NEW YORK -Kozmo.com Inc. began raising its latest round of venture capital funding in December. The round, rumored to be targeting $30 million, is being lead by SOFTBANK Capital Partners and Flatiron Partners.
Kozmo, operating in nine [urban] markets, began delivering rental videos in 1997 and has expanded its inventories to everything from convenience items to high-end gifts.
Stephanie Cohen Glass, director of communications at Kozmo, said the company recently added a $1.99 charge for orders under $30, adding that the charge provides an additional revenue stream and encourages larger orders. As an incentive to build daytime order traffic, the charge does not apply to orders delivered before 3:00 p.m.
For wired urban dwellers, Kozmo has represented the prototypical New Economy company. At the beginning of 2000, it was a company on the cutting edge, but by the end of the year, many of its peers found themselves over the edge and falling fast.
Kozmo filed for a $150 million initial public offering in March 2000 that was withdrawn in August; however that has not discouraged the company’s backers.
“UPS didn’t go public until last year ,” said Gijs van Thiel, general partner of Triad Media Ventures, a two-time member of Kozmo’s venture syndicate. United Parcel Service Inc., the world’s largest package delivery company according to its Web site, was founded in 1907.
In August, Kozmo’s fate seemed doubly uncertain when it laid off about 5% of its labor force in effort to consolidate its operations in Los Angeles and New York. In December, the company also cut another 5% of its employees by ceasing operations in San Diego and Houston. Cohen Glass currently counts 2,000 company employees.
“We’re no different than a traditional retailer,” said Cohen Glass. “We are continually evaluating under-performing markets.”
Despite third and fourth quarter setbacks, this latest round of funding has signaled a new life for Kozmo.
Charley Lax, general partner at Softbank, whose firm got involved with Kozmo in 1999, said that in lieu of the postponed IPO, Kozmo needed additional funding, and Softbank was happy to provide it.
“We all have portfolio companies, that are not going as well as planned, this one has exceeded estimates,” he said.
“I would call it a round to perfect the business model,” Lax said, adding that this round will prove the company’s ability to be profitable. He hinted that following year-end accounting, a couple of Kozmo’s locations, including New York, could be profitable.
Lax said no other company combines instant delivery with a broad product line.
Kozmo’s former main competitor, UrbanFetch.com, radically changed its business model in October, reverting to a courier service, and has effectively ended its competition with Kozmo. Lax and van Thiel said they thought UrbanFetch’s exit from the market would ease competition; however, Cohen Glass said Kozmo recognized no impact from the departure.
Lax said UrbanFetch, which raised $72 million, failed because of an unsound business model and weak financial backing. “When a company fails, I blame the boards,” he said, adding, “when it succeeds, I credit the management.”
Not so fast said the former competition.
“I wouldn’t raise too much of a distinction between Kozmo.com and UrbanFetch,” said one of UrbanFetch’s backers. “Both of the business plans were similarly predicated on attracting capital. These are classic examples of companies caught in the change in the public markets. Both are victims of basically the same thing.”
This VC identified grocery delivery company Webvan Group Inc. as another competitor in the same space as Kozmo. He said that Webvan’s stock performance had eliminated UrbanFetch’s access to the public equity and debt markets the company needed to get the capital to complete its business model on a national scale. He said Kozmo’s business model also needed the same kind of capital. Webvan held an IPO in November 1999 at $15, but it closed trading in 2000 below $0.50.
“Maybe it’ll work out for Kozmo,” he said.
Cohen Glass would not comment on the funding round at press time, because she said a funding round had not closed.
Only Lax would comment on the round, saying that Softbank, as a co-lead investor, was planning to contribute $9 million. Beyond identifying Flatiron as the other lead investor on the deal, he did not comment on any other backers.
According to Venture Economics and other sources, the previous round of funding closed at $95 million on March 14, 2000. The round was lead by Starbucks Corp. with an investment of $72.6 million. Other investors included Softbank, Oak Investment Partners, J&W Seligman & Co., Flatiron and entities that have become J.P. Morgan Partners.
That round was preceded by a $120 million round lead by a $60 million investment from Amazon.com Inc. Closing in January 2000, the round was also subscribed by Softbank, Flatiron, Oak, J.P. Morgan, Seligman and Triad Media Ventures.
In October 1999, a $28 million round closed with investments from J.P. Morgan, Oak, Flatiron, Seligman, Triad, Thomas Weisel Capital Partners and the New York City Investment Fund (NYCIF).
At press time, Triad and NYCIF were not participating in the funding round. Oak, Thomas Weisel and Starbucks declined to comment. J.P. Morgan referred comments to Flatiron, who had introduced the deals to them. Despite repeated attempts, Flatiron and the remaining investors could not be reached for comment.