Bad Timing for Kozmo.com's Bad Press

SAN FRANCISCO (04/17/2000) - The IPO-expecting Kozmo.com has a public relations nightmare that's gone from bad to worse. On Tuesday, it had to defend itself against allegations that it's a racist firm. Yesterday, Kozmo was slapped with a lawsuit for racial discrimination. Today, Sam Donaldson and a pack of prominent scandal-mongering reporters want Kozmo to answer for its alleged practices of redlining.

The accusations came to light Tuesday when MSNBC published an expose that concluded Kozmo is intentionally neglecting predominantly black neighborhoods in the six cities it covers. In other words, the report concludes, Kozmo's armada of bike messengers is pedaling junk food and movie videos to the doors of white customers, but not to black neighborhoods. The report has spurred at least one set of lawsuits.

The Equal Rights Center, a Washington, D.C.-based civil rights group, filed suit Thursday against Kozmo for alleged practices of redlining, or neglecting to serve neighborhoods because of their racial makeup. David Berenbaum, director of the Equal Rights Center, said he was unaware of any new suits filed Friday. He did say a number of Washington residents have called his office to find out more about the case. And they weren't alone.

"We've had a lot of names from the media, frankly more so than anybody else," he said, adding that he believes the publicity will generate attention outside the D.C. area. "We1re focusing on Los Angeles and Atlanta right now," Berenbaum said. Kozmo serves Washington D.C., Atlanta, Los Angeles, New York, Seattle and San Francisco. Kozmo vehemently denies the redlining allegations.

It argues that like any Net startup, it identifies and targets communities with the highest level of Internet and computer penetration first. Kozmo has been operating in Washington only since November, and it's still building out its delivery routes.

"The conclusions [the story] draws are frankly not accurate," says Kozmo COO Kenneth Trevathan. "There's nothing in our business model that has any consideration to the race-based allegation that they make." The company remains steeped in red ink with no end in sight, having lost more than $26 million last year, on revenues of only about $3.5 million, according to regulatory filings. That's typically the extent of the bad press that Net startups find themselves embroiled in.

This time, though, Kozmo is finding it has to defend its very honor to the media. Reports of the allegations have been reported in various newspapers including the Washington Post, New York Post and Atlanta Journal and Constitution. New York's Fox TV affiliate picked up on the story, and ABC News' Sam Donaldson was digging for an angle earlier in the week. The whole mess couldn't come at a worse time. Kozmo is scheduled to go public the week of May 22, according to an IPO calendar distributed by Edgar Online. And the Nasdaq isn't being kind to firms with even a squeaky clean reputation.

The index shed another 356 points Friday, dropping 9.7 percent to 3320 as investors continued to flee technology stocks. The ingredients of a sour market and unsettling scandal point to trouble for Kozmo's IPO, says David Menlow, president of IPOfinancial.com. "I think any negative press in today's marketplace could cause people to steer clear of the offering," Menlow said.

"To be mired down in any controversy is an ever-increasing deterrent for investors who are already shell-shocked by this market." Menlow acknowledges a lot can happen between now and late May.

The market could recover, leaving April's poundings and the whiff of racial profiling allegations a distant memory. But the weeks before the IPO are crucial. Kozmo's management has to sell its story to an institutional investor community that's exceedingly wary of e-commerce stocks. A potentially damaging scandal could further impact the asking price for the offering. Sources close to the company say Kozmo's plans to operate in 15 markets by the end of this year may be scaled back because of the allegations.

Instead, the company may reach deeper into its six current cities before expanding. These plans were being discussed before to the allegations, a source says. Kozmo's Trevathan denies such speculations, maintaining that the company will indeed operate in 15 markets by the end of the year. And Kozmo officials insist that the plan to go public the week of May 22 will not be derailed by the bad press.

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