business, focus on the core insomniac, who is that college student, and just get better at delivery, make sure the product tasted better each and every day, there was some clarity that that can grow into something bigger. And I started to just believe it. And honestly, if you said, Seth, maybe you were just delusional, I'd have a hard time arguing with you. What other changes did you make to make it more efficient? We started to, like, tweak the equipment package, you know, very early on,

make sure that the oven was right, that we can keep the cookie warm for the long term, that when we delivered it, we can do it quickly, that the technology that underpin the business was strong. You know, I made the supply chain really clear from day one, which, like, I wanted the cookies to taste the same everywhere that we went. And so we figured out ways to standardize the product that shows up in each of the stores. Those tweaks over time, one, brought the cost down and two, made the product even stronger. And how are you financing? Like, so you mentioned that, okay, you have, you want to, you open a store in New York.

I know you opened a store in Madison, Wisconsin. you were just constantly raising money all the time to open new stores? Yeah, yeah. I found a fresh, I mean, it's fresh capital, but I found, you know, I met a new group of investors in later half of 2006. Penn alum, through their kids, by the way, who'd been customers, which is pretty, pretty gratifying. And they sat down with me and they said, you know, what's it going to take for you to turn this into something more meaningful? It's like, honestly, like a real slug of capital. You know, I've been raising tens of thousands of dollars in pieces over the course of the last three or four years.

And I've never had like a real considerable amount of money to hire a team to find more locations, to get that critical mass of stores that would lead to that sustainability I was looking for. And that was really the first more meaningful capital raise I did in, you know, kind of the latter half of 06. Hmm. And as you open more and more of these businesses of these storefronts, presumably you had to start to hire people around you in the New York, your New York headquarters to help kind of run corporate. Because these were not franchises. These were corporate-owned locations.

Yeah. Yeah. I mean, I was always a believer in corporate-owned just to make sure that something that was a little bit novel as it related to the restaurant environment. Like basically delivery as a core competency, outside of Domino's of the Pizza Guys, it's pretty rare. So I wanted to make sure that a franchisee didn't turn it into retail only, that I saw fail in the, forms of Mrs. Fields and Great American Cookie. And so I made this concerted effort to keep it company owned and still is to today. But then I had to hire a management team. So in late 06, early 2007, I hired an operations lead. I hired a director of marketing. We had a creative

manager. And then we had some finance support. So it was kind of the first time I built the team was about five of us. It means interesting because we've had founders in the show who preferred the franchise model and those who didn't. And what I found, is with the franchise model, and I think you probably would agree with this, you can expand much faster, right? You can really build your brand out very, very quickly if you start to sell franchise locations. And it doesn't require as much capital. But it sounds like you were just absolutely opposed to this idea. You didn't want to do that. You know, I'd seen some franchisees really flop. Yeah. There's a lot of recency bias in some of the things I'm saying. Like,

I saw Mrs. Fields. It didn't do well. At this time, I watched Quiznos. grow so fast and then be done like that. And so there were things I was seeing around me that were giving me some anxiety, but I think it also goes back to who I am. You know, I really like the details. I really like innovating all the time. I like changing things up.

I like mixing them up. And that's not really where franchising is built. Franchising is stronger marketing. It's really strong standardization, making sure that you can educate and train really, really effectively. And I was still kind of in that roll my sleeves up and get in there and figure out what the brand, was going to be. I'm not sure I even understood what I was going to be franchising yet.

Yeah. By the way, I still didn't have clarity, a hundred percent clarity on the model because I tried a vending truck, you know, in Ann Arbor in late 2007. Oh, so it was like it was just like a food truck with cookies, so you could just get there. And we were able to bake on premise and get the dough work down on premise. Like we really had a full insomnia kitchen in a vending truck. Nice. And, you know, very little rent, right? Almost no rent. And so it was just, trying to continue to skinny down the model. And it was super, super successful. So much so that we opened up another one in Madison, Wisconsin.

