How I Built This with Guy Raz - Misfits Market: Abhi Ramesh

Episode Date: March 31, 2025

While apple picking on a farm near Philadelphia, Abhi Ramesh learned that a massive amount of “misfit” produce goes to waste. He started running ads on Facebook to see if people would pay a discount for subscription boxes filled with twisted carrots and oddly-shaped squash.   Demand was so strong that Abhi soon hired drivers on Craigslist to deliver produce around Philly from a rented warehouse. Four months in, Misfits Market had thousands of customers and landed $2 million in venture capital to expand. The pandemic turbocharged its growth and the business evolved into an online grocery store offering 1100+ items. Today Misfits Market operates in 48 states, and was most recently valued at $2 billion.This episode was produced by Casey Herman with music composed by Ramtin Arablouei, and edited by Neva Grant with research by Katherine Sypher. Our engineers were Robert Rodriguez, James Willets, and Kwesi Lee.You can follow HIBT on X & Instagram, and email us at [e-mail]. 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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On top of all this, it was a very challenging kind of personal time as well. My wife was actually diagnosed with lymphoma. During COVID. So if my wife hadn't been gone through that type of cancer treatment, I probably would have looked at some of the problems that Ms. Fitz was going through the time and been like, holy cow, this is like life or death. But it certainly did give me perspective on what is truly a life or death problem and what are actually just hard problems that you can deal with.

And at the end of the day, come out on the other side. Welcome to How I Built This, a show of a show of a problem. about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how Aby Ramesh realized that people will buy less than perfect food for a lower price and launched Misfits Market, a grocery delivery service that's been valued at $2 billion. When you walk into an upscale grocery store like Whole Foods or Wegmans, you actually pay a hidden price for blemish-free fruits and vegetables, which,

I think for the most part is fair enough, right? Those stores want pristine produce because customers are just going to pick around the misshapen apples and carrots and squash and those will eventually get thrown away. Now, when it comes to how produce is evaluated by the USDA, the top grade is fancy and the second highest is U.S. number one. But some produce never makes it great at all. The problem is that fruits and vegetables are natural products, which means a large. A lot of them are weirdly shaped or might have blemishes and bruises. And in many cases, that produce gets sent to animal feedlots or worse. It rots in the fields.

This discovery was a revelation to Abbey Ramesh several years ago when he visited an apple farm in Pennsylvania. Seeing all these imperfect-looking but perfectly edible apples rotting away, he wondered, is there a business here? The short answer was yes, but it wasn't exactly the business. Abi set out to build. What started out as a grocery business really ended up as more of a logistics business. The company Abbey founded is called Misfits Market, and today it sells and delivers over a thousand products to customers in 48 U.S. states, including, yes, misshapen fruits and vegetables,

for less money than what you might find at a premium grocery store. Miss Fitz was an idea that came to Abbey after several previous startups fizzled out, and we'll hear about some of those too. As for Avi, he grew up mainly in the Atlanta area. He was seven years old when his parents immigrated to the U.S. from India. Both of them were software engineers, and both of them had very high expectations for their kids. If I ever got anything below 100 on a test, my dad would show up to the school. And this wasn't for show. He actually meant it. He would schedule a meeting and he'd be like, why did he get a 97? You know, is there anything we need to be doing it? home to make sure he's not missing three points out of 100 on an exam. And he did that a ton

to my embarrassment. And I, you know, as any kind of teenager growing up at the time, I was like, this is nuts. My parents are crazy. Like what's wrong with them? I think I understand it a little bit more now. For both my parents, education is what got them here. Yeah. Is at the end of the day, what got them out of India, what got them the opportunities to move to the United States. So for them, it's such a this critical, critical foundation. And as I think in most of my like, what do you want to be when you grow up, you know, answers, it was probably like either an engineer or a doctor. Yeah. I guess while you were in high school, you were doing some tutoring because you were doing SAT prep for people, right?

Because I guess you did really well in your SAT and started like a tutoring program. Are you like informally or formally tutoring people in high school? Yes. So the SAT, I took it twice, and I actually got a purpose score on the SAT. Wow. And so. By the way, this is just as an aside, the only other person on this show, who I believe got a perfect on their SAT, does a business that is somewhat competitive with yours, which is Thrive Market. Yes.

So I listened to that episode as well, and I did not know that. I was like, holy cow. And believe it or not, I believe Nick also started and worked on a tutoring business. Yes, he did. If I recall. So maybe there's something, some correlation between a perfect SAT score and starting a food delivery, grocery delivery business. All right, keep going. So you, so in high school, right?

So the tutoring business kind of came naturally out of that where, you know, there were a few other high schoolers, you know, friends in mine that were like had good scores and SATs. And we said, hey, let's go create a, you know, tutoring program to run that. Now, to be honest, it was mainly because I had to make money. Yeah. I think when I was 15, I wanted to buy like a go cart or something like that. And my parents said, sure, but you pay for it. Yeah. And I was like, I can't pay for it. I don't make money. And so they were basically like, but go make money and figure it out. And so at an early age, it was like, you got, if you want to buy stuff, you need to kind of earn and appreciate what things actually

cost and why they cost and what it takes to go generate that. Obviously, as a high schooler, you have, you know, only a handful of things you could do to go make money. And so I started tutoring people. All right. So you go off to college, go to Penn, and you start your degree studying economics. So you get there in 2010. And I guess while you're there, you restart this tutoring company, but in a more sort of methodical way. It's called Altair Prep. Is that right? Yes. And so tell me what was the new idea. What was it going to be? So it was somewhat of a technology idea. We created a gigantic Excel spreadsheet, tagging. thousands and thousands of SAT and ACT questions. We then use this to essentially create a personalized program for kids who wanted to get much higher scores on SAT and ACT. And so what we'd end up

doing is the program was you take a diagnostic test at first. We will then take that diagnostic test, see which 30 questions you missed. Go to our bank of tagged, you know, 10,000 questions, and essentially go and build you a 10-week program personalized to the exact types of questions that you had been missing on your diagnostic. You know, early on, we thought we were going to monetize this by building software. When you said we was you and who, who else? So the main co-founder was a friend from high school named Darwere. She actually runs a different startup today, and I worked on another company with him after her.

