How he turned $5k into $20m with a subscription business

You got your first year in business and you made how much in the first year?

Nothing. It was like 30k. It was tiny. Second year like 180. Third year, 650. Fourth year, 2 million fifth 6 million 6. This was when Covid happened. I think we shot up to 15, 7, 21, 22.

This is Michael and this story is all about how he quit his job to build this company that now does $20 million a year. But he started with just a few thousand dollars living in his parents basement and turning it eventually into putting your entire life savings at 27 into this company.

Before I quit my job is one of the boxes I needed to check which is.

Ooh, that is really good. I think there are 10 steps from having a business idea, actually starting it and then scaling up to multi millions. Let's see if those 10 steps are the same as yours. So step one for you was you came up with a brilliant idea.

Which happened where I was in Malibu, California. I went out there with a buddy of mine, took a couple weeks off of work. I thought about starting the drop ship business. I was like, let me find something that has high revenue, decent margins and that like don't do any of the outs myself and just use that margin for ads to work. And funny enough like the idea for Atlas came from that coffee shop, but didn't turn out to be a dropship business at all.

I love it. Coffee company at a coffee shop. You're a genius.

So at that coffee shop where I had the idea, I wasn't a coffee snob at the time. I hated coffee. I thought that coffee was like, because I'd only ever had like Starbucks or my grandpa's Folgers or whatever. And it's just like, I'm like, this is clearly something that everyone has got an acquired taste for but no one really like really likes it. But I had this coffee that was really fruity and like really, really tasty. The guy, the barista at the time, it was a natural processed coffee that I was drinking. So how they take the coffee bean from the cherry actually can have a huge difference on what you taste. So coffee's a fruit. Didn't know that in certain countries they don't have enough rain. And so instead of washing the fruit off to get to the bean and they let it set out on these raised beds and kind of like the fruit kind of shrivels over the bean like a sun dried tomato and so it imparts that fruit flavor on the bean. So I'm like learning all these things and from there I was like, oh shit. Like, let me collect all these nuggets. And then that's where kind of the idea like, oh, coffee comes from over 50 countries. There's so many things about each of these places that make it taste different. Like, let's tell that story. You can't just sell coffee, right? You can't just be like, hey, it's roasted strong. I mean, you can build a brand on anything. Right? People do lifestyle brands with coffee. Coffee all the time. But ours actually had something to do with the product.

Step two was you reached out to a friend, right? So you both would do it together.

Yeah, he was actually, he was there with me.

Ah, he was at the coffee shop together.

He was just one of my best friends from high school.

Step three, you come up with a name.

Atlas Coffee. Because Atlas, it's like from around the world. And the club is we wanted to build this community around people who were getting to taste all these different things.

Then did you obviously do the next thing which is like check all the domain names, make sure you could actually get them the social media accounts?

Yep, yep. Actually, I think we were slow to get the social media accounts, but luckily it was so long ago that like they didn't get snagged. Mmm. God damn, Jimmy, this is some serious gourmet.

Next for me, five would be landing page for pre sales or what you call the pay to door.

Pay to door test. Yeah, it's like, here's a product, buy it. Oh, sorry. Hey, we're low on stock, but you get the data you need to confirm the validation that it's something people want.

Yeah, that would be the smart idea.

Yeah, it would have been.

But not what you did.

Yeah, exactly.

Your next step was what? Getting a supplier for coffee.

Luckily that part wasn't too crazy. And when you go to buy coffee, there's kind of like two types of markets. There's a spot market which is like, okay, like that you have this, send me a sample. I want that super easy. Like you can go from I see a coffee, I've tried it and get it in house in like 10 days. And then where we are now, we do contract buying. So we'll work with the farm six months before harvest and say, okay, we're going to buy two containers worth. It's a well oiled machine at this point.

I remember I invested in one CPG company and we called it like the Great Tahini Disaster. It was basically like we used a bunch of tahini in one product and it was really expensive. And they dropped it all over the warehouse and ruined this entire shipment. And so I think it was like $50,000 lost or something like that. Did you have you ever had a container drop into the middle of the sea that you had already bought, contracted for?

