Considering the challenges that he’s faced over the years, Doug Lebda’s most remarkable achievement is probably the fact that he’s managed to stay in business.
Just four years after founding LendingTree.com in 1996 as an online lead generator for mortgage lenders, Lebda ran full tilt into the dot–com implosion, which laid low most of his competitors. LendingTree managed to survive by raising additional capital and recovered enough to sell itself in 2003 to IAC/InterActive Corp., which is owned by television mogul Barry Diller.
Last August, IAC spun off the company, now known as Tree.com Inc., just in time for Lebda to face the full force of the nation’s ongoing credit crisis. The Charlotte, N.C.–based company lost $202.3 million last year, following a loss of $550.4 million in 2007, when the results were skewed by special changes related to the spinoff. Lebda’s response? In February, he invested $3.65 million of his own money in the company’s common stock.
“I view this as historic times,” he said in a recent interview with BAI Banking Strategies. “We’re navigating through this and it’s incredibly energizing to me.” Spoken like a true entrepreneur — and also a true maverick in financial services. For his ability to stick with his unique business model over the last 13 years, Lebda will be featured at the upcoming BAI Mavericks in Banking event, to be held May 4–6 in Chicago.
In the interview, Lebda expresses confidence that his earnings diversification strategy — branching out beyond LendingTree’s original focus on mortgages — will get the company through this difficult period. He says he’s always been guided by a long–term commitment to his strategic vision combined with tactical flexibility.
“You need to be well grounded in your core principles, but also willing to change a whole heck of a lot of things,” he says.
See Doug Lebda at the 2009 BAI Mavericks in Banking, May 4–6, in Chicago, Ill.
Q: Everyone can have great ideas but a true maverick is someone who can bring that idea to fruition. How have you been able to stick to your vision at LendingTree and actually implement it over the last decade?
Lebda: We’ve always been rooted to a core set of principles that then enables us to be flexible. |
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The core concept is really just the notion that consumers should not have to go apply for loans from multiple institutions. They should be able to fill out a simple form and have that information flow to multiple lenders so those lenders can make them offers. From the lenders’ side, the idea is that lenders shouldn’t have to dangle a rate out there and have consumers apply for a particular product at a particular rate. Instead, they can evaluate the customer and make them an offer that makes sense given the customer's financial situation.
But within that framework, lots of things can change. For example, the initial idea for the site was that the consumer would fill out a form and the lender would make a firm offer immediately that the consumer could accept or reject. The first thing lenders said was: “I have to talk to this guy. I don’t know if his information is accurate. I can’t just make him a bid; I’ve got to actually find out some more information.”
Well, that changed our business model a lot because, all of a sudden, this purely technological exchange — where bids and asks are thrown around, buttons are clicked and mortgages are closed — was kind of out the window. Now we had what today would be called “lead generation.”
By the way, today we are much more able to fulfill on the original vision of a more automated process because the technology is a lot smarter. Over the last 10 years, we’ve seen the development of decisioning systems, where banks have all of their credit policy, if you will, residing in a database. Today we are actually in a position to fulfill on the original vision of LendingTree in a way that wasn’t possible before.
The other thing that changed early on was the target market. Except for a few institutions such as PNC Financial Services Group Inc. and National City Corp., the big banks weren’t interested in working with LendingTree. One senior banker once slammed his fist on the table and said to me, “You’ll never get between us and our customer! We’ll never let you do that!” Instead, we worked with mortgage entrepreneurs or mortgage brokers.
Now the large institutions are much more willing to play ball with us. It took the advent of what I would call the “direct banking center model,” or contact center. Before that, banks had traditional loan officers in field offices who worked directly with realtors. We told these mortgage entrepreneurs, “Look, you can’t send this lead to a decentralized loan officer who’s going to get two leads a month from us. This has to go to a group of twenty people who are just working LendingTree leads all day.” The mortgage guys said okay and set up centralized offices.
So, we helped to push the mortgage industry to that sort of call center mortgage model. And then the banks, over time, as they grew their centralized banking centers, moved in, particularly into the home equity space, and have done a great business with us. So, the target market has changed and the technology has changed, but other than that the core LendingTree concept is still the same.