So, you know, we actually had clients, and we were tutoring folks. You were like physically showing up to like a library and tutoring kids? Actually an important distinction. So I was not doing the tutoring anymore. I was helping build and design the curriculum, kind of pushing on strategy. We hired tutors. And actually as we started to kind of get a little bit more momentum and traction and clientele for Altair, I was like, okay, I actually think there's merits, you know, investing more time and energy. I'm going to go take a year off from school to do it.

All right. So sometime in 2012, you decide to move to Los Angeles to really build this business up. So basically, it's a test prep business, but you wanted to turn it into a software product? Yes. And so the primary reason was, though the test prep kind of business model, the tutoring business model, allowed us to get traction quickly and had real margins and we were able to get it to a certain scale, we thought about how we could actually scale it beyond that. Like how do you scale a physical tutoring business to a thousand, really hard to do. So we're like, okay, we got to go software. And so the

reason we moved to L.A. was there's a small incubator in L.A. that essentially said, well, you know, we will write you a $25,000 check to go build the software around this. So instead of, you know, a giant tutoring business, we can actually have like a recurring subscription sort of software business. So that was the idea. The long story short was that did not work. Given who our customer was, know, like a high-performing student with, you know, parents that they want to figure out a way to get their students to get great scores, they didn't want to just pay for software. They wanted to look a kid who got 2400 in the eyes and sit their kid next to that kid and say, learn from this person. And so even though the software we built kind of had the same pieces that the Excel

sheet and the tutor did, people ended up preferring the tutor. So we realized that early on, ended up essentially dropping the software model entirely. So basically you decided, or it sounds like you decided that that it was time to kind of wrap that up and go back to college. Yes. And what ended up happening was I took a full year off from Penn. This happened probably around month five or month six. And I still had five or six months left on my leave of absence. And so I ended up deciding that I was going to teach myself how to code, how to become software engineer. In trying to build the software product for all their prep. I realized how hard it was to hire engineers, to speak their language, unless you actually knew how to write code. So I was like, I'm going to spend the next five or six months learning how to code by myself and trying to build things. So once it became clear that Altair wasn't going to take off, I guess as you say, you kind of dabbled in a few different ideas. Like one was kind of like a stitch fix, but for men called Trend Bent, I think, right?

Yes, it was exactly like Stitch Fix before Stitch Fix existed, so maybe I should have continued to do that. But it was a style, a personalized style quiz for men. So you'd go online, you'd kind of go through this giant quiz, and then we'd essentially send shoppers to go and pick a box for you every month and send it to you. So I coded that myself from scratch. But you weren't, you were doing this all with the $25,000 grant that you got from that incubator? Pretty much, yeah, because there were really no costs for, you know, for me. it was, it was, I had to live somewhere and I crashed on people's couches in L.A. And my only cost were my living costs.

All right. So after this kind of year, I guess you decided to go back to school and then figure it out. Once you got your degree, were you still thinking, I'm going to try something. I'm going to do this again. Or were you sort of like, I'm done with startup world? I'm going to go get a corporate job. So the conscious side of me was I'm kind of done. This whole startup thing is really hard.

You know, I'm at Wharton. I met the sort of premier institution for learning finance. Why did I go actually give that a shot? Okay, so after you get your undergraduate degree from Wharton, I guess you get a job at Apollo Group, which is this like a big prestigious private equity firm. Yes. But you didn't stay at that job very long.

Like I think less than a year. So why? I mean, what happened? So yes, I only lasted nine months there. So it was nothing about the firm itself or the experience. I just got the hitch to go do something else on my own, and I could not get rid of it. You know, most of my job was looking at these, you know, I'd say companies between $50 million of revenue and $300 million of revenue.

And so by and my job was to go and like analyze them, underwrite them and go and figure out whether Apollo would lend to them. Every single time that I would sit there and look at one of these pitch decks, and build the model, I was like, I wish that I were on the other side. And so it got to a point where I was like, gosh, like, it's not like I don't like working here. I just, this itch is so strong that I feel like I have to go do something on my own. And I reconnected with Darwish, who was my co-founder for Altair Prep. And funny enough, he essentially had the exact same itch.

And he was like, gosh, I'm sitting here working in finance, thinking back to our Altair prep days. And we did some things wrong. We did some things right. Like maybe we should give that another go. Back into education technology. Yes. And the reason that came up was because I was talking to Darworship about how I had taught myself how to code. And he was like, interesting because I also have kind of been teaching myself how to code as well, using a lot of these tutorials online, things like Code Academy.

And we were like, do we think that there is, an opportunity to actually build kind of like a, can we focus on teaching people software engineering skills? And there were a whole lot of people that were looking at kind of pivoting their careers from finance, you know, consulting to technology. Yeah. And one of the big gaps was, yes, there were non-technical jobs in tech, but if you didn't know how to code, it was hard. And if you didn't study computer science in college, you did not how to code. All right. So you guys decide to do this. And I guess you called it. at Horizon School of Technology.

And this was like a boot camp, like kind of program, right? Yes, it was a 12-week program. And we hired an instructor because, again, we were kind of the operational heads. We helped design the curriculum. We wanted to make sure there was someone with like real credibility and also could teach computer science fundamentals well. Again, I'm self-taught. So while I can write code, I don't think I'm good enough to teach code.

And by the way, what was the cost? How much does it cost to do the camp? So we priced it at $10,000 originally for a 12-week course. I have to imagine the margins on that are pretty good. Really good. Because your expenses are low. It's like a kind of a business where you have a space and you've got the instructors and the curriculum. But, I mean, then you just repeat that.

Yes. I'd say the hardest part to the financial equation for the coding boot camp is just what your class size is going to be. You want to have a big class size and try to stretch that instructor cost. to over as many students as possible. However, the more students you have in a class, in theory, the less effective it is for the entire class. And so we have to balance class size with that. Did you have to raise any money to do this? Or could you basically do this with very little money? We didn't raise any money. When a student signed up, we took a deposit. That deposit gave us enough to kind of fund some of the upfront costs of renting a space, paying the security deposit.

And then, you know, the rest of the business ended up being, you know, cash flow positive because once people paid their entire tuition up front, we could fund the rest of the program after that. So you have the successful first pilot in Philly, and then you move to San Francisco to try and establish the school there or to sort of be headquartered there? Yes, for one very large reason. We didn't just promise that you would learn how to code. We also said we were going to help you find jobs to all the students. So you had to be there. Or internships or jobs.