And that one was really successful. And after these two trucks, I committed to eight more. Wow. And while those eight more were being built, in the case of Madison, Wisconsin, the city changed its ordinance, where our truck was no longer the right size. It was too big, and we had to move it off campus. I think I took it a little personally,

but it felt like they reduced the ordinance to like one foot smaller than my truck was. And there were other trucks that operated on campus, but the vending truck environment just didn't work for small cities. And you know what? I get it, right? Like they're loud. They're open all hours a night. It's not like it's self-enclosed, right?

People are lining up on the streets. Right. It doesn't lend so well to the college environment, kind of in the long term. I do get that. And no one knew how to fix them. The oven would break and the propane system would break and the truck would break down.

The maintenance level, on that were so, so high. That over time, like, we just weren't open as much as we really wanted to be. And so I talked about recency bias before. Like, I think I got a little bit to focus on, oh, this, maybe this is it. And then I went really fast. And vending trucks ended up being a right turn. I wish I hadn't taken. It was like a two-year real distraction. And we veered into the Great Recession in 2009. And so built a couple trucks. They looked great. It was going to be, like, that's the future of insomnia. By the time the 10 were on the road and not working that well, raising capital became nearly impossible. And like, I mean, it was a really scary time. When we come back in just a moment, how Seth manages to keep going through years of crisis until a technological revolution gives insomnia new life.

Stay with us. I'm Guy Raz, and you're listening to How I Built This. Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2009, and Seth has a handful of cookie stores and a fleet of new food trucks that are starting to wobble. And just like the country at large, he's facing a serious financial crisis. You know, once it really became clear whether, like, Lehman Brothers had blown up, there was no more capital. And I went to the investors, as I'd been doing for the last three or four years. I'm like, here's what our loss is for the year. It's less than last year, but it's still a loss.

You know, I'm hoping to raise a half a million dollars. And they're like, checkbooks closed. We have no idea what the future holds that the checkbook is closed. Like, figure out what you're going to do. And so I ended up cutting my team down to myself and a finance associate. And we had kind of a field operator who drove around. And I stopped paying myself for 18 months. Yeah.

I moved my office from a corporate office to one of my investors, like really like kind of his closet, like the back of his office. I had this little 50 square foot space. We put two desks in there. Wow. And I drove around the country. I did it for three years. Fixing generators, delivering product.

I remember I used to deliver cookie dough from New York to Syracuse. I'd meet the Syracuse team on the bridge on the way into Syracuse, so it saved me 30 minutes so I could turn around and drive home. So instead of being an eight-hour round trip, I'd do it in seven. It was crazy. I mean, honest, I did compartmentalize that time. Like, I don't really think about it too much. It was so very hard. How long would you say, like, your hell period lasted, like, two years?

It was definitely two years. I'm thinking whether it made its way into three. Between two and three years. It was like I was driving at Temple's campus, and I was the only guy who knew how to fix the generator. Yeah. I'd say, hey, do we open to it? And the store was doing pretty well. The truck was important.

And I'd say, did the generator work this morning? No. Like, all right, I'll see you in two hours. and I'd get in my car and I drive to Temple and I'd fix the generator and I'd head on home. Like there were moments like that for years. On the bright side, cookies are like, I think it's kind of recession proof, right? It's a small treat that people will still be willing to pay for. It's not like a car or, you know, a big purchase that you really see the effects.

Is that true? Was the business still okay? That's what we've experienced at times. I mean, it's also like it's a nice pick-me-up. Like people just like a little sweet moment, especially in a department. kind of environment, right? It's just, it's one of those small indulgences. All right. So on the one hand, the business is doing okay, but the challenge is that you're not going to be able to, you're still anticipating losses, and you knew that your investors had sort

turned off the spigot. And so what did that mean for the future viability of the business? At a certain point, did you start to lose faith that this was going to work? I did. I really, this was the point where, I'm a first of all, I didn't know what to do. I have no other, I don't have any other experience, right? I've been a cookie entrepreneur for 21 years, right? It's all I knew. And so the idea of what was my next career path and is the middle of the recession. Like it felt like the only option was to move forward, but I had very little confidence.

