Besides running the Verizon Center and three professional sports teams, including the Washington Capitals and the Washington Wizards, he serves as a vice-chair of Groupon and chairman of documentary film producer SnagFilms and is one of the three core partners, with Steve Case, behind the $450 million Revolution Growth fund.
And yet, when Revolution Growth invested in FedBid, a reverse auction site for government agencies and businesses, Leonsis took a position as chairman of the board.
VentureBeat interviewed the former AOL executive to learn more about the site, what it promises, and why a billionaire with so much on his plate already would take a reasonably active management role in what was probably something like a $25 million investment.
VentureBeat: It’s got to be a tough time for a sports team owner when one team is locked out or on strike and the other is not doing so great.
Leonsis: Now, you never get too high with the highs or low with the lows. I just have more time right now to talk to you about why we’re excited about FedBid.
VentureBeat: Excellent. How would you describe FedBid if somebody asked you off the street?
Leonsis: FedBid is a private marketplace that delivers great cost savings by connecting multiple sellers digitally with an RFP-based buyer.
The technical word for it is “reverse auction,” and now the network effect has taken place because we now have 45,000 to 50,000 active vendors in the marketplace, and we’ve got 25,000 to 35,000 or so active buyers.
FedBid originally was created to help government procurement officers buy more efficiently and save dollars out of their budget. That’s how it was created. And the entrepreneur who founded the company literally over a 10 year period had to get each arm of the government to approve the use of the platform.
So that would take time … you’d go to the Army and you’d have to work really hard to get the Army to say ‘yes, we understand, and we agree to let you implement and have the platform exposed to our thousand procurement officers all over North America.’ Then they had to go and train all of those procurement officers on what they should be putting up on this network.
VentureBeat: Which means that the ramp-up was slow, but once you’re up and running, you’ve got some large volume coming through?
Leonsis: Right. Now there’s volume so sellers are interested because they can go in and look on a daily basis at what RFPs are going up, and the buyers are putting more up because their last field that went up, a lot of people bid on it, and the more people who bid, the better the pricing, and so you get that network effect.
Now it’s more than 10 years old, and the volume, I mean right now I think over the next 12 months we could do $3 billion on the top line.
VentureBeat: Can you walk through a specific case of how it works?
Leonsis: I’ll give you a personal case study — I own Verizon Center, where the Capitals and the Wizards and the Mystics play. These teams have been around for a long time, and we have unbelievably competent financial people in our organization. They spend an inordinate amount of time managing the building, maintaining the building, upgrading the building, keeping two-and-a-half million customers a year happy. We buy big things from big companies, and we do lots of little transactional sales.
VentureBeat: Supplies, food, souvenirs, stuff like that.
Leonsis: Right. So as an example, I asked our CFO, who’s incredibly diligent, loyal, competent: could we take a consumable product to test on FedBid. And he chose paper cups.
We went to our incumbent person, who’s done a fine job for us for many years, and asked for a bid. And for the size lot we asked for on that bid, [we were told] ‘here’s what you paid last year, and we’re increasing the price 2.5 percent.’
Coffee has gone up, costs have gone up, and so that bid was up. And then we put that exact same spec for paper cups on FedBid. Thirty-three vendors first got approved — they had paper cup products that met the exact spec that we had — and then they started to bid; and they bid in excess of 140 times.
VentureBeat: Seriously — while you’re sitting there watching the numbers come in and go lower and lower and lower?
Leonsis: Yes. Then there was the final bid – which our CFO checked to be sure came from a company of size and scale and reputation, and whether they met the spec, and if they could ship the product on time — and it was almost 20 percent less.
VentureBeat: So in other words, you’re running a reverse auction which, to do manually would be inconceivable, I mean, you’re talking months of work for many, many people, and you’d never get the same sort of effects of everybody seeing the bid go lower and pushing it down.
Leonsis: Exactly. So as the network gets bigger there are more people selling, and there are more people buying. As you get more people buying, then more people will be interested in selling, and there’s virtuous circles within that as well.
Another example: We added the Veterans Administration to the network and the VA … and they want to get the best price, but they also have mandates to give business to small businesses — not just big businesses — and veteran-owned businesses as well.
VentureBeat: Ahh … which could mean tons of overhead in management, presumably.
Leonsis: And they are supposed to source from minority-owned businesses as well, so as a procurement officer you’re having to manage multiple mandates. So you’re wanting to bring the price down to save money … there’s a needle to be threaded.
So the VA in this instance wanted to upgrade to digital scales, just as an example, and they needed 1,000+ digital scales. So they put that out on FedBid, many people bid, and the next-to-lowest bidder happened to be a female-owned business; she was also a vet.
So it hit a lot of the positive metrics. We’re saving money, and we’re giving business to a veteran-owned business that’s female owned and operated, and for the seller, she was very competitive now because it was online selling.
VentureBeat: Because she didn’t need to have outside salespeople going all over the place, traveling, staying in hotels, meeting 10 different people in five different departments?
Leonsis: Exactly, exactly. So the case study we gave you about the Detroit Public School systems, was, I thought inspirational. I call that one a double bottom line endeavor, in that we had a city that was struggling with its economy, a school system that was under mandate, wondering how are we going to open, if we can’t pay for it, and so they said they needed to generate new revenues or cut expenses.
So the questions become: Does that mean we have to have layoffs, do we have to shut schools, is there a way that we can find money in being more efficient in using technology and business methodology to come up with a lot of dollars?
