As first reported by News.com, the 3-year-old company announced late Wednesday that it would stop delivery service in all nine cities it operates.
New York-based Kozmo, which dispatched legions of orange-clad deliverymen to cart goods to customers' doors, is the latest dot-com dream to evaporate in the market downturn.
Amazon.com, venture capital firm Flatiron Partners and coffee giant Starbucks were among investors in Kozmo.
Kozmo said in December that investors promised a total of $30 million in private funding. But last month the company learned that an investor had backed out of a $6 million commitment.
Kozmo executives had been working on a merger deal with Los Angeles-based PDQuick, another online grocer, sources said. The deal collapsed when funding that was promised to PDQuick did not materialize.
Sources said Kozmo still has money but decided to close now and liquidate to ensure that employees could receive a severance package.
Just last month, Kozmo Chief Executive Gerry Burdo was upbeat about Kozmo's future in an interview with News.com, saying he was looking to steer Kozmo away from its Internet-only business model and toward a "clicks and bricks" approach.
But some analysts say Kozmo's business model only made sense in the context of a densely packed city such as New York. Vern Keenan, a financial analyst with Keenan Vision, said the service had a chance to work in only a few other cities around the world, such as London, Stockholm or Paris.
"This seemed like a dumb idea from the beginning," Keenan said. "This grew out of a New York City frame of mind and it simply didn't translate."
Kozmo was started by a pair of twenty-something former college roommates. They got the idea for the company on a night when they craved videos and snacks and wished a business existed that would deliver it to them.
Kozmo offered free delivery and charged competitive prices when it launched in New York. Though customers loved the service, the costs of delivery were high.
After co-founder and former Chief Executive Joseph Park stepped down, Burdo slashed Kozmo's overhead, instituted a delivery fee and oversaw several rounds of layoffs. The company also closed operations in San Diego and Houston.
Burdo said last month that profitability was not far away. The company had reached a milestone last December when it reported profits at one of its operations for the first time. Kozmo later saw two more operations reach profitability as a result of brisk holiday business.
Online delivery companies have been among the most ravaged by the Internet shakeout. Kozmo's rival in New York, Urbanfetch, shuttered its consumer operations last fall.
Online grocers such as Webvan and Peapod have also struggled, and smaller operations such as Streamline.com and ShopLink.com have closed down. Peapod was days away from closing last year when Dutch grocer Royal Ahold agreed to take a majority stake.
News.com's Troy Wolverton contributed to this report.