And, you know, I had continuous conversations with my wife, like, I don't know what to do. This isn't working. Once she said, like, maybe we should throw in the towel. And I was like, no, no, no, I'm not doing that. And then there was another time where I was driving cookie dough somewhere in the middle the night and I called her. I was really frustrated. And I was like, oh my goodness. Like, I'm peddling cookies through the Midwest. Like, two o'clock in the morning. Like, how did I get here? But she said to me, like, you believe, you know, you believe in this. You do. You've been doing it for 10 years.

I believe in you. Do what you got to do. Like, go make it happen. She stood behind me through all of this. Were there days where you just didn't want to get out of bed? No. I, you know, I had my first child, March of 2010. So right in the middle of it. And I kind of had this feeling at that point, like, Seth, you've got to figure it out. You're seven years into this. You have a kid. Like, what is it really going to take? Figure it out.

And one thing that helped us there was I opened up a location on the Upper West Side of Manhattan, two blocks from where I lived at the time. It was the first kind of like city-only location. We had NYU, but we never had like a city-only, like a neighborhood store. And that store, I ended up building it myself. I didn't really have a ton of capitals. Like, I cleaned the store, I put down the flooring. I hired a plumber to run the sink and an electrician to put in the oven. But, like, I built the millwork and, like, really put the pieces together.

I painted the location. And it was a absolute home run from day one. So you asked the question, like, did I ever reach that point of just utter despair? I really didn't. There was always something that was keeping me optimistic. You saw, I mean, you mentioned chains that no longer exist, really tasty to light. and, you know, even Quiznos eventually filed for bankruptcy. He's still around, but, you know, we've seen this story play out.

So all the indications were that, you know, your company could just be another kind of statistic, right? I think when I zoomed out, especially at this point, so in 2010, when you peeled back and you looked at the core model that exists today, brick and mortar business on a college campus in a late-night environment where we deliver, there was, real success there. In the Great Recession, the stores were working. And it wasn't what other people were experiencing, which were franchising with declining volume. We didn't have declining volume. Or margins that were very hard to come by. Like, we always had a reasonable margin. So I could see it on paper. I just needed to believe it and then bring it to life. At the same time, something kind of world-changing happened at this moment, which was the iPhone was introduced in 2007. And I think the App Store starts in 2009 or maybe, you know, in earnest 2010 really kind of blows up.

But that was really going to have an impact on your business because now you could start to order through your phone. I mean, that's the moment, right? I mean, that's where the business tips from fledgling to there's clear path forward. The iPhone was an absolute game changer. It turned us from a late night on-demand business in a universe where that did not exist to being right in the middle of what everybody wanted. So how many years before you were able to attract capital again?

Was it a year, two years? It was by, I think, 2011, the world was getting better. The financial world was certainly improving. Our business was improving, and we were getting closer and closer to break-even. And I sat down with a new potential investor. I remember he turned to this good friend of mine who'd given me office space, and I'd sat with a couple years, he's like, you've got to cut another check into these guys.

Like, they're there. They're right there. And that conversation, by the way, it was huge. There's been moments where I'm like, thank goodness these happened. That's one of those moments where this person I had really never met before convinced one of my most trusted investors to cut one last check. And that was the last check we ever, it was ever cut back into the business for like really seed money ever again. Wow. So you start to emerge from the recession.

And I think in 2012, there was a pretty, what I think would think is a momentous, a turning point, which is you opened up the first store that was opened entirely through cash flow, a store in Kent, Ohio that didn't require, like, you basically didn't require any outside capital to open that store. Is that, is that right? Yeah. I don't think I even realized at the time. Like, I had to look back, you know, I think you're closed out and be like, oh, it was store 22. But that was the point where we weren't, you know, living check to check as related to investors, right? We were on our own. We were all set. And we then opened 120 stores exactly like that directly from the profit of the business.

It was from that point forward. From that point forward. It went from so difficult. And it was still, I mean, it's not easy to open stores at a rapid clip. But it was so fun. What kind of spaces were you looking at? I mean, were you just looking for cheap, small spaces? It didn't really matter where it was because he didn't need foot traffic?