That’s where they used FedBid, and that’s just a perfect story because the school systems saved $103,000.
VentureBeat: Pretty impressive.
Leonsis: So we see why I’m enamoured of FedBid as a company and as an invest: The benefit of working with them and using the service is self-evident. It’s not about romance, it’s high utility. You know what you paid before and what the spec was. Here’s an option to meet that same spec and save 10 to 12 percent on average.
VentureBeat: And to make the whole bidding process very transparent, I would assume.
Leonsis: And very automated, with lots of data around it and with lots of historical data, but also to have all value-adds that you can put into the system.
For example: I’m looking for this kind of price but also this other criteria … and that is proving to be of great benefit to lots and lots of customers, and it’s why we’re growing so rapidly. I look at it and we’re growing rapidly, but if we’re saving organizations 10 percent and we do $3 billion, that means we’re saving someone $300 million!
And that $300 million can be used by those organizations in multiple ways. It allows them to keep people employed, it allows them to hire new people, it allows them to reinvest that savings into new R&D and innovation, it allows them to drive profitability.
VentureBeat: Why did you take a role as chairman of the board?
Leonsis: The strategy with the original set of investments Steve Case and I made was that we would not make a lot of investments; we would make a few investments of size, where we could own a big piece of the company and we would add value through our leadership and management with the entrepreneur and his leadership team.
So we own about a third or so of FedBid, and we’ve been in it for about a year. The company is a growth company both on the top line and the bottom line – about 40 percent top line growth — and we’re proud of it because it’s doing the right things the right way.
VentureBeat How big can this company get? I mean the federal government is enormous, and you’re hitting education now, and there might be room beyond those, I don’t know …
Leonsis: So our investment went in so that we could scale the business and the network and go after three or four adjacent opportunities, one of which is state and local, and another of which is the B2B marketplace, mostly around midsized companies. Because if you’re a company that’s $50 million to a billion, you don’t have the pricing leverage and the scale of a really really big company.
Although I’m pleased to say — we can’t announce it yet — that several really really big companies have come on board, and they’re putting a lot of test trial orders on FedBid. They’ll say, we buy $10 billion worth of stuff, we’ll let you try and see if it works on $100 million. And everyone goes through that initial phase like my CFO did, thinking they’ve been buying paper cups for a long time, I know I’m getting the best price!
That’s what they all say! And they say ‘I’m not spending a lot of time on it because I know I’m getting the best price.’
And then the bids come in, and they go, ‘Whoa, I didn’t realize I could save that percent on that. Could I do it on hotdog holders and on straws and on toilet paper and on cleaning supplies and on laptop computers and on writing pads and …’ all of a sudden you start to look at all the dollars you’re spending on those unmanaged assets, if you will, unmanaged purchases and a 10 to 12 percent savings, it really adds up.
VentureBeat: So you actually have the opportunity to go revolutionize the procurement side of perhaps any business?
Leonsis: Well, I mean, a lot of companies have tried to modernize and create their own networks like this.
VentureBeat: Right, which doesn’t make a ton of sense because as a seller you have to belong to 15 or 25 or 100 different networks.
Leonsis: Right, so we’ve broken through as a bigger marketplace.
VentureBeat: Talk to me about competition — who do you view as your biggest competition? Is it just legacy systems?
Leonsis: You know, we don’t have a direct head-on competitor. There are companies that will sell an organization a single platform solution, like Ariba, and there are some different vertical solutions, Liquidation Services, for example. But they’re very different business models.
Some could say [FebBid is] kind of like eBay, but for business, but it’s a very unique company. It has big buyers, lots of money from buyers and big sellers and then the network effect takes place, so the more buyers, the more sellers, the more sellers, the more bids, the more bids, the more buyers, and so you get both spirals going up.
VentureBeat: Do you have to rebrand or anything like that as you attack non-governmental markets?
Leonsis: No, we’ve been very pleased with that. At first we thought that would be an issue, but when people hear what the market’s all about, they realize that having all of those buyers, they just add to the community. It could be a lot of people think of FedBid like Federal Express. You know, like it’s the federated network between buyers and sellers, and we say, ‘yes that’s exactly what it is!’ But no, we haven’t had any confusion or any issues with the brand yet.
VentureBeat: Anything I’m missing that maybe you wanted to let me know?
Leonsis: Um, no, just that you should talk at some point to the founder, because he never took any outside financing —
Leonsis: Yes. A lot of big firms wanted to invest in his company, and he chose us. You know, money is money, but it was our philosophy and strategy of working with him as a partner that differentiated us, and it’s been great, it was our first fund investment and he’s very very happy.
VentureBeat: You’re kinda the anti-VCs in this case.
Leonsis: Yeah, it’s not spray and pray, it’s very concentrated, kind of a throwback to the early days of venture capital: lots of mentoring, concentrated capital, really really good due diligence before you go in … and having one of the principals stay very close to the company.
There’s three principals: Steve Case, myself, and Don Davis, and we see in this first fund — which was close to a half a billion dollars — we’re going to do 10-15 deals between the three of us. So we’ll have three to five portfolio companies each over a five year period.
VentureBeat: I have to ask … I am Canadian, and a hockey player. When are the Capitals and Ovechkin gonna hit the ice?
Leonsis: I’m afraid I have no comment [laughing].