# Kozmo.com (1998 – 2001)

- URL: https://girisimcikafasi.com/en/startup-graveyard/kozmo/
- Sector: Logistics and delivery
- Country: United States
- Total funding: $250 million
- Cause of closure: Business model failed

## What did it do?

Kozmo.com was a New York-based online delivery company that brought videos, games, DVDs, music, magazines, books, food and basic essentials to the door within an hour, with no delivery fee. Couriers made deliveries by bicycle, car, van or public transport. At its peak in July 2000 it operated in 11 US cities.

## Why did it shut down?

Carrying low-value orders free of charge and at great speed pushed the cost per order above the revenue it brought in. According to filings with the SEC, the company made a net loss of $26.3 million on revenue of $3.5 million in 1999. A promotional deal with Starbucks, which committed it to paying $150 million over five years, inflated fixed costs; the deal was terminated in March 2001 after $15 million had been paid. Although it filed for an IPO, the company never made it to the stock market. Right after the dotcom bubble burst, Kozmo closed in April 2001, laying off its 1,100 employees.

## The story

In April 2001 staff arriving for their shifts at many of Kozmo.com's 18 locations found the doors locked; that is how most of them learned the company had closed. Yet only shortly before, Kozmo had been delivering on one of the boldest promises of the dotcom era in 11 US cities: a film, a game, a magazine, a snack or a Starbucks coffee at your door within an hour, with no delivery fee.

The company was founded in New York in March 1998 by two young investment bankers, Joseph Park and Yong Kang. Couriers made deliveries by bicycle, by car or by public transport. The founders' thesis was that not paying shop rent would more than cover the cost of delivery. Investors were convinced: in 1999 a group including Flatiron, Oak and Chase invested $28 million, and in 2000 Amazon put in $60 million. Total investment is estimated at around $250 million. In February 2000 a five-year deal was signed with Starbucks; Kozmo agreed to pay $150 million in return for promotion in its coffee shops.

The numbers, however, did not bear out the thesis. According to filings with the SEC, the company made a net loss of $26.3 million on revenue of $3.5 million in 1999. In April 2000 MSNBC.com published a report alleging that Kozmo excluded predominantly African-American neighbourhoods from its service. The company denied that race played any part in its decisions; the civil rights organisation following the issue later launched a joint initiative with Kozmo. It filed for an IPO with Credit Suisse First Boston, but the company never went public.

Shortly after the dotcom bubble burst, Kozmo terminated the Starbucks deal in March 2001 by paying $15 million, and a month later closed, laying off its 1,100 employees. The brand was sold to Yummy.com in 2013 and relaunched as a wholesale shopping club in 2018; as of July 2023 the site was once again unreachable.

MaxDelivery, a similar service founded in Manhattan in 2005 by former technology director Chris Siragusa, showed that the idea could survive in a small, dense area. Therein lies Kozmo's lesson: fast delivery can only survive when basket size and order density cover the cost.

## Lessons

- Free, instant delivery is only sustainable if the average basket size and density of the area cover the cost; run those numbers city by city.
- Do not take on the fixed payments of long-term promotional deals with big brands before your revenue is proven.
- Document the criteria you use to choose your service areas transparently; decisions about coverage can turn into a reputational risk.

## Sources

- [Kozmo.com](https://en.wikipedia.org/wiki/Kozmo.com)
- [Kozmo.com Pedaling To The Precipice?](https://www.forbes.com/2000/06/22/mu3.html)
- [Kozmo.com will pay Starbucks $150M](http://www.bizjournals.com/seattle/stories/2000/02/14/daily1.html)
- [https://www.wikidata.org/wiki/Q6435354](https://www.wikidata.org/wiki/Q6435354)