Yes, you had to be there. Now, that increased the pressure a lot because the cost of doing anything in San Francisco is a lot higher than it was in Philadelphia. So hiring instructors, teaching assistants, classroom space was a lot more. And so we knew that by moving to San Francisco, it was going to be a higher stakes game. But we still thought it was the right decision to actually start to scale the program. All right. So you moved to San Francisco and you do the same thing there. And how does it, I mean, how does it do?

So moving to San Francisco allowed us to scale in a very meaningful. meaningful way. And I actually believe we raised the price a little bit when we moved to San Francisco Francisco to probably more like 12,000, $12,000. So you can do the math. Like if we're running 200 students a year at that, you know, a tuition cost, like it was getting to be a real, a real business for us. And by the way, I'm just curious. Today, is that business entirely under threat because of AI? I think it is definitely under threat because of AI. I also think it's under threat because software engineering hiring has just has shrunk. Yeah.

Those roles are just, they're a lot fewer of them now. And then I also, yes, definitely think the self-serve tools have become a lot better as well. All right. So you've got this business going,

Horizons, and I mean, it's doing well. What happened to it? So it's funny because you think that we would make the same mistake twice, but the big realization for Horizons again was we were like,

okay, we have this thing at a couple hundred students a year. But going from zero students to 100 students was easy. We couldn't see a world and we should go from 100 to 500 or 500 to 1,000 without like multiple years trying to scale to multiple locations, multiple cities. And I think we still could have done it. But I think, you know, both of us looked at each other and said, like, do we actually want to be scaling a physical, another physical tutoring, you know, education business? And this is probably early 2018. We're doing Horizons for three years now. It's a profitable business. We were making money from this, which is awesome, but it's really hard to scale. And there was a period of time where we actually took on a few hundred

thousand dollars of external capital. We returned it two months later, the entire amount, because we looked at the type of businesses was, and we were like, this is not something that can withstand venture style funding. Like, it just doesn't make sense. And so rather than disappoint a bunch of investors who want to see a, a, 10x on a tutoring business. Let's just give the capital back. And so maybe we should go look to to see if we could do other things. Okay. So, I mean, clearly, you're the gears in your head are turning. You're thinking about what is the thing that could work. And you're living in the Bay Area. And I guess you start to, you sort of come across this idea of produce, of maybe doing

something with produce. Tell me what, how that idea started to kind of crystallize in your head. Yep. So there were a couple of moments that led up to me deciding there was something interesting to do with selling produce online. The first one was I actually stumbled into an article that talks about produce specs. They're actually like extraordinarily specific specifications that the USDA puts out for every item, bananas, apples, oranges, there is strict guidelines on what falls into what tier. If you look at apples, for example, there's extra-famination, fancy, fancy, you know, grade one, grade two, and all the way down. And so I sum up in an article that kind of was explaining some of this, and I just didn't realize that that's actually

how produce grading work. And it's based on size and shape and color. Color aesthetics, dozens of other things. It's like how meat is, although meat is graded based on fat distribution. But it's, yeah, it's basically a grading method that enables grocery stores to charge different prices for different products. Exactly. And what kind of peaked my curiosity, was when you read through some of the standards, some of them are sort of like very quantifiable. You know, it's like, oh, you know, you don't want a rotting spot on your pair when you sell it or, you know, you need a certain size. And some of them are pretty vague. You know, some of them are like, you know, you want the apple to be clean on the outside. And it's like, what does that mean?

You know what I mean? If there's a little dirt on it, does that not count as clean? And so, so this just piqued my curiosity. And I kind of just put it in a folder in the back of my head, but I was just interested having learned about it. And then I think the most pivotal moment for me, I actually ended up moving from San Francisco to Philadelphia. This is after you decided. Well, this is you decided to fold the business or wind it down. We decided to wind down horizons.

I still did not know what I was going to do next. So my girlfriend at the time, wife now was finishing up her med school. at Penn. And so on one of our adventures, we ended up going to an apple orchard located about 40 minutes outside of Philly. And when I was there, I remember seeing, like, we were going through the apple orchard. And for every apple that was, you know, on the tree that we could go pick, there were like hundreds on the ground already. And so I, you know, I remember that article that I read. So I ended up asking a farmer, I was like, what happens to all these apples in the ground? Like, what do you do with them? I'm more just curious. And he, he pointed out. He pointed out of

points this giant cold storage container that he has and says, I put them all there. I donate some. I make cider with some. And I end up having to throw out the vast majority of them at the end of every season. So I was very curious. I was like, can I look at them? So he opens up his cold storage little container. I look inside and I just see giant drums of apples. And I pick one or two out. I was like, nothing seems wrong with these. Like, yeah, maybe they're a little small. Like, I maybe see a bruise on one or two, but like, I don't see anything fundamentally wrong with these apples. So I was like, can I buy some from you? You wanted to buy them for what reason?

To just to experiment or to eat them or what? I was just generally curious about, like, does it taste any different from the apples that we're picking from the trees? I see. And I think the other thing going through my head at the time was, okay, if these apples could be sold via retail channels for a dollar an apple and sold to the juicing, cider channels for 20 cents an apple. Probably less. Probably five cents. There's a whole lot in between there.

And so are there apples here that could be sold for 40 cents or 50 cents through to the retail channel? And is there something there? And so in a sense, it was sort of testing the farmer because I was like, okay, can I buy these? And he said, sure, how many ever you want? And I was like, you know, how much do you want me to pay for them? And he kind of was just like, name your price.

You know, pay whatever you want for them. Right. That was probably the first moment. where kind of made me realize, like, I am looking at a grade of apples that I, as a consumer, would feel totally fine eating. And I'm talking to a farmer that is willing to give it to me at almost any price, you know, not any price, but it is basically saying, like, my alternative here is either zero or five cents or ten cents. And there's a whole lot of room between that and what I, as a consumer, and probably willing to pay, given the price of apples at the grocery

store. And the beauty of apples is you can really, they last a long time. Yes. Like apples in particular. Exactly. And if you think about the time that I was doing this in Philadelphia, this was kind of late summer, summer to late summer. And so a lot of what was being grown at the time was these kind of like heartier seasonal fruits and vegetables. Apples were a huge part of it. The squashes, the potatoes, the onions.

