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.

#VC & Technology