We had some stuff get stuck a long time. You remember when the container got stuck in that port, like, turned sideways and got stuck?

Yeah.

And they weren't like, in Panama. Yeah. We had some stuff get affected by that, which is not fun. You just have to swap out something else and. And say, like, hey, you're not going to bill us until we get it, you know, so cash flow didn't hurt us, but we just swapped in another country.

So part of the game that sounds like is a skill set of yours is basically being like, x is happening. That sucks. Now we're gonna negotiate and figure this out. And so it's really just having the gravitas to call these people and sort of negotiate and make changes to something that's gonna have to be fluid.

One of the only people who did what we were setting out to do in the space at the time, they didn't sell their own coffee. They use other people to sell their coffee. So we were like, okay, so other companies are comfortable sending coffee on behalf. So we called, I don't know, 20 different ones, found the one with, like, the best pricing and the most options, and it turned out to be pretty turnkey.

And the next step is you need a way to ship and have boxes.

We provided them kind of our branding and our packaging, and they took care of all the downstream stuff.

So before you actually even had the supplier for your coffee and your boxes, you had branding that was, like, really important to you guys.

It turned out to be really important later. Our whole thing was like, we want to show the outline of the country, remind people that coffee doesn't come from here.

In every business, you gotta have the math. The numbers have to work. But if you pair that with the magic, you have a lasting business. It seems like you have three magic moments. The first magic moment I see is basically this.

Yeah, this is our postcard that we send with every shipment. Other than kind of educating them about the country and where their copy comes from, it's just a visual reminder that this thing you're about to consume doesn't come from here. One of our models is to take people there, take them there. I don't know. And so right when you open the box, it's kind of like you're being teleported to Costa Rica.

Then you also have this.

Yeah, so this is our tasting card or coffee card. So this is more about like the specific coffee that you're trying. So what are the tasting notes to look for? How is it roasted? A little. Fun fact. Coffee has over 800 aromatic and flavor compounds, which is more than wine.

So as you're sipping your coffee, you get to have this moment where you associate the story with taste. And anytime you can get multisenses involved, you have a longer lasting memory. And so you know how they say that smell is our most powerful memory? Well, you actually have that with coffee. Then you've paired smell with taste with a story. So you're kind of having this assault on the essences which creates this lasting magical moment. And the third magical moment I see is that every single month you have a different country that you give people to tell them why and how you came up with this crazy statistic. I didn't even know of all the.

Places coffee came from, the most fun kind of fact was that copy comes from over 50 different countries. And honestly, people collect these like, people like love the patterns, love getting something new. It definitely keeps our designer on his toes because there's so many ones to design. But this one's our Indonesia box and that one's copy from Uganda.

Remember when you were a little kid and if you were like me, you got those National Geographics and every single month you got the National Geographic in your hand and you kept them like you kept the images or even if you were a super nerd like I was, you had those binders, did you ever have those full of all the animals?

I had Zoom books. Yeah, that was awesome. And then, yeah, I collected cards.

And why would somebody do that when you have the Internet and you could have these things all online, why would you do that if you could go see a tiger and you could see it live in India? Well, it's because you can't always do that when you're a little kid. You're not going to get to go to Uganda, you're not going to get to go to Indonesia. And probably a lot of people that get coffee shipped to them aren't going to get to go to these places and taste the coffee firsthand, but you get to send them a country and an experience in a box that is a beautiful magic moment that when they think about the price of this coffee, they aren't thinking about bean to bean price comparison. You have taken pricing out of the equation because you are delivering a travel experience to another part of the world. Not a cup of coffee. Now for you guys to get clients, you did something else. You went to friends and family. But then maybe because you are a data science scientist, a more data based.

Way before I quit my job, this is one of the boxes I needed to check, which is, okay, we've got kind of like a 1.0 version of the branding. We've got kind of the framing. Right. We've talked to our friends and family and eyes light up when we talk about it to humans. Let's run some paid ads towards it. And at the time, Facebook was pretty new and I actually had experience with Google AdWords. You can choose kind of what someone searches, what you want to bid on. So people who search for coffee of the month club or coffee subscription, that's like the prime audience. And if those people weren't converting at a certain rate, at a cost per conversion of a certain range, like, I didn't know how we were going to make this thing work. And so that was ultimately like the real test.

