Skype founders place $6 million bet on MadBid.com

Atomico Ventures, an investment group started by Skype cofounders Niklas Zennstrom and Janus Friis, has invested £4 million, or more than $6 million, in a first round of institutional funding for pay-to-bid auction site MadBid.com. As with sites such as Swoopo and Fluttero, which have been growing in popularity, MadBid.com is part of a move to bring the feel of a Las Vegas casino to e-commerce.

Pay-to-bid auction sites sell packages of bids that users purchase ahead of time. In MadBid.com’s case, depending on the package of bids purchased, each bid can cost users £0.75 – £1.00. The “game” consists in bidding on an item against other “players,” with each successive bid raising the price by 1 pence and resetting the countdown clock at a set time (between 20 and 120 seconds).

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According to MadBid.com, winners of their auctions save, on average, 80 percent of the registered retail price on items ranging from cash to TVs and smart phones. Since the company makes almost £1.00 for every pence the price goes up, by the time the bidding reaches £10, MadBid.com has already pocketed almost 100 times that amount.

Thanks to the intensity required during each auction, users can find themselves quickly going through their package of bids without ultimately winning, although users can purchase the item at full price minus the amount they spent on bids during the auction.

In addition to their e-commerce aspect, pay-to-bid auction sites bill themselves as entertainment companies. It goes without saying that the business model can be quite profitable. MadBid.com reports revenue of over £2.5 million in their first year, with projected revenue in excess of £20 million by the end of 2012.

Such sites have drawn controversy after economists found that $1,000 checks auctioned on Swoopo drew an average of $2,452 in bids, raising questions of whether the bidding exploited people’s irrational competitive instincts.

“Skillful bidders in the long run do win more, although anyone can have fun with MadBid since you can purchase the item at the registered price minus the bids spent,” said MadBid CEO Juha Koski.

Needless to say, VCs have taken notice, with August Capital leading a $10 million second round in Swoopo and BigDeal.com raising $4.5 million from the Mayfield Fund and others. Rival QuiBids.com was recently written up in Time magazine.

According to Mattias Ljungman, a partner at Atomico and member of the MadBid.com board, “We think there is a lot of room to innovate in e-commerce and introducing more entertainment to enhance the experience is one way to do this.”

Koski said that the company will use the funding to invest in technology, product range and expansion throughout Europe.

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