Like I was so excited. I need to immediately figure out if this is a one-off thing that I just learned about this apple farmer or if, this exists across other commodities. And so the first thing I did when I got back home to Philly is I was Googling around to see how I could get in contact with other farmers. What's interesting is the USA actually publishes a list of every organic certified farm. Wow. And so some people ask me, why do we start organic at Misfits? Because we actually started the business only doing organic produce. In part, I think it was because, you know, I thought that starting organic would kind of give us more of the quality credibility. But the real answer is there's not a list of all conventional

farms, but there is a list of all organic farms online on the USDA's website. And so what I did when I got back home is I pulled that list of every organic farm in Pennsylvania. And I started cold calling or emailing all of them. Wow. One of the challenging things was some of the Amish farms, you probably know they can't use cell phones. They don't use. And so they have their one phone landline in the barn. And so if you don't catch them at 6 a.m., you're not going to catch them the rest of the days. I'd wake up early, call them at 6 a.m. I would call them and ask, hey, do you have produce that you can't sell to grocery stores? And most of them would say, yes, why, who are you, what do you want? And I would just say, I want to buy it from you. They all said, great, come on buy. And so

drive to the farms, I start buying up cases and cases of their kind of grade two product. Mainly apples, squash, onions. onions, potatoes, beets, carrots, a lot of root vegetables. Things that just last a long time in cold storage. Last long time. There's huge quantities of. And a lot of these are like, what's fascinating about the root vegetables especially was there are significant aesthetic imperfections.

Nothing but aesthetics. Like I'm seeing carrots that are just... With like two roots coming out of it and... Two roots. They're twisted around each other. It's like, you know, there are two carrots that are almost like hugging. each other. So I started buying all this stuff. And it was your spending a couple hundred bucks? Max, yeah. Yeah. And the interesting thing that I found was for most of these farmers, they didn't even

have a price for these items. They kind of were like, I don't really know, you know, like, what would you pay? Things have changed a little bit now, but at the time, there was really no market for these items. And so there was no such thing as a market price. And by the way, you're buying the produce, but What were you doing with even buying $100 worth of, you know, I mean, that's, you might have like several cases of produce stacked up in your apartment. What were you, were you eating it? Were you just buying it just to buy it? I would eat some of it, but I can't eat cases of it. And so there's a lot of produce just sitting around my apartment.

And I lived in an apartment building. So I started leaving it out for free for people to take in the apartment building. And so it was really just kind of like a way to test the supply side. If it was good. If it was good enough to use. If it was good enough. So I'd eat some of it. I'd give away a lot of it.

it and then like there were just cases and cases of squash sitting in my living room. Yeah. And I have photos. My apartment was filled with produce. When we come back in just a moment, Abi is able to find customers for those stacks of squash and all of his other produce, but the much bigger challenge delivering it. 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 August of 2018, and Abie is pretty sure he can buy all of the ugly produce he can handle at a big discount from farmers around Philadelphia. But having a supply is only half of the equation. And the missing piece was, is there demand? Are people interested in, quote-unquote, good quality produce, but not your grocery store grade, delivered to you, but at a discount? So how did you test whether there was demand? Because it's before you raise any money.

You're using your own cash right now. My own cash, I put up a landing page. I built the landing page myself. And what'd you call it? So the original name was Misfits Market. So the name has stuff. Misfits Market. Oh.

I call the Misfits Market. That first farmer I met, he used the word misfit. He was like, these are the Misfit Apple. So I was like, Misfits Market. No one has it. It's not trademark. Like, let me do it. Wow.

And you got Misfitsmarket.com? Like, no problem. Got misfitsmarket.com. So day zero of testing demand, I got the domain for $10 or seven, whatever costs on GoDaddy. Use Shopify to kind of get a basic landing page up. And at the time, I put up two items. One was a small box, one was a large box. Did you specify what produce would be in there?

I just listed out what was seasonal. And I said, hey, for the small box, you're going to get 10 to 12 pounds or whatever it is of seasonal produce. and for the large box, you'd get 15 to 20 pounds seasonal produce. All right. And if I remember the early pricing right, I think the small box was $22 and the large box was $35. So I put that landing page up and created a Facebook ad account, put my personal credit card on it, and started to drive pre-sale traffic to the website. And what I decided to do was I was like, I'm going to lean into the weirdness and the wonkiness of the free. fruits and vegetables. And so I took photos of the kind of ugly twisted carrots and the weird

shape squash. And I would just say like, you know, ugly fruit in need of a home. And those are my Facebook ads. And when they get to the landing page, they couldn't order at that time. It was just a pre-order. It was a pre-order. So they could pay. So they could click buy and actually like pay the $22 or $35. But I had a, you know, blur that said, you know, shipping starting in two weeks. So, but these were ads that were going out all over the country? No. So I limited the ads. So my assumption was I'm going to start with like Philadelphia area, focus on, you know, apartment buildings and neighborhoods that are near me and we'll figure out a way to get them there from these farms. And what were you, I mean, sort of in that time period, what were you spending on ads? I mean, was it thousands of dollars, tens of thousands of dollars? Like, what did it cost? I started, I probably started with like, you know, $50, $100 a day, $200 a day.

What was very interesting was when I got my first two or three conversions, people to sign up, it cost me like $5 or $10 per person per person to get a sign up. Yeah. And I was like, okay, I think I can figure out a way to make this work if that scales. Now, does that scale is the question. So the only way to know is to start scaling spend. And so I took it from 50 to 100 to 200 to 500. probably on my own, I got to a point where I was probably spending about, you know, $1,500 a day on paid ads on Facebook and bringing in 100 customers a day.

Wait, hold on one sec, because you're getting a little ahead of yourself. Can we just wind back to when you just had a few hundred customers? Because I think you're about a month into this thing. And obviously, you need some money to get it going. And from what I gather, you reach out to this friend of you. years named Edward Lando. Yes. Who was Edward?

I think of Edward as like, he was a co-founder for Altair. He was less involved in kind of the day-to-day of the tutoring company, but I had still kept in touch with them and he was a friend of mine from Penn. I told him that I was working on this. And I was like, I got to figure out a way to get money. Otherwise, you know, I'm dead meat. And he offered to put in the first check, almost like a no questions asked. and he wrote $150,000 investment into Misfits.