I started this company to empower consumers, to give them multiple options, to give them all the information they need to make an informed decision and get a great deal. At the same time, lenders pay our bills so lenders are our partners. The value for lenders is that we operate a low-cost channel, enabling them to provide risk–based pricing directly to a consumer. While we're clearly pro-consumer, we also cut the cost for the lenders and give them a way to grow their business. And since we make a good portion of our total revenue on the back end, on the closed transaction as opposed to the typical lead generation model, we have great alignment with the lenders.
As I indicated, it was a challenge to get this going in the early days because we were changing the lending model to one of risk-based pricing and more customized offers. We were also changing the model in terms of the lender/customer interface to one more call center-based and less decentralized and putting the lenders in competition with each other. Those were certainly challenges to overcome.
The consumer side has always been less of a challenge. We have never had a problem from the first day we ran our first online banner ad out on Yahoo! We have never had a problem getting consumers to engage with us, and that has been one of the pleasant surprises. People used to say, "Well what about privacy, what about security, is the consumer going to put all this information online?" Well, thousands of them do it every single day.
Q: Have there been any periods where you might have been tempted to quit?
Lebda: I’m always confident and always highly paranoid. While I have the will to believe that we’ll do it, I’m also highly skeptical every day about the tactics. I think that combination of confidence and paranoia works well for an entrepreneur. You need to be well grounded in your core principles, but also willing to change a whole heck of a lot of things.
I also had to change my framework for measuring success and failure. I almost didn't start LendingTree, which would have been the biggest tragedy. I almost took an investment banking job and returned to business school. For a variety of reasons I said, “Let’s go give this thing a shot and if it doesn’t work I can come back.”
But the big mindset change for me was to not measure myself based on the success or failure of the enterprise. I actually measure myself on whether I’m learning new things and advancing myself as a manager and as an entrepreneur. So, at times that are the darkest for the company, I am the most engaged.
For example, we went public in February of 2000. The stock went from $18 to $2. We had to go raise what's called a “pipe” deal — private investment and public equity — in the worst possible market of 2001 and we were about three or four months away from running out of cash. Fortune Magazine ran an illustration of the dot-coms closest to getting sucked into the sun and we were always the closest one to the sun.
But while people here were worried about surviving, I was actually extremely energized. I had never gone through a pipe transaction. I’d never been in serious adversarial negotiations with my investors before. All of that was a tremendous learning experience for me. I had the confidence to basically say, “We will get through this.” We pitched hundreds of investors and eventually got our financing done.
I kind of feel the same way now. Everybody talks about the “mortgage meltdown.” But I view this as historic times — with the financial markets, the banking system and the mortgage business — and we're right in the middle of it. We're navigating through this and it's incredibly energizing to me because I’m learning a lot.
Q: So you still have your confidence?
Lebda: Yes, totally. I still have my confidence and I still have my paranoia.
| LendingTree has never been more of a relevant concept to people — the notion of somebody looking out for consumers. It’s also never been more relevant to lenders. A few years ago, every prime lender wanted to be in sub–prime; every sub–prime lender wanted to be in the prime space. Now, everybody has more segmented niches and that makes the Lending Tree proposition more valuable than ever to the lender. A LendingTree lead has been scrubbed for credit. Lenders know the quality is there. And if they get high quality leads, they can retain their salespeople. |
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There are also positive aspects for us. The competition is fading and our advertising rates are going down. Obviously, it’s put some price pressure on us from lenders who advertise with us. But it's cheaper for us to go buy advertising on TV and radio.
The challenge for us now is to make the product even more relevant to consumers, so that’s what we're working on. We’re working around the notion that LendingTree needs to be relevant for everybody who has a loan or is looking for a loan. We’re playing around with a concept that we call “The Low Rate for Life.” If you’ve already got a loan, tell us who it’s with, tell us the triggers at which you would actually refinance or get a different loan. And whenever those triggers occur, we’ll show you your options. That opens up a whole new segment of customers.
Another thing we’re working on is called “Lender Score Card.” It basically ranks loan officers for consumers. If you’ve gotten a referral to a particular lender and want to find out more about the guy, we can give you ratings and reviews based on the experiences of other people. We want to have that for both LendingTree lenders and non-LendingTree lenders.
Q: What’s your strategy for getting through the current market crisis?