No, we were really, really disciplined about real estate. There was one principle, which was late night. It had to be a late night area, no matter what. So a bar club area. Because you wanted people to walk in. Yeah. Saturday night, after the bar is closed, we were the go-to. And I say that sometimes, like people make bad decisions late at night, like 12 cookies.

We want to be your go-to move there at 2.30 in the morning, right? That's where insomnia is most successful. But retail still was a smaller part of your business. The delivery side, I have to assume, was and probably still is, the bigger side, the bigger part. At this point, they started to reach parity. Huh. Retail and delivery right around that point, retail reach about 50 percent, and it's kind of been like that for 10 years now. And how did DoorDash start to change your business?

And Uber Eats and all these places grow up. I mean, was that, was it a net positive for you? I have to imagine it was. I was very resistant to working with third parties. I believe that the brand moments that we can elevate in the store and when we deliver to customers was so core to who we were.

I didn't want to lend that out to DoorDash and a third party delivery system. And so I didn't really open up to the DoorDash and Uber's of the world in earnest until the middle of COVID when we had to rethink the entire business model. And it turned out to be a good decision. It was certainly a good financial decision.

I think there's elements of it still today where we can just drive a better experience at the door. You know, I order food multiple times a week. Our drivers care about the insomnia cookie order, whereas the DoorDash drivers are agnostic to what they're delivering. And so there's a little bit of an ability to really maneuver and make the experience stronger, and you can't really do it with third party. Yeah.

All right. So you, as you expand now, I mean, I think by 2016, you had 100 cookie locations, 100 insomnia cookie locations. By that point, was the business profitable or was it still not quite there yet? No, at that point, we were profitable and passed the, like, there was money after all the building we were doing. It was that kind of self-sustaining dream by 2013 had been achieved. Did you feel more confident at that point, or were you still, you know, vigilant about what could happen given what you had seen in the previous few years? I have some healthy paranoia.

I never trust that insomnia is safe. I mean, honestly, I'll look at sales in a given day, in a given hour. And if I see it going in the wrong direction, I start to get, I try to, I course correct. You know, I'm constantly course correcting. I think it's being forged out of crisis, right? Like, becoming an entrepreneur in a business that took 20 years to get here and all the struggles of financial crisis and all the pivots and model. Yeah, it'll be very difficult for me to ever get to a place of comfort and complacency. It's just not who I am.

Yeah. Did you have any competitors by that point? I mean, you know, there's other cookie brands now. You know, Crumble, I think is one. But I think I just started at that point. Were there anyone else doing anything like what you guys are doing warm, delivered cookies? Not really. I mean, I always thought of like Domino's as the competitor or even some of those are kind of, you know, local mom and

shops that were delivering. That was really a share of stomach at one o'clock in the morning. That's what we were going after. You know, even with other businesses growing in the last couple of years who were focused on some form of a cookie, whether it's larger or has tons of toppings, like for us, that late-night insomniac is so true to who we are, and that's what we compete for. When you saw brands like Crumble start to emerge, did you start to sort of look at what they were doing? I mean, I keep a very close watch on the indulgence space. in general. Like, I watch the cupcakes guys all through, you know, the early 2000s. I watched, you know, kind of ice cream scoop shops, 2015 to 2020, Jenys and Salt and Straw. So I'm always

watching the indulgence space because a craving is a craving, right? You're trying to meet a craving. If somebody's, somebody gets in the way of the craving that you were filling, that's difficult. So we keep a watchful eye on it. But we'll look closer. We'll look at, when are they successful? What times of day? What sort of products? Can they deliver it? Can they do it quickly like we'll really digest it as it relates to really our benchmarks as a brand. And then we'll start to understand what's competitive and what isn't and make sure that we're telling the right value story. Yeah, I mean, I think of the same way with this show, which is I don't compete against other podcasts, but against everything that is consumable media because that's what, you know, where people's attention is going. And so it makes a lot of sense.

I mean, just kind of talking about crumble for a moment, and it's not always fun to talk about. you know, other brands or competitors, but their expansion has been math. I mean, they start in July or in 2017 that they have more than 900 locations. That's a franchise model, right? We talked about this earlier. They really just blew up quickly. They're everywhere. They've managed to successfully use social media. Not clear whether it'll be around in 10, 20, 30 years. It might be. It might just be a trend. But it did grow really rapidly. Did watching that happen? kind of change your thinking about your business model in any way? Honestly, it didn't.

