In the hipster-chic headquarters of Saxbys coffee company, in Philadelphia, Gabrielle Spica stands before a presentation screen, running through the numbers. Bagel waste at the café she leads dropped in March, contributing to a significant reduction in total cost of goods. Labor costs rose with the hiring of 10 new people.

Across a table, flanked by his executive team, Saxbys CEO and founder Nick Bayer listens intently. "On revenue, can you talk about the effect of flex dollars?" he asks.

Spica launches into an explanation of how those dollars, a supplement to Millersville University's meal plan that can be used at on-campus dining spots, created a sales boost earlier in the year. That has flagged as students spend down their funds. "But flex doesn't roll over" to the next semester, "so students will be looking for opportunities to get rid of it," says Spica. "I think we will see an increase toward the end of the semester."

The Saxbys café at Millersville, a public college in central Pennsylvania, employs 43 people. With an enviable location near the residence halls and fitness center, it does brisk business selling lattes, mochas, macchiatos, smoothies, and sandwiches. Spica opened the store in late January and since then has managed everything there from hiring to inventory to finances. She is 20 years old: a junior. Everyone who works for her is also an undergraduate.

Millersville is the second student-operated café opened by Saxbys. The first--with annual revenues over $1 million--resides at Drexel University, just under a mile from the company's Center City office. A second Drexel café will open next month, and Bayer has locked in a third location on that campus and another at Temple University. He says he is close to deals with eight more colleges and universities--including several in New England--and in "advanced discussions" with around 15.

"This program is our moonshot: a way to make the world better by teaching young people what it is like to be entrepreneurial and run their own businesses," says Bayer, 39. "What they do with this experience we are going to feel for a very long time."

But the cafés aren't just an altruistic gesture to help students grow. They are also a shrewd strategy to help Saxbys grow. Bayer is counting on the stores to help the company--which projects 2017 revenues north of $20 million--to continue its pivot from a small franchise operation, chiefly in the Philadelphia region, into a fast-growth corporate-owned chain stretching from New England to Washington D.C. His competition is the coffee shops that are colonizing cities the way chain restaurants colonized the suburbs. Those businesses, which are legion, typically compete on sophisticated products: small-batch, single-origin, on-tap, hand-poured.

Saxbys, by contrast, competes on people and on location. Bayer says that roughly half of new stores will be "experiential learning cafes"--situated on college campuses and staffed entirely by students. He believes that as the chain expands into new markets, school loyalty and excitement around the novel learning model will earn it a warmer reception than that received by typical coffee businesses. The rest will open in city centers where college students tend to gravitate after graduation. Those urban locations, ideally, will be led by many of the same young people who operated the campus cafés: company loyalists already indoctrinated in Saxbys culture and processes.

"We are following students' life cycle," says Rob Brown, vice president at the private equity firm MVP Capital Partners, which acquired Saxbys in 2012 for $2.6 million. "If you can form this brand loyalty during the college years, it remains sticky going forward. At the same time, you have this incredible opportunity to create a pipeline of talent."

Coffee Break

Nick Bayer is imposingly tall, with slicked-back hair and an unexpectedly deep voice. He has a Gatsby air, which is fitting given that--like Fitzgerald's character--his road to success was not pretty.

A former consultant, Bayer in 2005 ploughed his savings and $150,000 of credit-card debt into starting Saxbys in Atlanta with two partners. Despite a lack of expertise and infrastructure, he franchised out of the gate. "That was among the worst decisions I have ever made," he says. Some franchisees performed poorly. The company grew but struggled.

By 2007, Saxbys was out of money. Following rejections by 19 venture capital and private equity firms, Bayer eventually found an angel investor willing to come to the rescue on two conditions. First, that he relocate the business to Philadelphia. Second, that he jettison his original partners.

The partners sued. Litigation dragged on for two years, costing Bayer more than $1 million in legal fees. "In 2009, we were at a crossroads," he says. "In order to be able to take investment and sell franchises we had to clean the situation up." Following the advice of lawyers and accountants, Saxbys filed for Chapter 11 bankruptcy protection 10 days before Bayer's wedding. Three years later, MVP bought the business out of bankruptcy. "They said, 'We will give you a new lease on life'," says Bayer.

That new lease required a new strategy. The student-run cafés are a big part of it.

