Washington entrepreneurs Ted Leonsis and Steve Case have made the first big investment with their $450 million Revolution Growth fund, acquiring a major stake in Vienna-based FedBid, which they hope to grow into an online marketplace for tens of billions of dollars in government procurement.
The investment was made less than two months after the two former AOL executives announced the formation of the fund, a private investment vehicle designed to reignite the high-tech, entrepreneurial culture that dominated Washington in the 1990s.
Leonsis and Case would not disclose the amount of the investment, but sources familiar with the transaction who are not authorized to speak on the record, said the amount was about $25 million.
The deal closed Friday.
“We love that it’s a local company and that it is serving probably the biggest market there is,” said Leonsis, who will become FedBid’s chairman. “The federal government is the largest buyer of goods on the planet, and this is a big, vertical, e-commerce company being used to save the government lots of money and provide much more efficient delivery of services for the government.”
Revolution Growth is now the largest shareholder in the company and is placing two directors on the board: retired Gen. George Casey, the former Army chief of staff; and Washington entrepreneur Mark Walsh, co-founder and chief executive of GeniusRocket.
FedBid last year facilitated more than 20,000 transactions worth more than $1.4 billion, according to FedBid chief executive Ali Saadat, who owned most of the company until Revolution Growth’s investment.
FedBid collects a percentage of every transaction, which varies based on how much money the government saves.
More than 8,500 government agencies, from the State Department to Homeland Security, shop for everything from boots and uniforms to laptop computers and network services using FedBid. Approximately 45,000 private companies are registered to use the site.
“When you walk through the airport [security checkpoint], pretty much what you see . . . from [Transportation Security Administration] uniforms to trays, tables, all the hand-held scanning machines, was pretty much bought through FedBid,” said Saadat, who bought the company 10 years ago.
Saadat would not disclose FedBid’s revenue but said the company is profitable.
Leonsis said he heard of Saadat and FedBid a few years ago from a guest at a Capitals’ game. (Leonis owns the National Hockey League team.) He said he googled Saadat, read about FedBid “and just kind of stored it away in the back of my head as an executive I’d like to meet one day.”
Leonsis and Case will use the investment to grow FedBid’s revenue and expand into state and local government procurements. The number of employees is expected to increase from its current 130 to 200 by later this year.
“We want to do speed-up capital, where we will make an investment of size and help the entrepreneur break out and build a big, scalable company,” Leonsis said. “This is a company already on a path to do more than $2 billion on the top line and now [can] go into new markets like state and local government purchasing agents. We are going to provide the growth capital so the company can grow top-line revenues.”
Industry observers said the purchase was ambitious and interesting, but it may be difficult to get government bureaucracies to become as comfortable with online purchases as have millions of consumers.
“The question is: Is it perfectly timed, or is it a little bit ahead of its time?” said Morris Panner, a local software entrepreneur who sits on the board of the Software and Information Industry Association, which is based in the District.
“In my last company, we worked very actively with the federal government in participating in an app store,” Panner said. “It was a very frustrating experience because the procurement rules hadn’t kept up with the vision of a more agile purchasing system. The vision has outpaced the legislative and regulatory process.”