I look at what they do. I look at their entry point. I look at the type of product. And I look at a, I see a cupcake. I don't really even see a cookie. So I see it. It's real. It's not nothing.

But it's a different, really a very different business. And it's not something that we struggle with. And really, I mean, you focus on this idea of fresh baked cookies. Like, that's what you're, it's not. about an Instagramable, decorated thing. It's like, it's warm, and nobody's, very few people are doing that. For us, it's me, I mentioned that craving. Like, we want to meet the craving. We want the product to always be delicious and for you to rely on that, for you to eat it and want it again. And not eat it and then something else next week change that maybe you want to take a picture

of. Like, I don't want to be disparaging to them because what they've done is extraordinary. There's not very few examples of this. They had a really big growth story at one point. Yeah. It's hard to sustain that pace. It's hard to sustain consistency and standards and quality at that pace. And it's just really hard to do it in a franchise system. As you said, it's yet, well, you have to be, the story is yet to be told. So let's talk about Kris cream now because in 2018, crispy cream owned by J.B. Holdings,

which also owns Panera and Noah's bagels and Einstein bagels and a couple other places. They bought a majority steak in insomnia. And before we dive into it, were you looking for partners at that point? Did you feel like, okay, we've hit a certain scale here, you know, 120 locations or whatever by that point. And I think we need to partner with an even bigger player at this point. I didn't realize that's what I wanted, but it's what we needed. Yeah. The way Krispy Kreme came about was, I think it was late 2017.

Yeah. Something happened internally. I don't even remember exactly what it was. where I just felt like we had had this huge growth store, 20 stores, 150 locations so rapidly. And we didn't hit a wall, but I could see something was breaking. Like it was, the demand wasn't exactly there in the same way. Our innovation wasn't moving at the pace that we needed it to.

Our delivery times were slipping. Like, we were going back to our organization. We have an annual summit, which actually we're going to have next week in Philly. We had a couple hundred people. And I remember kind of walking through... This is a summit of all your employees? It's all our managers and all our support center team. So it's a three or 400 people event.

It's truly the highlight of my year. But I remember going through the details of how to get delivery times down from 40 minutes to 30 minutes, how to do it step by step. And it was such hard work. Like, the system had gotten so big that the type of work we were trying to do was it just... I felt like I was a roll your sleeves up operator entrepreneur. who needed to morph into CEO, who could understand how to really rely on others and trust others to build the brand with me. And I just wasn't in that place.

I recognize I was in that place. I'm like, I need help or I need to exit. Those are really the two options. And we started a process trying to find buyers. We hired an investment bank and we spoke to dozens and dozens of people. I met Krispy Kreme in February of 2018. then I met 60-ish people. And then at the end of the process,

they were standing there with us shoulder to shoulder. And they were clear with me from day one. Like, Seth, we're only doing this if you're still here. Like, you know the story. You know the experience. And they really helped me kind of rethink the whole thing. And so they purchased about 75% of the company in 2018 for $140 million.

It's amazing. What did that enable you to do now that you were part of the Krispy Cream? family. Like, did it change, you know, efficiencies and how you distributed supplies? And, I mean, what did it enable you to do as a business? I think the part that was so helpful is that, one, they helped us think about the brand, why we were successful and how to tell that story. So delivering the warm cookies, being value-oriented, but also driving a business. This is going to sound kind of silly, but, like, over the years, I was so desperately trying to get to a sustainable place by growing that I sometimes lost sight of what the business is.

itself needed to look like to be successful. So they kind of helped me thread discipline through it, like financial discipline back into insomnia, making sure that the decisions we made were helping the business and the organization grow in tandem. That's where I kind of got lost. And as I told you the story today, going through the 15 years that preceded this, a lot of the decisions I made weren't about discipline. They were about hope. I hope this works out. I hope this truck works. I hope that this Tasty Like Concept Works, it became much more centered on the data and say, okay, this is working. Let me do a lot more of this. Now, the one part with Krispy Kreme, though, is that we joined them in late 18.