Experiential learning refers to hands-on education that typically occurs outside of an academic environment. It is the foundation of successful European apprenticeship systems and considered by many to be a promising path for American higher education. Among the most common forms of experiential learning is the co-op, on which Bayer is playing an ambitious variation.

Saxbys cafés differ from traditional co-ops in that students take over a business and run it top to bottom, rather than merely work alongside regular staff at a company. "A huge amount of opportunity is afforded students stepping into a real leadership role and acting exactly like an owner would," says John Fry, Drexel's president. "They are at the helm of an entity that has to roll with the punches and deal with changing circumstances. If there is an incident or an opportunity to do something innovative, they are the ones that deal with that. They can't wait for Nick to come down and settle matters for them."

Aminta Breaux, vice president of advancement at Millersville, says the Saxbys program recognizes that college students today are typically more experienced and capable than their predecessors and--partly because of technology--better able to solve their own problems. "They have done a lot of things before they get to college and while they are in college. They really set the bar high for themselves, " says Breaux. "Sometimes what we have to do is trust them. They can handle a lot."

Brewing Motivation

Bayer's inspiration for Saxbys experiential learning cafés was an acclaimed program at his alma mater, Cornell University. Each year, 200 students from that university's hospitality school are given jobs at the on-campus Statler Hotel, where they work with professionals representing every aspect of operations. Bayer has been the hospitality school's entrepreneur in residence since 2011: The dean had once explained to him that a hotel is the perfect microcosm for the human side of running a business. "If you learn all the moving parts of how a hotel operates, as a leader, then you can apply that to any industry you go into," says Bayer. "But the emphasis is on people instead of the business."

The Cornell gig requires Bayer to drive between Philadelphia and Ithaca once a month. "That's a lot of windshield time," says Bayer. "You can sort of think through things."

What Bayer thought through was how the Cornell-Statler partnership resonated with his own situation. In 2012, two challenges seemed especially relevant. First, Bayer and MVP had agreed he should migrate Saxby from franchises to a corporate-owned model. That required a more cohesive culture and a steady stream of strong managers to open and run new stores.

Second, Bayer had decided to expand exclusively on college campuses and in dense urban areas, the locations where Saxbys performed best. The plan: Target students at a time when they are forming brand loyalties, then be present in the city centers where they tend to settle after graduation.

As Bayer contemplated the Cornell example, he envisioned a way to marry his need for a corporate talent pipeline with the company's student outreach strategy. The idea also presented a path into new markets already crowded with regional and national chains.

MVP agreed to back the strategy. "It is certainly a risk, and something we discussed at board meetings," says Brown. "But the Saxbys people are betting that these students would have enough energy and [feeling of] ownership to counteract those risks.

"Saxbys was asking the question, 'Who are we? Who would we most desire as our customers and our employees?'" says Brown. "That is where the experiential learning model really coalesced."

The contrast is stark. On one corner of the intersection, in a warm, brick storefront behind an inviting patio dotted with white umbrellas, is Saxbys. Across the street, inscrutable behind dark glass, is Starbucks.

Student CEOs

The first student-run Saxbys at Drexel, with 34 employees, opened in 2015. It had been in operation just three months when the Seattle Goliath appeared across the street. "They put up a huge sign before they opened, and I was like, 'That is so close'," says Kelsey Goslin, who became Saxbys's first student chief executive officer (SCEO) as a 20-year-old marketing and entrepreneurship major.

Goslin and her team prepared a proposal to counter the threat, which included doubling down on guest engagement and paying more attention to cleanliness. "I said, 'Guys, I have nothing to add. Go execute,'" says Bayer.

In the end, the newcomer didn't even ding Saxbys business. "We had already built loyalty before they got to campus," Goslin says. "Drexel students want to come here to have their friends make them a latte. They want to be part of what Drexel has built." The university's student newspaper weighed in. "Our student-run Saxbys is something unique, a franchise run for the business of education," opined the editorial board of The Triangle. "Total Trump move to stuck a multi-billion dollar franchise across the street, right?"

In fact, the Drexel Saxbys is unique. Like all new campus locations, it reflects the school community. Graffiti by student artists splashes across the front of the coffee bar, and art by student photographers adorns the walls. Furniture and other décor elements--including, in the entryway, a large balloon levitating above a coffee cup that is the company's new logo--were built by Oat Foundry, a startup founded by recent Drexel grads.

