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Revolution Growth banks on FedBid for first investment

Revolution Growth, the venture firm founded by AOL(s AOL) veterans Steve Case and Ted Leonsis, made its first bet today, investing an undisclosed portion of its $450 million fund in FedBid, an online auction venue for the federal procurement process.

FedBid runs a reverse auction site where qualified sellers compete for government business, bidding the price down to win the deal. This bizarro eBay (s ebay) for federal purchasing agents is one example of how the Internet can make buying processes more transparent and efficient for even the biggest customers.

Leonsis, who is now chairman of the board for Vienna, Va.-based FedBid, said the money will help the company expand its service to state and local governments. It plans to add staff, which stands now at 130 people.

There is “tremendous upside” in a move beyond the federal government — state, federal and local governments combined buy trillions of dollars worth of goods and services annually, Leonsis said on a conference call on Tuesday.

Currently, FedBid’s seven biggest customers are the Department of Homeland Security, the U.S. Army, the U.S. Navy, the State Department, the Department of Interior, the U.S. Park Service and the Veterans Health Administration,  according to Ali Saadat, FedBid CEO.

For the 2011 fiscal year, FedBid saved the feds $150 million on the sale of $1.4 billion worth of goods and services, Leonsis said. This year, the company is on track to hit $2.4 billion this year, Leonsis said.

FedBid takes a transaction fee of up to 3 percent of the total purchase. That fee is factored into each bid submitted through the marketplace. Average net savings on deals is 11 percent, including that fee, FedBid said.

Saadat said rivals sell software and consulting services to help build e-commerce sites like this one, but “we operate a fully managed marketplace.” The federal buyer posts what he or she needs and lets the service do its thing. “You post your buy and you don’t have to sit on your computer at all” since FedBid handles the process, Saadat added.

Technology aside, FedBid has also identified and recruited more than 3,000 authorized purchasing agents who post what goods they want to buy.

Some say there’s a downside to this automated process. Contractors contend that federal buyers use reverse auctions as an overly easy way to buy IT goods that might stand a closer, more detailed assessment, for example.

Still as government budgets remain under fire, Internet-based commerce sites could help cash-constrained agencies get what they need for less.

Photo courtesy of Flickr user Diana Parkhouse

6 Responses to “Revolution Growth banks on FedBid for first investment”

  1. I am no fan of Fedbid. I cannot count how many times I have taken precious time, energy and money to build a system and provide a quote to my customer only to have them take my quote and post it on Fedbid. I used to take it personally, but not anymore, because that is the present and future world of government procurement. Learn it, live it, love it, or get out. Going with the follow- my initial strategy was to reluctantly lower my price when I was lagging in an auction. However, I began to feel duped after several battles in which I lowered my price, but still ended up lagging when the buy closed, only to get the award later! One can argue that the purchaser may have made the award based on best value, not just price, therefore they may award to sellers in lag, but I have a difficult time believing this is the case when the buy for a product that the buyer has stated “Exact Natch Only” (i.e. NO SUBSTITUTES). In those instances, I began to realize that I came down on my price needlessly, because most likely another vendor was not following the rules. I suspect that other vendors placed a bid for something that was not on their GSA schedule (when it was a GSA ONLY Bid) or a substitute (when it was exact match only). It is not a fair playing field when those of us who follow the rules have to compete against unscrupulous vendors. In one instance- the buy was restricted to Small Business, but one of my competitors, who is not small business, placed a bid anyhow, and was awarded the contract! I protested to Fedbid, but they did not do a thing to remedy the impropriety.

    Because of these issues, I refuse to lower my price below my initial bid to the customer, so now what I am finding is that the government is paying 3% more than what they would have had to pay if they would have just placed the order directly with me in the first place. It really irks me that now more of my tax dollars (or should I say our rising national debt) is going to a private company in the business to make money under the ruse of reducing government spending.

    Another beef many of my customers have with Fedbid is that they will turn in the paperwork to their purchasing agent to get a system procured, only to have their agent post it Fedbid in which another company outside of their geographical vicinity or area of expertise get the award because their price was lower. I lost one bid for a customer in my area by $1 to a company 9 states away who knew nothing about the customer’s site or needs. Long story short-my customer told me they spent more than 2X in lost time, long distance phone calls, misunderstandings, mistakes, etc. then what they would have spent if the award would have went to us (even at the higher price- a whole dollar!).

  2. There is no doubting that reverse auctions are an efficient and effective way of achieving cost savings, as well as for winning business as a supplier. It saves everyone involved a great deal of time and encourages a professional process.

    What I object to in the above is the 3% transaction fee. For contracts worth several million dollars, this amounts to a lot of money for a commoditised technology (at least $30,000 per auction). And the fact the fee is factored into the bidding represents very poor value for the buyer, since they are immediately paying 3% above the market price for their goods and services. For a multi-year contract, the problem is exacerbated.

    Where we try and differ here is by offering our professional e-sourcing technology at a clear price level. For example $1600 per e-auction, regardless of spend value or number of suppliers involved. Suppliers pay absolutely nothing and so are more willing to take part. In fact, our contract-free monthly licence allows you to run as many auctions as you like for the period for just $800 – much better value for everyone.

  3. Very well researched story… Great to see that GigaOm has much deeper story here than Washington Post and even Washington Business Journal’s senior reporter who specializes in federal contracting.

    As someone based in silicon valley but deeply involved in government procurement technology, I’d love to see your follow up on this!

  4. Matt Eagar

    The entire federal procurement system/GSA is broken and FedBid isn’t helping. You have to go through hoops and accept ridiculous terms to be a part of these “approved” marketplaces, so we end up with something other than a free market where the best combination of price and performance wins. For example, we manufacture product overseas. Because the country in which we manufacture doesn’t have a free trade agreement with the US, we cannot participate. That doesn’t mean that the government doesn’t buy our product, however — what we would be willing to sell to them for, say, $25 I have seen on these marketplaces through third parties for twice that price. In other words, these closed markets create anomalies that actually raise the cost to the government and enable a cottage industry of resellers that otherwise would have no viable business model.