Turning Late-Night Craving Into a $350M Business: The Story of Insomnia Cookies

Dec 01, 2024

Show - How I Built This

Host/Guest - Guy Raz/Seth Berkowitz (Founder of Insomnia Cookies)

Link to the episode - Link

Reading Time - 5 mins

Summry

The Beginning of Insomnia
- In 2003, Seth Berkowitz, a sophomore at the University of Pennsylvania (not Penn State University), craved something sweet late at night.
- Realizing that others might share the same craving, he started baking cookies in his dorm room, handing out flyers, and sticking Post-it notes on doors.
- Using his cell phone to take orders and his car to deliver them, Seth offered warm cookie deliveries between 9 PM and 2 AM.
- His initial target market was Penn students.

From Modest Beginnings to Big Breaks
- Early sales were modest—3 to 5 orders per night, with an average order value of $10.
- A breakthrough came when a college newspaper featured Seth’s business. Orders shot up to 80 per night.
- This surge in demand created operational challenges, with Seth able to deliver only about 60 orders per night.
- During these months, Seth hardly slept, delivering cookies at night and studying by day. He stretched himself thin and had to find ways to scale operations.

Scaling Operations
- In 2004, Seth raised a friends-and-family funding round to expand beyond the University of Pennsylvania.
- He added deliveries to Drexel and Temple in Philadelphia, generating $20K/month in revenue.
- Despite this growth, high operational costs meant the business was not very profitable.

Adding a Partner and Moving Off-Campus
- Jared Barnett joined the business in 2003, initially taking over operations on weekends. He remained a partner for three years until 2006.
- In 2004, Seth opened the first Insomnia Cookies storefront in Syracuse, marking the transition from a dorm delivery service to a retail model.

A Diversification
- Alongside selling cookies, the Syracuse location offered frozen yogurt under the Tasti D-Lite franchise.
- This approach was an attempt to hedge against the uncertainty of retail cookie success, as most standalone cookie shops failed.
- The yogurt experiment continued at two additional locations but proved challenging, with $10,000 yogurt machines and unpredictable seasonal demand.
- These operational difficulties, combined with differing visions, caused Seth and Jared to drift apart.

Doubling Down on the Core Offering
- Seth abandoned the yogurt model, focusing solely on delivering freshly baked, warm cookies.
- He improved packaging, streamlined the supply chain, and standardized products to cut costs.
- Customization options were eliminated in favor of consistent, high-quality cookies.
- Seth believed warm cookies evoked comfort and nostalgia, making them the brand’s emotional anchor.

The "Hell Period"
- From 2006 to 2009, Insomnia Cookies faced significant challenges, with the team shrinking to just three people.
- Seth stopped paying himself for 18 months and even repaired delivery trucks himself to keep the business running.

Two Pivotal Moments
- Seth resisted calls to quit, thanks to customers’ love for his cookies.
- Two major developments helped Insomnia Cookies turn a corner:
  - The Upper West Side (NYC) store: The first non-campus location, it became an instant success.
  - The iPhone launch: The rise of mobile apps revolutionized ordering and logistics, shifting the business from a "campus-only, late-night" model to an on-demand indulgence business.

Scaling Through Cash Flow
- By 2012, Insomnia Cookies had enough cash to open its 22nd store entirely through cash flow.
- Over the next several years, they opened 120 stores using business-generated cash.
Krispy Kreme Partnership and Legal Challenges
- In 2017, Seth partnered with Krispy Kreme, selling a 75% stake in the business for $140M to scale operations further.
- Jared later sued Seth over his stake, leading to a six-year legal battle. The matter was eventually resolved amicably.

Focus on your core - Seth realized his yogurt mistake and focused on the core business rather than getting distracted again. He was also clear about corporation-owned locations vs going down the franchise route.
Resilience and Grit - Seth persisted with his idea even when others around him didn’t believe in the potential. He navigated the ups and downs while ensuring a great customer experience. It took him 15 years before he saw any fruits of his labor.
Customer obsession - Seth was almost fanatical about delivering warm cookies on time and with consistency. It became the hallmark of their business.
Adapting to external shifts - Seth was quick to adapt to the iPhone world and used that to propel their growth.