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VC Cliché of the Week
I am at eTech in San Diego now and was at a dinner with the usual suspects last night talking about the usual things. But then we got into a good conversation about bricks and mortar. In the late 90s, there was this craze in the venture business about bringing the Internet to the bricks and mortar businesses. We were going to marry online and offline. Mostly we just lost money.
Jason Calacanis (always sticking it to me) brought up Kozmo. I told him the story about how I used to quote Jonathan Klein of Getty Images who famously said in the mid 90s, "retail is a bad business offline and its going to be a bad business online". For the first three years of Flatiron, we stayed away from retail and bricks and mortar. But Kozmo was the deal that wouldn't die. We passed on it a couple times and then in the spring of 1999, it came back in. Jonathan Klein's line didn't win the day. We put in something like $6 or $7 million and funded the build out of a new warehouse and distribution system to service the growing business in New York. Among other things, we funded bricks and mortar.
Then within six months, Amazon led a financing of over $100 million and the writing was on the wall. Because all of that money went to bricks and mortar. The company opened up something like 18 new markets within the next year.
What had been a good business in NYC turned into a really lousy nationwide business. Only a couple of the 18 new markets worked and the company burned through all of that >$100 million financing.
We tried to do a bailout financing and close the markets that weren't working and focus back on the ones that were. But it didn't work. In hindsight, how could it have worked?
We screwed up a good thing and all that bricks and mortar killed Kozmo. We tried to negotiate our way out of 18 long term leases but the landlords wouldn't budge until it was too late. Kozmo never filed for bankruptcy but it was put out of business by the huge contingent real estate liabilities it had accumulated on its books. It's a sad story mostly because the business was and is loved to this day in NYC. There isn't a business that people ask me more often about than Kozmo.
There's a new Kozmo in NYC called Max Delivery that I posted about a while ago. I have no idea how they are doing.
And then there is Fresh Direct which we use every week and love. Fortunately they are focused on the New York market and are making it work. Like Kozmo could have and should have done.
So there are people making the basic Kozmo idea work and are apparently doing it well.
Kozmo wasn't the only web 1.0 company to be brought down by bricks and mortar. Many of the internet retailers were killed by long term leases. And so were many others who were not bricks and mortar companies but unfortunately signed huge long term leases in 1999 and 2000 and could not get out of them when the bubble burst. The companies became unfundable.
I must have renegotiated ten real estate lease deals for my portfolio companies between 2000 and 2002. I had to threaten to shut the companies down in every case. It had a huge cost to the companies in terms of financial hardship, management distraction, and high anxiety levels for everyone.
So forgive me if I flip out the next time I see a company bring a huge long term lease to the Board for approval. It's not a good thing to be in the bricks and mortar business. Keep your rents low. Sign short term leases and get clauses that let you out. Don't let your leases bring you down. It's happened to many people, don't let it happen to you.
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» the 1990's from gapingvoid
[Thanks to Fred Wilson for the inspiration.]... [Read More]
Tracked on Mar 9, 2006 10:59:25 AM
Posted March 8, 2006 in Venture Capital and TechnologyComments
Fred, please tell me that you never invested in WebVan (a.k.a. FreshDirect 1.0)....that makes the Kozmo experiment look like childs play! The good old days of ordering my girlfriend a soda and a box of candy over the net as a surprise delivery in the middle of the afternoon.....sorry, but I was one of THOSE people taking advantage of the service for all the wrong reasons. I do smile whenever I see a delivery guy with the Kozmo bag though!
ohh, do I remember getting in some pretty heated debates with friends back then about the pro's and (mostly) con's of a web-based grocery delivery business and the majority of them focused around the same point you mention with Kozmo - projects like that are greatly (wholly??) reliant on the critical mass that only a handful of urban areas can support. In fact, I think that I even have a whitepaper somewhere by Booz or McKinsey or someone like that re: internet based bricks and mortar retailing...if I can find it I will shoot it over to you.
rob
Posted by: rob | Mar 8, 2006 10:24:12 AM
no, rob, webvan wasn't us
but there were plenty of bricks and mortar busts to go around
most everyone in the VC business had one or two of them
lot's of lessons learned in 99/2000
Posted by: fred | Mar 8, 2006 10:32:08 AM
Not just bricks and mortar - any business - long term leases can kill you - amen
Posted by: howard Lindzon | Mar 8, 2006 12:52:04 PM
I stil have a sock puppet.
Posted by: Charlie Crystle | Mar 8, 2006 11:31:32 PM
Hard to believe all that was already 5+ years ago. (Although, we all talk about the 1.0 days like WWII vets did 25 years afterward, so even our nostalgia kicked in "on Internet time," apparently.)
PS: Webvan's backing from Benchmark was famously written up in Randall Stross' "eBoys"... :-)
Posted by: John Stanforth | Mar 9, 2006 1:10:17 AM
Totally agree on the bricks and mortar sentiment. As a Web 1.0 "survivor" I recall many a NYC dotcom with massive overhead, little to no revenues and even less hunger due to obese financing. Seemed odd for an industry that largely existed in cyberspace.
"Build first, building second" is what I say.
Posted by: MMG | Mar 9, 2006 3:37:46 AM
And of course there was the popular buzz phrase of the time for these online/offline marriages: clicks and mortar.
Posted by: krucoff | Mar 9, 2006 7:42:04 AM
A lot of people don't think a business is "Real" till they start owing serious money to the real estate boys.
"WOW! We're in debt up to our eyeballs! We must be players!"
Posted by: hugh macleod | Mar 9, 2006 10:12:19 AM
Yep, real estate is the leading cause of death for startups.
Posted by: Ross Mayfield | Mar 9, 2006 2:30:00 PM
Amen, Ross.
Posted by: hugh macleod | Mar 9, 2006 8:40:33 PM
So how long can you stay virtual? I've received some push back from the VC community in our "not yet ready to pitch" conversations about our virtual status. As long as we're just 3 founders I don't see a problem. We IM and video conference all day long. We do BD and partner meetings in restaurants. The servers are all colo'ed. We're using contractors for lots of stuff. To a large extent I see office space as sunk costs.
I look at it as we have offices at 350 CPW, 14 5th Ave and a retreat office in Bath, Maine.
Posted by: Erik Schwartz | Mar 10, 2006 10:46:55 AM
Fred, timing on "Cliché of the Week" was ideal. After running virutal for the last few years, we are considering office space. I have been torn between Joel on Software's view that the only way to attract top talent is to have a killer space and my own instinct that the money you give to mr. Landlord does not grow the business. We are currently debt free and plan to stay that way. Thanks. MR, ex@mbldr
Posted by: MR | Mar 10, 2006 10:52:48 AM
for those new to the kozmo story, I suggest watching E DREAMS.
Posted by: dan | Mar 11, 2006 12:00:58 AM
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