There's no corporate entity. There are no documents. I opened up a Bank of America account and he wired 150K into it. And then I was like, don't worry, I'll figure out the docs. I'll figure out the entity later. And in the early days, he also, you know, he was living in New York City at the time. And he was like, look, like, if you need help doing stuff, I will help you. And so he actually came down to Philly for the first few months of the founding of misfits.

It actually helped me on the ground with things as well in addition to putting in that first check. All right. You now had about a couple hundred people to deliver boxes to. And so tell me about that. Like were you, did you, I don't know, like rent a U-Haul truck and drive to a bunch of different farms and then bring the stuff back to your apartment or did you like rent a space and start to like hand pack the boxes? Tell me about that first order. So that's almost exactly what I did. I very quickly signed a lease on a small warehouse base in North Philly. I purchased two industrial refrigerators, I think from Costco, put it in the warehouse space. I was like, this is where I'm going to store, at least the things that should be kept cold like apples.

So I had a warehouse base. I then went and drove to all these farms and started to pick up inventory to fulfill the 400 plus orders. three times a week, I'd go out, rent a Yuhon the morning, drive out two and a half hours to the farms, spend the entire morning and afternoon collecting all the produce, drive back to the fulfillment center. And what I am doing is the first kind of 10 to 15 boxes I packed on my own and I actually delivered them myself. But I very quickly realized, while I could do the sourcing and those pieces, the fulfillment and the logistics was going to become impossible to do solo. So I put up initial job listings on Craigslist. And who's to how are you? I mean, the packing is easy. But delivering them is a different story to each address in, you know, in the Philly area. How did you do that?

So delivering was really hard. At first, I just handed the boxes. I'd hand like five at a time or ten at a time to these drivers that I hired off of Craigslist. Yeah. And whose cars? Their own cars. They use their own cars to deliver the boxes. Now, the hardest thing that I realized was routing.

because if I hand 10 boxes to you, Philly is a big metropolitan area. How do you know where to go to first? This is why UPS is the best. Those 10 boxes might take you 12 hours to do if you route them incorrectly, and you're not going to route them in your head. Right. So there was an off-the-shelf routing tool where you can plug in 50 addresses at a time, and it will create an optimal route for those 50 addresses. Right. And that is what I used. We would route them through this manual routing software, print out the, output, hand at them and say, this is the order for your 10 orders, go deliver them. By the way, I would think that at this point, you would bring in your dad, who was a logistic specialist on shipping. So I called, it's funny you say that because I didn't really tell my parents about this until

much later. What do you mean you didn't tell them about this? They didn't even know I was working on misfits. They thought you were doing nothing? Pretty much. Yeah, they about the altar days, and part of it was, you know, I didn't, certainly amongst my parents were like, well, you left Apollo, this like big, fancy job. You started this, um, horizon thing.

It didn't work out. Like, is this like a, this is just a track record of doing things that are not going to work. And so I didn't tell them. Yeah. I think the first time I told them about misfits was right before we released our press release for our seed round of $2 million. Wow. Okay. All right.

We'll get there. So you, um, you've got this logistic software. And it does that work? Does it work? Yeah, it did work, but very quickly, I realized that having my own drivers go and deliver these things was just way too hard. And I was just doing work that other people had already done, the big logistics providers. And so probably about three weeks into it, I switched from our own drivers to UPS FedEx. Yeah.

Now, what I had not thought about to date was how you actually package the items. I just put squash, apples, onions, potatoes, peaches in a box together and handed them to a driver. Thinking that they would just be carefully placed on the ground, not just tossed on a doormat with the peaches bouncing around with the hard butternut squash getting bruised. Correct. And when I was handing them to our own drivers to go do that, it was fine. Now I put on a FedEx truck and it's bouncing around a FedEx truck going to a sort center going down. everything changed. I start to get, you know,

people are still, customers are still happy. They, like, they love the boxes, but like one in 15 would email and be like, uh, my squash smashed my peaches in the box. Like,

what are you going to do? And so that was, I know, it was important moments. I realized, like, if this is going to scale, I have to figure out the packaging side of this.

Yeah, because basically once somebody calls and says that, and then you got to go and send more peaches, you've lost money on that order. Exactly. And even to date, the packaging of, of what we do is actually a huge component.

So I started testing a variety of different things like insulated bags, containers for peaches, wrapping fruits, separating them with cardboard dividers instead of the boxes, all those sorts of things. And eventually found a solution that has worked even for the FedEx deliveries. So when you were, just going back to like these first customers, I mean, the marketing was very simple. It was like this weird looking fruits and vegetables. But essentially, were you sending this message to people saying, hey, you're

spending too much on perfectly pristine produce when you can get the same quality that might look a little blemished or weird for a fraction of the cost. Were you sending that message out in these ads? Yes. I would say that the message, there were two. One was get really high quality produce at a discount. And the second message was help fight food waste. We have a huge food waste problem in the U.S. and forget about whether you should fly on planes or not, 10% of greenhouse gas emissions in the U.S. comes from methane produced by landfills, which are filled with food waste. It's an order of magnitude higher than what's produced by planes.

At what point that, because this is now the fall, early winter of 2018, do you go out and look for real money? Because you got about 150,000 from Edward, your sort of first investor, but you needed to raise a couple million at this point. Yes, and between kind of the end of the summer of 2018 and the end of the year, between August and December, we kept growing at that same clip. So by the time December rolled around, we had a couple thousand customers. And the warehouse was getting packed. I had gone from one packing shift to two packing shifts. So we had a 6 a.m. to 2 p.m. shift of packing orders.

And we had a 2 p.m. to 10 p.m. shift for packing orders to the warehouse. We got from two refrigerators to five refrigerators. So the business was growing. And so in October, probably late October, I reached out to a guy by the name of Patrick, who was at a new fund called Green Oaks Capital. Patrick had been my desk mate at Apollo. The other thing I forgot to mention probably is when I built that landing page for these customers to sign up, they signed up into a subscription.

Right. It wasn't just that I'd have 2001 times. orders or 300 one time orders. These are repeat orders that were either biweekly or weekly. And so I had a real, you know, at a couple thousand customers ordering weekly, you know, it was a scaled business doing a couple million dollars of ARR. So I gave Patrick some of the high level metrics and I was like that this is what I'm trying to build. Ultimately, I think this can be kind of like something we can scale nationally. I think there's a lot of supply of this ugly produce. What do you think? They came back a week later and they said we would write a $2 million check into this.