Lebda: When LendingTree was spun off by IAC, I analyzed what we had and tried to configure it in an interesting way to try to attack this market. What we had was a phenomenal marketing capability, a great brand name and a very large customer database. We also had a RealEstate.com business that was gaining traction with a different kind of model.
The strategy, then, was to leverage the marketing capability to get into other lead general categories besides mortgage. Since we’re spending less than we did on advertising now than before but still have the same number of people in the marketing department and can handle more marketing expense, we can find some new categories. We’re looking at insurance, education, credit cards, student loans and small business, the big five, and then a few others as well.
For example, we’ve taken the LendingTree model into insurance and called it InsuranceTree.com. It’s now live in a beta mode as a library of resources for consumers shopping for insurance policies and providers. In the coming months, we will add a marketplace to enable insurance providers to compete for your business. We could do the same with credit cards and commercial loans. So, that would be leveraging the marketing capability.
A second strategy is to get more organic traffic by making LendingTree.com applicable to a much broader audience. That’s the tool strategy, which we’re also still building, and involves things like “Low Rate for Life.” That strategy is designed to break the direct marketing cycle. Even as we’re trying to get into the direct marketing game in some new channels, we’re trying to break that cycle on LendingTree.
The third strategy involves cross-selling. We've got 25 million customers. What other products would they be interested in buying? Once I’ve gotten all your information on this mortgage form, with a click, I can also quote you some homeowners’ insurance. So, we’re working on partnerships and a quoting engine to be able to quote your homeowner’s insurance.
Finally, the “über” strategy, which we’re still working on — is to combine all our products: LendingTree, GetSmart, InsuranceTree, etc. under the Tree.com brand, on one site. So, we’re working on a Tree.com that will be a LendingTree for every major financial decision that you make in your life — going to school, getting a lawyer, financial planning, insurance, etc.
We made one step in this direction with the acquisition of justthrive.com from Loudwater Labs Inc. This is a free, easy–to–use Web site designed to help consumers monitor, manage and improve their financial health. The purchase will expand Tree.com's offering beyond home loans and real estate.
Q: Do you see any scenario in the current market environment that might threaten your ability to carry out these strategies?
Lebda: No, because we're an unprofitable company today. At our peak, our lending business made about $80 million earnings before interest, taxes, depreciation and amortization (EBITDA) a year. We've gone through a series of cost cuts trying to shrink our cost base as our revenue has declined. But we were also fortunate to get spun from IAC with plenty of cash. While we’re managing this company very much for the long term, in the short term we’re trying to be smart and not spend money recklessly. We need to be profitable and growing by the time we run out of money.
We were spun off with $110 million of gross cash. At December 31, 2008, we had $89 million left. We’re still burning cash but there’s a lot of money there and a lot of time. We’ve got at least a couple of years to give this diversification strategy a shot. If that doesn't work, we could go back to being very small. After all, the biggest driver of everything for us is advertising. If we stopped advertising, we would immediately get a good portion of our gross revenue back; it would fall right to the bottom line.
Q: So you'd mainly focus on LendingTree?
Lebda: Yes, totally just focused on LendingTree. Maybe we’d keep some small investments in some of these other things, but they would have to grow organically. You’d have just a few people focused on them.
Right now, we’re still keeping the advertising, although it’s come down a bit as I’ve said. We still generate a lot of leads for lenders. If we were a smaller business, I wouldn't need a sales force aggressively signing up lenders. It would be a much less expensive business to run, if we weren't trying to grow.
Q: What's your best guess as to how things are going to turn out?
Lebda: I think that long term — which is really all I care about — things are going to turn out just fine. The U.S. has a growing population and over the next 50 years will have a stable and growing housing base, as long as you keep supply and demand in balance.
We can all debate the politics, but the government is clearly going to make sure there’s a liquid second market in mortgages. They’re clearly not going to let big banks fail. So, if the consumer is going to have access to credit and the housing market is going to be stable and growing over the long term, I think everything will turn out fine.
In the short term, we’ve got to work through this housing deflation. My guess is that things will start to stabilize sometime in mid–to late–2009, but we have a huge glut of houses right now.
Mr. Cline is managing editor of BAI Banking Strategies.
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