It's really hard to figure out how to charge for things and how to decide if you're making money. What is one formula you use to simplify that?

Yeah, so we for subscription businesses, kind of the North Star financial metric is your lifetime value of a customer. So how much profit you make over the life of a customer divided by your cost to acquire that customer. So lifetime value is just your average order value per month, times your gross margin on that product, times your number of months that someone stays. So if you're a business that sells a $20 product and you have 50% gross margins and people stay for 10 months, your LTV would be $100. And so then you come up with what you can pay per customer based on this. And so there's like kind of different healthy ratios. As a bootstrap company, we had to have a really aggressive one. So we needed an LTV to CAC them greater than 5. In this math, that means we needed to pay $20 or less for a customer.

What we just saw here is how to charge for your products in order to make money. We got average order value, AKA how much money somebody spends with you. We've got gross margins, AKA how much money you keep from that. Then we've got how many months they stay with you before they churn or you lose the customer. That equals the lifetime value. That's your North Star, how much money the customer is to you. As a company, you divide that by how much money it takes for you to acquire a customer. So can you go out and buy ads for x dollar amount? This leads to a ratio that if this company needs to be 5 or greater.

Are you telling us absolutely everything?

Not exactly. We're also out of coffee. So then you are getting your customers through this one strategy, but you overlaid another one. Pr, which I typically like never tell startups to do or never do in.

Mine work as well as it does.

But it works for you guys. How and why?

And so we got really good at pitching press and those ultimately you stacking up with those backlinks up and then you start ranking organically for those same search words that you're bidding on. For paid, we didn't have to infuse a ton into paid because organic was cutting our cost per acquisition down. Like our paid ads were still profitable, but our organic really bolstered that.

Most businesses overall fail. They never make it. They're a wreck. And the difference between the businesses that make it and that fail is often sops and a level of detail to the systems and processes you have in your business, whether it's coffee ratio or otherwise. Are there original SOPs or to do lists that you used in your business that you thought were really important?

I think you're 100% right. It's like if you can simplify running a business to just the repeatable processes that drive things and you can communicate them to other people and hand them. You can't hand it to someone until you can communicate it clearly. Like it's fewer things done better to the nth degree that actually causes a business to win. One of my favorite quotes is most businesses die from indigestion and not starvation. They're trying to do too much instead of like the few things that they need to better. Playing the right games and playing them better. Even though you might be truly the best person doing a thing like that's not a strength over time. Like, you have to be able to codify what you do and hand it down and even maybe accept that it's not going to be done to the same standard. But that's okay because you can't scale otherwise. One of the realizations we had when we grew really quickly was that we just didn't have enough good managers and like understanding the value of that. And they're the people who understand. Like they have people who have managed people before and they know, like, hey, if there is a bad performer on the team, here's kind of how this is going to play out in like a behavioral psychology way on the team. It's not good. I think for me, it's like we eventually got to a phase where I knew that even if I could manage all those things, there was just too much.

What was the final step?

There was as soon as we saw actually that those paid ads were converting in a way where people wouldn't have to retain for that long to make it pay off. It was actually a conversation with my dad that got me kind of over the edge and he said, you're 27. There's never going to be a more risk free time to do this if you're ever going to take a risk in your life. The soil is fertile for now.

That's so fascinating because I think that's one of the reasons I love YouTube and you guys should also. I'm so excited to finally remind them to subscribe because I forget every time. Every time.

I'll just keep saying it. Smash the subscribe button. Don't forget. She'll forget every time.

Let's give away three year long subscriptions to Atlas.

We'll do it.

I was gonna pay for it, but you can pay for it too. Okay, great.

As long as they subscribe. They gotta subscribe, right?

That's right.

I'm here for it. Your daily list. I'm here for it. I can't believe I haven't asked this. Do you want some coffee?

Totally. Let's go get some coffee. We ready to do some tasting notes?

Let's do it.

Okay. Do we?

Cheers. We have.

Okay. Ooh, that is really good.

We have a tasting wheel. This is how we decide what we taste.

Oh, good. Because I have no idea what I'm doing.