I mean, that's unbelievable, you know, given how quickly that happened. Let me just kind of dig into this for a moment. Because clearly, your friend had faith in you. This is a low margin business. It is. You're dealing with like highly perishable products, right? I mean, now the business has evolved and we'll get to that. But at this point, it's like fruits and vegetables.

And, I mean, it's. It's like a supply chain nightmare. Like the margins are, like the math has to be perfect to make this work. Yep. It's really risky to put money into this. So I think you're right in that the first investment from Ed was very much so like a, you know, you're a friend. I trust your execution. You'll figure it out like angel, friends and family check.

I think the green oak check, the big part of why what got them sort of excited about this was the unit economics component of it as well. Like, I think they looked at the ability to buy produce that you could sell for 80 cents in the dollar. The fact that we could buy that for 40 cents to the dollar or 30 cents a dollar, I think they looked at that and they were like, that is a very interesting kind of arbitrage opportunity. And I think there should be a way to scale that. And my thesis from day one was I have a cost advantage on the supply and I can pass on a chunk of that cost advantage to the consumer, still have a chunk that, you know, and keep that in

between to have, you know, margin for the business. But that cost advantage from the supply is kind of what drives everything. Okay. Now, it's 2019. You've got $2 million. Who were your first hires? What were the roles? A director of operations was probably the first or second hire than I made. And how did you recruit them? How did you find them? Did you look for people with experience in food, people who worked at whole foods? Like, who were they? Yep. So the first director of Opshire that we had. She was a woman with specifically experience running a food fulfillment center. One of the decisions that I made early with hiring some of these roles was I did not go super senior with my hires. And it was actually something that I kind of disagreed with

multiple times with some of our investors over the years who oftentimes would encourage me to go like, hey, hire, you know, hire like the super fancy chief operating officer from XYZ, e-commerce company, like early. And I never did that. I actually ended up hiring folks that were right for the stage that we were in today, not for the stage that we'd be at in three years. There's pros and cons doing that. And I think for me, I needed someone that could do the job, not someone who could sort of build infrastructure and go hire teams to go do the job. And so the first director of the ops, the ops that we hired, she had done the job. She had done the job. She knew how to manage a two-shift, you know, 30,000 square foot warehouse with some food.

But you know with your ambitions here to make this work, because this is not really just a produce business or food business. This is a logistics business. This is a supply chain business. I mean, really, and it reminds me we did the story of Zumi's, this surf and skate shop a couple years ago. And I remember the founder saying, you know, the key to a successful retail business is inventory management. He's like, forget about everything else. If you want to have a good retail business, you've got to manage inventory perfectly. And I think that philosophy applies here, not necessarily with inventory, but with the logistics and the margin is just so the line between this not working and this working is so thin.

100%. And it's funny you say that because there's a couple of small companies that I advise these days. And one of the things I told them recently, both of them was like, you have to be very honest with yourself on what business you actually are in. Because with us, right, with Missowitz, it's easy to say, oh, we're e-commerce, we're, you know, grocery. But fundamentally, we're in operations and logistics business. And being excellent at that is actually what is required. if you've seen the McDonald's documentary, like when they realize they're a real estate business, that's when McDonald's actually started to work. And so realizing what business you actually are in, like what is the fundamental driver

is so critical. And I think it was probably late 2019 that I realized that. That you learn. That I learned that perishable fulfillment logistics is the business that we are in. And the way I learned it is between that $2 million seed round, And March 2020, over that period of time, we moved warehouses three times. And the growth was coming from customer. I mean, you were basically spending tons of money on customer acquisition.

Tons of money on customer acquisition. But also, we started to scale the number of items we'd bring in, right? Like, this was no longer squash, potatoes, apples, beets, and peaches. We started to increase the variety of items that the box would have. So we'd have leafy greens, we'd have broccoli, we'd have a variety of other fruits. So we probably went from five or ten items to 30 or 40 different items. And so imagine not just packing those 30 or 40 items in a box. Imagine the inventory requirements down because we need to actually hold inventory for 30 or 40 different types of produce items,

each with a different temperature requirement. Broccoli comes on ice, which I don't know if people realize. When broccoli ship, it comes on a ton of ice. ice melts and then water gets all over the warehouse, so you have to have drains. So there's all these small operational nuances that we started to kind of learn by doing this. When we come back in just a moment, a not so small operational nuance, the unprecedented challenge of delivering groceries during a pandemic. 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 the end of 2019, and Misfits Market is growing so fast that it's easy to forget the company is barely a year old. They're moving beyond Pennsylvania for deliveries and moving into other types of food as well, not just produce. One of the first ones was actually a salad dressing item, and I believe at the time it was a shelf life issue. So they were like, we have a bottled salad dressing. It has 120 days of shelf life. grocery stores can't buy things that only have five months or six months of shelf life often. And so we looked at that and said, can we test a non-produce item as part of our offering? So when someone kind of came in to look at their next order, there was an option that said, you know, add salad dressing.

And we sold out of them. Wow. And so that was kind of our first foray into non-produce items. And that also kind of gave us some initial clues as to how we would attack the. non-produced categories, essentially by looking at some of these other inefficiencies. Things can have manufacturing errors. So one of our early buys was a giant shipment of olive oil. The labels on the cans were printed upside down.

Hmm. And so they can't sell that through their traditional channels. And so they ended up finding us. And we bought, you know, the 20,000 cans of tray, I think it was a man. At a massive discount. At a huge discount. Because they can't sell it at Whole Foods because you need to. And so you could basically say your customers, hey, we got upside down labels.

And did that kind of become the model? Like the, you know, I don't know if it's still the case, but I remember when I was a kid, my parents would take me to get all my clothes at Ross, dress for less. That was where I got my clothes. And I always had like irregular jeans. You know, like there was like seven stitches instead of like 12. And, you know, or like one pant leg was slightly longer than the other. and my mom would just cut it off or something.

And that was it. I mean, it was like, that's why it was so much cheaper. Exactly. And all of that exists in food. It's interesting because it sounds like this wasn't part of the plan. Definitely not. Putting in olive oil. It was just going to be produce.

