Kozmo Calls it Quits

As rumors of its demise were spreading through chat rooms and message boards Wednesday afternoon, New York-based instant-delivery firm Kozmo announced it would cease operations immediately.

The news ends months of speculation that the sluggish economy and skittish investors impatient for signs of profitability would spell the end of the online order and delivery outfit, which managed to raise over $250 million since its inception.

Kozmo employed 1,100 people. A majority were delivery staff or worked in the company’s 16 distribution centers. A small transition team will stay on to close down the nine markets and corporate headquarters.

The news comes about a year after the company filed to go public and raise $150 million. The IPO was later yanked when market conditions lost their luster.

Although the company said it had turned profits in Boston, New York and San Francisco, the achievements were not enough to warrant further backing to maintain full operations.

In a statement, Gerry Burdo, president and CEO of Kozmo, said if given more time and more hospitable market conditions, Kozmo would have succeeded in rounding the corner.

“However, some decisions made early in the company’s development combined with current market conditions prevented Kozmo from overcoming the challenges associated with conquering the last mile.”

Burdo also said Kozmo had a strong commitment from its investors, who funded the company as recently as January. But after looking over its options, including the cost of severance packages, the company said it was time to preserve its remaining resources.

As market conditions worsened throughout last year, Kozmo kept fiddling with its business model, such as offering fewer low-ticket delivery items, charging more fees for delivery orders under $30, dropping the dot-com from its name, or re-negotiating its $150 million distribution deal with Starbucks.

Yet despite the popular appeal of its ability to deliver food, household goods, sundries and specialty gifts within an hour, the company was basically a logistics business with razor thin margins at best.

According to Securities and Exchange Commission documents it filed in March of last year, Kozmo took in $3.5 million in 1999 but recorded net losses of more than $26 million. Its costs of paying its delivery staff alone were just over $3 million at the time, without counting the cost of distribution centers, inventory, and staff ($11 million) and marketing ($10 million).

At the time of its IPO registration, Kozmo listed Amazon.com as its largest equity holder, with 31.8 percent of the company. Then-named Chase Capital Partners and Oak Investments held 9 percent, Softbank 8.9 percent and Flatiron Partners held 6.2 percent.

In an example of the relative ease of raising venture funding in 1999 compared to now, Kozmo managed to secure a $60 million stake from Amazon.com for 31 percent of the company even before it filed an S1 in 2000.

A press release issued Wednesday said the company would liquidate its remaining inventory and pay its creditors. The Kozmo Web site was also offline as of Wednesday.

Kozmo’s demise comes just months after its archrival Urban Fetch exited the business with a plan to focus on the corporate courier marketplace.

With big money behind it, Kozmo launched operations in 1998 and garnered strong word-of-mouth fast about its Web site where customers would order items for delivery an hour later.

But eventually investors were no longer willing to tolerate years of losses that go into building a business, and Kozmo’s challenge to remain viable grew increasingly difficult.

At the time of the announcement, Kozmo served nine cities: Atlanta, Boston, Chicago, Los Angeles, New York, Portland, San Francisco, Seattle, and Washington, D.C.

* Erin Joyce is managing editor of InternetNews.com’s sister site atNewyork.com.

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