So when you're trying to identify a taste, the first rung is kind of like, all right, is it what I'm tasting fruity? Is what I'm tasting sweet? Is it more like chocolate? And then from there it's like, okay, you tell your brain, okay, it's in the fruity camp. Is it more like a berry fruit or like a citrus fruit? And then, okay, it's berry. It's in the berry family. So eventually you kind of just train your brain to kind of say, okay, not only is it fruity, this is more berry than citrus.

I definitely taste some spices.

Okay, yeah, yeah.

Spices in there.

Yeah. I mean, we don't add any spices, but that's why it's on the thing. Is this like cinnamon? Would you think like cinnamon baking spice?

Oh, yeah, yeah, yeah, yeah.

Actually, that's actually like a pretty common taste. Descriptive baking spice.

Is it?

Yeah.

Interesting.

And this is a lighter roast, so it's going to be a little bit more acidic than like a darker roast. So you're going to get a little bit more of kind of the. Like, it's gonna light up your tongue a little bit. Yeah.

I've just learned that I'm very bad at coffee tasting. On a wine, I might be able to tell you, which tells you something about me.

What are you doing? Told you I need a drink, so I'm gonna help myself.

Okay, there's you, the entrepreneur, right? And then there's the 472 different things that you could do as an entrepreneur to drive this one thing you actually want team. The problem is, as the entrepreneur, you are sad because you can't figure out which of these leads to more of this. So what do you do you think about, okay, if my North Star is I want more money. You could do option one, increase price. Right. You could do option two, start social media. You do option three, make better product in order to option four, decrease churn for customers leaving. If those are only the four options, and there's never four, there's always 4 million, then what you're trying to get to is which of these leads to more of this? And you, as a data scientist, have a background where you're like, huh, I want to figure out if I touch number one, if I just give it a little poke, how sensitive is number one to distributing me more dollars? Number one maybe equals $2.

Well, number two, the unintuitive thing is some of these have outsized impacts. So even if you prioritize it in this way, one of these could be five times more important than the rest.

Well, Exactly. So number one may lead to $4, and number one will only lead to $2. And then you get way more complex. And you could say, well, number one not only leads to $4, but it also takes, you know, four times the work. As opposed to. That's a clock, in case you're. As opposed to. This one only takes. So this one takes four and this one takes two. So this one makes more money, but it takes more time.

Quick wins versus big investments.

Right. And so the cool part about you and, like, your unfair advantage is that you're always trying to figure out, where do I drive this? Because it drives this with less. This. And that's some version of play the right games, win the right prizes.

Shall we play a game?

You start with one product, a coffee subscription box. And then what happens?

So at a certain scale, with just one product, you sell A set number of subscribers and a set number leave. And to continue that growth, you either have to pump more into acquisition, sometimes unprofitably, or you can use your same infrastructure, your same warehouse, your same marketing technology and launch new products where it makes sense. And so tea was kind of that next evolution for us. So we started Atlas Tea Club Tea from different countries around the world.

You really cool. You can either have one customer and try to get a ton more of them. Right. Or you can have one customer and try to get that one customer to buy a bunch more stuff. If you can just treat your first customer like it's your only one and you can make them never want to leave you and be so obsessed with you that they bring a bunch of friends, then your business is a lot more profitable. But that doesn't talk about that next stuff, which is how do you get a lot of depth from people in your business. And so basically now you can cross sell your entire lift.

And it's a new market. So you're right, it's a combination of you have an existing audience who loves to try things from around the world. Hey, now we do tea, maybe one day we'll do chocolate. Right. But then you also have a net new market of tea lovers who are like hey, this is a cool concept. I've never heard of that.

Yeah.

So.

And they could even maybe reverse sell into your coffee.

I think they might, yeah. So brilliant.

Great.

It's like an ecosystem around the brand narrative.

So you can sleep in your parents basement and run a company like this. You can also do what he did and have a soft off ramp four months in his job before he took the huge plunge. My point isn't tell you there's one way to do a startup or one way to get rich. It's to show you that you can that normal humans just like you and me doing this every day. So hit that subscribe button because maybe you are the one that's going to make it with that next $20 million company or hell just six figures.