Report: Kozmo’s Last Days a Scramble for Funding

The decision by urban-delivery pioneer Kozmo to abruptly shut down came after a frantic but failed attempt to find as little as US$3 million to sustain limited operations, according to a report published Friday.

The VentureWire newsletter reported that Kozmo executives spent most of the past week working the phones and pounding the pavement around its New York City headquarters, looking for venture backers or strategic partners who could provide the cash infusion.

In order to obtain the funding, Kozmo was reportedly prepared to cut services in all but two of its nine cities: Boston, Massachusetts and New York. Those markets were the closest to turning profits on a regular basis.

Merger Breakdown

The fund-raising frenzy began when talks about a merger with Los Angeles-based online delivery service PDQuick.com collapsed on Tuesday, apparently because PDQuick could not find investors willing to put up the financing to make the deal work.

Kozmo had obtained $30 million in December, but one investor reportedly later quit that funding round, taking out as much as $6 million. Earlier backers of Kozmo include Amazon.com (Nasdaq: AMZN), which sunk $60 million into the delivery service last year.

Severance Details

Kozmo has been careful to point out that it is not filing for bankruptcy, and that it decided to stop operations while it could still pay off creditors. When it announced it was closing, Kozmo also said it would provide severance pay to some workers.

Kozmo now says that only salaried employees — or about one-fourth of its 1,100 workers — will be eligible for severance deals. Hourly employees, such as those working in warehouses, were laid off Thursday without additional pay.

Wild Fire?

Meanwhile, analysts have raised questions about the message that Kozmo’s failure sends about the health of the overall online grocery and delivery industry, which has already seen several high-profile players go down in flames.

Urbanfetch.com, which sprung up to compete head-to-head with Kozmo, closed last year. Webvan (Nasdaq: WBVN) recently announced that its auditors had raised questions about its ability to continue “as a going concern.”

Peapod (Nasdaq: PPOD), one of the earliest and now best-financed online grocers thanks to its pact with the Royal Ahold grocery chain, recently left the San Francisco market to concentrate its efforts on the East Coast.

However, others say Kozmo’s lesson is not easily applied. One Kozmo employee complained that upper management burned through as much as $1 million a day, renting a $50,000 a month distribution center in Manhattan and offering bonuses to bike-riding delivery workers during the time when it was competing with Urbanfetch.