The True Story of Failed Start-Up Kozmo.com

Way back in 1988, Kozmo.com made the headlines with a highly innovative and daring online business idea:

The enterprise would deliver essential, on-demand items to various locations within the US. Kozmo would charge nothing for these services.

Ultimately, customers would enjoy unprecedented convenience at no extra cost.

Yet Kozmo’s idea failed. Things did not work as planned.

What led to this massive modern-day business catastrophe?

This is How Kozmo.com Set Itself Up for Guaranteed Failure

At the beginning of the story, Young Kang and Joseph Park, two investment bankers who were based in New York City, launched the famous Kozmo.com in 1998.

The company was essentially a venture- capital-funded business. It had $250 million worth of investment capital. This came from market-leading enterprises, including Amazon, Chase, and Flatiron. As noted, Kozmo.com, which later changed the name to Kozmo, was a daring business venture that promised fast deliveries of goods- on- demand to selected locations within the US.

Kozmo promised to do this in 1 hour, regardless of the customer’s location.  And unlike today where you can host servers and data cheaply, they had enormous costs around the logistics of the technology.  The company was set to deliver various entertainment items, including videos, DVDs, magazines, music, games, and other basics.

Roping in Starbucks

In time, Kozmo even delivered Starbucks. This deal was a result of a co-marketing arrangement between the two enterprises. It was worth $150.

In the deal, Starbucks would fulfill their part of the bargain by stocking Kozmo movie- return- boxes in their countrywide stores.

Note: when Kozmo commenced operations, the company did not charge any delivery fees. Neither did it have minimum purchase requirements.

Typically, Bicycle-riding messengers delivered most of the orders. They were not allowed to take tips. How on earth was such a strategy going to work?

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Why Kosmo’s Profit-Making Strategy and Target Audience Sucked

Initially, Kozmo employed about 3,300 workers. These employees delivered goods to selected urban areas with high internet connectivity.  These cities included Chicago, Boston, Houston, Atlanta, New York, San Diego, Los Angeles, Washington, and San Francisco.

Most targeted customers were tech-savvy youths. Significantly, most of these were unemployed. Thus, the customer base expanded rapidly. But with deliveries made without a charge, the goose was already cooked. Kozmos’s bank account was depleted fast with every purchase and delivery.

Then came the year 2000 with the tell-tale dot.com bust. There was little capital. No one wanted to put money in online companies. Like most tech companies of the time, Kozmo bled cash and struggled to survive. The company groped desperately for investors. It even attempted a merger with a Los Angeles delivery service.

Eventually, Kozmo reduced operations drastically, added higher-margin items, and introduced a delivery charge, too late.  The company also changed its strategy to target older, wealthier people. In a desperate move, Kozmo veered off its original line of promoting online shopping. It mailed out catalogs and encouraged people to place their orders on phone.

Soon, the inevitable happened: Kozmo began laying off its staff.  By its final year, Kozmo had expanded the customer base to 400,000 (from 150,000). Minimum orders also grew to $25 from $10.

This was, however, too late.  Kozmo eventually closed its virtual doors In April 2001. The modern-day Titanic had finally sunk.

Conclusion:

As the facts illustrate, Kozmo’s grand business idea famously revolted but would be shown to be a successful idea with modern companies like InstaCart and Uber.  However, Kozmo lost a staggering $280 and eventually folded.  Sometimes timing is everything.