Yes. So once we started doing it, we realized there's a lot of potential here to kind of meet customer demand and to obviously increase our baskets. But the original non-produce items that we added came because these brands came to us. So from what I understand, the way it works, like if you go to a Whole Foods, right, there's a farm or like a food manufacturer, then it goes to a packing plant, then it goes to a distributor, then it goes to the grocery store, and then to you. And every part of that process, somebody's adding a dollar to the more to the cost. What you're able to do, if I understand it's correctly, is cutting out some of those steps. So that's what enables you to really offer up a lower price.

So that combined with the fact that we're getting a lower price in general, kind of when we buy these rescue buys in particular. Right. Today, when you look at our assortment, we have 1,200 different items. Not every single one of those items are rescued or opportunistic. We offer some that are kind of like regular items just to make sure that we can fill the basket and there's consistency. All right. By the middle of 2019, I believe, let's back to the timeline. You guys, you raise, you do a series A, $16.5 million.

also led by Green Oaks, your first seed investor. But to get to the scale you want to get to, you know you're going to have to raise at this point a lot more money. I mean, because, again, it's not just about, because still at this point, you're dealing with small farms. But at some point, you're going to have to deal with really big farms if you're going to go national and you're going to need lots of cash. I mean, you've got logistics and supply chain and warehouses all over the country. You're talking about like diapers.com or Amazon kind of complex business like that. Yes, and that journey, I would say, began right at our Series A. So once we raised that round, the ambition very clearly became go national and go national fast.

We launched multiple new fulfillment centers in that next 12-month period. So our first kind of thought was we're missing a really big market on the West Coast. And so we ended up launching a new facility in Salt Lake City. We built that facility from the ground up. So 300,000 square foot refrigerated and freezer facility that was custom built for us. And so, you know, a lot of the capital we raised went towards, you know, investing in that infrastructure over the next two years. What I'm curious about is I want to get to get to COVID because COVID obviously was going to have a huge impact. It's unanticipated, but it would have a massive impact on the business in terms of its growth.

To sign up for misfits was free and is free, right? Yes, it's free. It's free to sign up for misfits. We have like a plus program that if people want to, they can opt into later. That's an annual fee and you get additional discounts across our assortment, our private label, you know, lower fee. You get all those things as part of the PUS program, but the actual base experience is free. And the shipping is free with the base experience? It's free at a certain threshold, depending on your zip code.

After like how much you spend. Okay. Yep. So, all right, you have now momentum, and you've got a lot of people and investors who are committed to this and COVID hits. In March of 2020, how many, had you already gone into New York? Were you in that market at that point? We were in New York. So by March of 2020, we were in most of the kind of northeastern states.

And we had opened up some of the West Coast as well via that Salt Lake City facility. So we were, you know, semi-national in a lot of ways by that point in time. And it opened up a lot of different geographies. And COVID hit. We, I mean, I think most businesses can say this. Like, we were woefully unprepared for COVID. And specifically, I just think the. the volume of demand and how quickly it came, between March and April, our customer base almost

double. You know, even an additional 5% in demand or 10% in demand in our business requires like meaningful planning and execution because we have to go get more inventory, get more boxes, make sure we have the warehouse space, logistics capacity, and that's for 5% or 10% in incremental demand. Wow. So, so how did you guys deal with that? So we made the decision to turn off like all new customer acquisition first and put up a wait list. That wait list then started to explode as well. And so we we had to kind of temper expectations on when we would offboard people off that wait list. Just the sheer volume of folks kind of signing up was, you know, something we had we had never seen before and did not anticipate.

On top of all this, we didn't know whether our business was not. essential business or not. The guidelines that were being put out by the state of New Jersey made it pretty unclear. They said if you're a grocery store, you're an essential business so you can stay open. But what about a grocery fulfillment center like us? And so we assumed that we were essential. And there was a lot of confusion. And for a moment in time, you know, the authorities actually said you're not. You know, you guys have to shut down. I actually got in touch with the governor's office in New Jersey. The governor in New Jersey had to actually kind of like step in and say, no, no, no, misfits is actually an essential business. We can keep

them operating. So, and then on top of that, obviously, like, you know, by this point in time, our total warehouse staff was about 700 people. And so just managing COVID to make sure people were safe, but also continuing to kind of deliver boxes and getting them out the door on time was, was incredibly challenging. Hmm. But also probably exhilarating also. I mean, you're watching your business just double, triple, quadruple, growth. Yes.

So the growth was absolutely incredible. And like, honestly, at the time, I think we were like, we didn't believe the numbers were real. But yes, I think COVID accelerated our business by multiple years and become kind of more of a grown-up company in a lot of ways, and we otherwise probably wouldn't have done that for multiple years. But the scale and the velocity of the scale from COVID forced us to do that. It was exhilarating, but I think at the time, like, you know, there was so much that everyone was nervous about as to whether, like, we just collapsed under the, under the pressure and the weight. I also, it was a very challenging kind of personal time as well. My wife was actually diagnosed with lymphoma.

During COVID. During COVID. And she's a doctor. She's a doctor. Oh, my God. My fiance at the time, wife now, she was diagnosed with lymphoma. Was it aggressive when it was diagnosed? It was aggressive enough such that they were basically like, you got to go start treatment ASAP.

Wow. And so, you know, I'm sitting here and I'm like, okay, I got to figure out how to run these warehouses during COVID. Traveling, flying. Traveling, but also figure out a way to sort of help my wife who's going through. chemo and radiation. And you probably had to be really careful because her her immune system was compromised. Yeah, I would do seven days. I'd say seven days on, seven days off routine. So I'd do a week at the facilities, then out of quarantine for seven days. Then visit her family was amazing and actually like moved down, rented a house in the suburbs of Philly and I'd go visit them after quarantining

back and forth. So that was our routine for the better part of the way. And you'd see her in a mask, basically. I see her in a mask. I had a little, a corner of the house that I would like sit in at first. And so going through those two experiences at the same time and seeing her go through that experience while I was dealing with misfits COVID, it certainly did give me perspective on what problems matter and what problems matter a little bit less. Because if my wife hadn't been going through that type of cancer treatment, I probably would have looked at some of the problems that misfist is going through the time been like, holy cow, this is like, holy cow, this is. like life or death, but on the personal front, there was actually a life or death problem. And so gives you perspective on what is truly a life or death problem and what are actually just hard problems that you can deal with. And at the end of the day, you'll probably figure out and come out on the other side. Wow. So yeah, I mean, 2020 was a pretty, pretty intense year. But look, you know, we emerged from 2020 cancer free on the personal front, which is awesome. And then we got through COVID as an organization. And I think at the end of COVID, we were

a nine-figure run rate company on a revenue basis. There's so much. I mean, there's so much we could talk about you. Today you're in 48 states. You're at every state, right? They're around in Alaska or Hawaii, I don't think, right? We're not Alaska or Hawaii, but yeah, 48 lower states. Everywhere else, right.