By the time, we really got to know each other, COVID hit. Yeah. And then everything, all bets were off. Yeah, I mean, COVID, I imagine, like with many food businesses, you probably saw a significant increase in business. I mean, I think during the first year of COVID, you opened like 25 steps. stores. So we had a really initially a huge challenge. So college campus-centric business in March of 2020. Right. One day we had college students, the next day we did not. All of them gone. And our sales decline almost 50% like this. But what we did understand was that our consumers still loved us.

They just weren't accessible. So how do we reach them? And so we started expanding our delivery zones, still trying to be true to our delivery times and making sure that warmth was there. But we extended out to five miles from three miles, and all of a sudden we were back to normal and growing and growing and adding stores. And since then, it's been the fastest growth we've ever had. So really, after many, many, many years of either getting paid nothing or getting paid very little, you finally made some decent, significant money in 2018. Yeah, it was a big change. It was honestly, it was like, all right, well, sometimes you spend 15 years of your life hoping something will happen. and putting everything you have into it.

And magic happens. But yeah, it was a big, big shift. Yeah. Talking about money, I want to raise something that I think probably was not pleasant for you or anybody involved or, you know, but your original business partner, Jared, he sued you back in, I think, 2023 and it went to trial in 2024. He, when he left the company, he retained against like 5% interest if there was ever a liquidation sale.

If you ever sold, if the business was. ever acquired. I imagine by that point, by 2018, when Krispy Kreme made an investment, you had been out of touch with Jared probably for a while, right? Yeah, we spoke at one point in 2009. We hadn't spoken nearly a decade. That was really the last time I had chat with him. Yeah. We talked some baseball. So you fought this suit. Basically, your argument was, hey, this wasn't a liquidation event. This was an investment. Their position was, well, no, they put in $140 million. This should count as a liquidation event. He should be compensated. He should get the money he was promised.

You know, probably from his perspective, he felt like, well, you know, I raised money and I had brought investors in and I helped build this thing at the beginning. From your perspective, you're thinking, well, I was alone doing this for, you know, 13 to the 15 years. So probably two very different perspectives on what happened. But in the end, at the 11th hour, I think once it went to jury deliberation, you then settled. Yeah, so just one small technical piece there. So it's very complex legal. But basically, we were debating over what I owned at the time, what he owned at the time, what I own now. It's just all these different pieces and elements to it.

At the end of the day, we went through a many-year litigation. I mean, it started right around the Christopher Cream announcement, and it settled in January of this year. It was almost a six-year litigation, which is pretty wild and I think only happened because of COVID getting in the way. But yeah, we were pretty far apart for a long time, you know. No one has really a reason to settle until you have a reason to settle. I think we hit the deliberation box with the jury having the decision in their hands. And we both were like, all right, we got to figure this out because this could go either way. But we did settle.

And a part about it that was really poetic was like, Jared and I, the relationship ended in such a difficult way. And the friendship really fizzled. And after we settled, we hugged, which sounds like silly. But like it was almost like a closure of a friendship for 20 years. So like at the end of the day, it's almost like a negotiation that's playing. through emotions and you relive history and this is just unfortunately the way that to go out. Yeah. Well, today you have, I think, over 250 stores, maybe 260 stores.

And you even have some overseas, right? At least one in the UK. Yeah, we're opening pretty rapidly. We opened up our 287th store last week. And we have five international stores. A couple more coming. I mean, the insomnia story is still early innings. Chris Be Cream announced that they were looking to sell their share in Insomnia last year.