As the site of the first experiential learning café, Drexel helped Bayer develop an outline for university partnerships going forward. It works like this: Saxbys and the administration collaborate to choose a location on campus. In exchange for that space, Saxbys pays the school a percentage of top-line revenue, which ends up being close to market rates for a comparable non-campus property. The main difference is that the money enriches university coffers rather than a commercial landlord's bank account. "We activate real estate and share in the success of it with the college or university," says Bayer.

Saxbys compensates student barristas and team leads--jobs the university helps publicize--at the same rate as employees at its other stores. The SCEO makes slightly less than her traditional Saxbys' counterparts. But she participates in the same bonus program and also receives college credit. At Drexel, plans to integrate the SCEOs' and team leads' experience into the curriculum are under discussion.

Campus Culture

Students apply for the SCEO position as they would for any co-op. In 2015, Goslin was one of six candidates. Today, the store receives roughly 150 applications for the job. At existing cafés, promising aspirants rise through the team leader ranks, being trained as they go. By the time a new SCEO is preparing to take over her café, she will have completed roughly 10 weeks of training, with the later stages devoted to subjects like managing a profit-and-loss statement and attracting and developing talent.

Once appointed, the SCEO joins Saxbys corporate staff in conducting one-on-one interviews to fill out the team. "We are there to help her, but [who to hire] is her decision," says Bayer. "The HR side of this--identifying talent, training talent, developing talent-- is arguably the most critical part of this whole operation. We need the SCEO to be fully involved, because it is a great learning experience, and because it is her team."

Dan Kinsinger was a 19-year-old biology major when, as an SCEO at Drexel in 2016, he first interviewed prospective employees. "We hire based on mission and core values," says Kinsinger. "Someone you want to be friends with, honestly, is most important because that is someone the guests want to be friends with." Over time, Kisinger has developed some of his own interview questions--such as "How do you keep track of schoolwork and extra-curriculars?"--as a gauge of organizational skills.

The SCEOs and their team leaders are responsible for everything: ordering, merchandising, setting hours and schedules, identifying and promoting talent, sponsoring campus activities, and staging in-store events. They can experiment with new products, although so far none have. Every quarter, the SCEO makes an appearance at Saxbys headquarters to run the corporate executive team through the numbers.

If a decision has significant implications for the P&L, then management will run it by someone in Saxbys corporate. That is chiefly for feedback rather than permission, says Bayer. And the Saxbys team is always ready with support or advice when matters get rocky--trouble with an employee, for example, or someone losing the cash drop.

After the SCEO's six-month stint is done, Saxbys prefers that she stay on another semester as a team leader, to help the new SCEO and provide institutional memory.

Social Work

So far, the café rollouts have been largely hiccup-free, according to Bayer, administrators at the colleges, and participating students. Bayer says a couple of new SCEOs were "more raw" than they had anticipated, so the company had to dedicate additional resources to their training. Students have also struggled with giving instructions and feedback to people they hang out with after hours. "When you're taking kids that may be in the same fraternity or sorority, to draw that bright line between manager and friend is really hard," says Bayer.

Someone from Saxbys corporate drops by the student-run stores at least three times a week to check in. Depending on what's needed, that person may help the SCEO solve a problem or make drinks and take out the trash. "We are not running the business for them," says Bayer. "We mitigate risk by showering them with availability."

Saxbys also mitigates risk by securing student commitment. To protect against SCEOs bailing on their posts, the company requires its university partners to award full academic credit for each six-month stint. "That creates a natural stickiness," says Bayer. "If the student says, 'This is harder than I thought,' then there is no recourse to them just quitting because they would miss an entire semester worth of credit."

So far, no SCEO has wanted to quit. Of the five past, present, and future SCEOs interviewed by Inc., all said they planned to join the company after graduation. That includes Kisinger, who had considered a career in medicine. Goslin graduated in March and now leads a Saxbys store in Center City.

Bayer hopes some former SCEOs will eventually become franchisees, a model he still likes. One reason it previously failed at Saxbys, he says, is that he chose people who could afford stores rather than people who had a feel for and were dedicated to the business. "If an undergrad is employing 35 or 40 of their peers and can do it at a very high level, I would love to back them as a franchisee," Bayer says. "We would put up the majority of the money and over time their equity would increase. Then we would have franchisees that were culturally aligned, knew how to operate the business, and love the company."

Why Student Entrepreneurs Should Defer Instead of Dropping Out
Published on: May 23, 2017