Okay, so you've done this. I mean, you basically have taken a farmer's market box and you've scaled it nationally. And I think the last time you raised money was in late 2021. I read the valuation at that time was like $2 billion. Yes. But you've gone on and acquired a competitor that was based here in California. What were they called? Imperfect foods.

Imperfect foods. Yeah. Yeah. And I still see that they're still branded imperfect foods, right? Yes. So we closed that acquisition in October of 2022. That's been a little over two years now. But we kept the brand separate because both brands have, you know, have invested quite a bit in the brands over time.

They mean slightly different things to different people. different people. So we've kept them separate, but they're both under the Misfits market umbrella. So Misfits is the parent organization. We have the imperfect brand and the Misfits brand. All right. Let's talk about logistics. Imperfect, I think. They have their own trucks, which is really hard to build. We did a story a couple years ago about Guayaki or Bamaute, and that's how they grew. They built their own distribution network with their own electric vehicles. You guys, Misfits, you still use third-party companies to do deliveries, right? So until we acquired Imperfect, Misfits was all third-party delivery.

Buying Imperfect, we thought that the logistics network was actually like really important. And so today, with Imperfect, we acquired a fleet of about 400 vans, and we're doing our own deliveries with our own drivers, own vans and trucks for about 70% to 75% of the deliveries that we do nationwide. For Imperfect or for both? Both combined. I think our view is that the fulfillment and the logistics for perishables, that is our core competency. And so we should own as much of that as possible. And now when I kind of think about the next stage of Misfits, and we've started to do a little bit of this over the past six, eight months, is we are now allowing other brands to use our perishable fulfillment centers and our perishable logistics. Other brands that do the same thing?

Other direct consumer brands that they're like if you have a direct consumer dog food company or cat food company or smoothies, you know, any brand that does perishable direct consumer deliveries, I think our realization of the years has been like the third party infrastructure today for that is not very good. Third party infrastructure is still designed for ambient widget delivery. It's not designed for food. And so I think what we have today, besides the grocery platform, you know, the items, the customer demand, I actually think what we have built that is in some ways even more valuable is the leading perishable fulfillment of logistics infrastructure nationwide. And so we're starting to allow other brands to kind of piggyback off of our investments over the years.

Wow. When do you – I mean, I know you're privately held and so your numbers are not transparent and that's fine. But, I mean, do you anticipate your close to profitability? Yes. Yes. So we've, we're pretty much there now. The business is mid-nine figures in revenue and growing at a decent clip. So ultimately, I think the very intentional strategy here is continue to grow the direct consumer business, but then start to really monetize this infrastructure.

And by infrastructure, I mean the ability to source, the ability to fulfill, and the ability deliver, monetize that infrastructure because there's a whole lot of other end revenue markets that can benefit from that. You're now going to your seventh year here. I mean, it's amazing how big this thing has become. And you're also really young. I mean, you're in your early 30s. This is a big business.

At some point, there's going to be an end game. Is it going public? Is it selling to Amazon? Is it or Walmart or something? I don't know. What is your, what's the vision here? So all the data that I've seen still points to, we're in the second or third inning. The stats are a trillion dollars a year in the U.S. of grocery spend.

Of that trillion dollars, 12 to 13% is online today. Now, will that get to 100%? Probably not. But if I look at any other category, you know, 30, 40% in that ballpark. And so if we're at 12 or 13 for grocery, we have a ways to go, double-trans. quadruple from where it is today until we get to a point where online grocery is as digitally penetrated as these other categories like clothing and electronics and whatnot. Now in terms of like the strategic kind of exit, like do we IPO, do kind of sell strategic. And honestly, I think like

we keep those doors open for now and we keep doing what we believe is right for kind of long term value creation, which is grow the core consumer business, grow third party, we're profitable. as we start to add more revenue on top of this, we should only kind of become more profitable and we'll kind of see where things take us over the next couple of years in terms of end outcome. When you think about the journey you took and where you are now, you know, it was a long one,

but in the grand scheme of things, it's a very short one, right? I mean, many founders don't, you know, see significant success until, you know, into their 40s or even later. How much of this do you attribute to the work and the grind and the skill and how much you think had to do with luck and timing? I think luck always plays a role. And I would be naive to say it did not play a role here. I think that we started a time where potential customers out there were willing and open to consider this as a way to get groceries.

I think the COVID wave, that bump was clearly luck. Like, you know, no way you could manufacture that. So I think those things were definitely helpful. At the same time, this is a business where I like to say like the pennies matter. Every single operational decision that we have made over the years, they've kind of led us to this as well. And there have been a lot of periods where it's been true grind. The first two years of the business were complete grind. I think getting through COVID was a grind.

I think the integration of Missits and Imperfect from 2022 to the end of 2023 was a grind. I think it has required an incredible amount of hard work to make this happen. I almost think the luck kind of amplifies or multiplies the end outcome. That's Abi Ramesh, founder and CEO of Misfitsch. By the way, remember back at the beginning when Abbey went to that orchard near Philadelphia and saw all those unwanted apples? Well, that place is still going strong and still producing a lot of extra apples, which are still used to make cider.

In fact, Weaver's Orchard says its cider is a frequent award winner at the annual Mid-Atlantic Apple Cider contest in Hershey, Pennsylvania. 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 if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at guyraz.com or on Substack. This episode was produced by Casey Herman with music composed by Rompina. It was edited by Neva Grant with research help from Catherine Seifer. Our engineers are Patrick Murray and Quacey Lee.

Our production staff also includes Alex Chung, J.C. Howard, Iman Ma'ani, Chris Messini, Sam Paulson, John Isabella, Carrie Thompson, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built This.