They felt like it was a strategic decision. They could make some money off of it. Does that make any difference? I mean, I guess it could, right, if they sell it to somebody else who decides to take a more hands-on role in the business. Yeah. You know, it's hard to try to control everything, right? I don't know how this will land. I do know, as we speak to parties, there's typically real interesting.

in our management team continuing to drive it. So that's always a good thing to hear. But this has been a windy journey in 20, 21 years, really windy, up and down, left and right. You know, anything I can imagine has happened to some extent. And so I try not to fret these things. Like, I feel like if we build the business, we grow the community, we deliver warm cookies, it'll all work out at the end. Yeah, I mean, Seth, I wonder now, you know, 20 plus years into this thing, 21 years into this thing,

you've made money, you validated the business idea. I mean, I'm sure there was a point where you were at Penn and you're about to graduate. And maybe even your parents were like, you really want to go into cookies? Like, you know, we sent you to this Ivy League school and you want to put a cookie shop? Like, did they ever say that to you? They said those exact words many, many times. Okay. Many times.

Are you still doing this cookie thing? Yes, they said that many times. Your whole investment of time into this has been validated. So 21 years in, you've made enough money to live the rest of your life, I'm assuming, in a comfortable way. You're still a young guy in your 40s. I mean, at what point do you think you want to move on? You know, insomnia is like a child to me. Honestly, it really is.

I would never think to give away a kid. I can't even imagine a world without insomnia. I'm ready to go for the next 50 years. I really am. It's just a function of the business. Can we turn it into something that can be that big? So I believe that. I believe that what you're saying is earnest and true. But I also know, based on your track record, that you have a lot of ideas in your head. I mean, you started a burger joint. And we even even talked about, you started like a little financial consulting firm and you started a little investment firm. And I have to imagine that you've got other ideas in your head that swirl around from time to time where you think maybe I'll try that. I think there was a period of time where I was much more experimental. Like I had a laundry business at one point and I've invested.

in different growth organizations and probably founded six or seven things. As I've gotten older, and since really the Krispy Cream transaction, I've gotten a lot clearer of what I want to do and focus on that, focus on it intensely, really put all my energy into one thing. And over time, I've slowly gotten rid of some things that I've had.

I've sold things off and close things down. And I'm really just down to insomnia cookies at this point, and that's been really intentional. Like I have been entrepreneurial, but I have morphed to some extent from founder, operator, entrepreneur, into a CEO. So when you think about, you know, all this time and all this effort and the sacrifice and the struggle to get this thing off the ground, and look, I would have doubted you. And you even doubted yourself at a certain point, which I think is very healthy, actually. How much of where you are today do you attribute to that grind?

And then how much do you think just has to do with luck? I mean, it's a persistent story, for sure. I mean, we should have been bankrupt a dozen times, easy. I think it's grind is how we got here to some extent. But, like, yeah, things had to fall the way that they fell. Like, the iPhone, if the iPhone didn't happen, obviously the world's very different. But insomnia, I don't know. I'm not sure we make it without the app culture we have today.

So I'll say 50-50. How about that? That's Seth Berkowitz, co-founder and CEO of Insomnia. By the way, shortly after we did this interview, Krispy Kreme did announce that they sold a majority of their shares to two private equity groups. Crispy Kreme is still a shareholder in insomnia, and Seth will remain its CEO. And remember how Seth used his own phone number to take cookie orders when he first started the business? Well, that phone number is still out there somewhere. Somebody still isn't getting calls for insomnia cookies.

I bet you they are. Because this phone number, it's like somewhere still in the system. Wow. So I'm sure people are calling there. That number, that original number, which you got rid of, somebody has it. Yeah, I'm terribly sorry to them. I know. They're getting cooked.

Hello. You can I order cookies? What? Who is this? And at two in the morning. Two in the morning. I can't get hot cookies on my phone. Do you know what number I use at the grocery store, like when I have to sign up for, like, loyalty club things?

I use 867309. Oh, really? Yeah, Jenny. Jenny, call my number. 867530. Not 86730. That's amazing. That's my number every time.

So if you call that, you're going to either get Jenny or somebody else. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And as always, it's free. And also, don't forget to sign up for my free newsletter. You can do that at guyraz.com. This episode was produced by Alex Chung with music composed by Ramtin Arableu. It was edited by Andrea Bruce with research help from Catherine Seifer.

Our audio engineers were Robert Rodriguez and Maggie Luthor. Our production staff also includes J.C. Howard, Casey Herman, Sam Paulson, Carrie Thompson, John Isabella, Chris Messini, Carla Estevez, Neva Grant, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built This.