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COMPANY CLOSEUP By Timothy J. Mullaney October 12, 1999


Can LendingTree Grab the Limelight from E-Loan?
To battle the glamour of its rival and woo opinion leaders, LendingTree will need not only its loan technology but also its $52 million in new funding

There's something about $52 million in startup capital that will make a 29-year-old CEO talk big. Just listen to Douglas R. Lebda. His three-year-old online-lending startup, LendingTree Inc., is about to scoop up all those millions in venture capital from blue-chip partners such as GE Capital, priceline.com, and Goldman Sachs. Lebda especially savors Goldman's backing, since the investment bank managed the June initial public offering of LendingTree's biggest rival, E-Loan Inc. "Goldman Sachs took E-Loan public -- but they invested their own capital in LendingTree," he boasts.

Lebda's edge: new software that lets him match loan applicants to lenders whose credit standards fit them. The goal is to give each borrower up to four offers, and to make LendingTree's 80-plus lending partners compete for applicants' business while paying LendingTree fees. If it works, LendingTree gets big without shouldering the risk and expense of making loans itself.

Lebda's biggest concern is making sure that LendingTree doesn't get dismissed as just another me-too affair now that rival E-Loan has grabbed the early glamour. E-Loan was the hot IPO in June, when its stock shot up to $37 on its first day of trading, after being priced at $14. And it also has been getting the high-profile press attention that has marked it as the hot online lender. Lebda knows that in the Web world, perception often begets reality: Without the buzzed-about "first-mover advantage" in the minds of opinion makers, you can lose ground in the battle for customers.

To fight back, Lebda is spending his time -- and will spend, he says, $50 million of that $52 million raised in September -- convincing people that his Charlotte (N.C.) company is the real revolutionary in online lending. That VC windfall will pay for an ad blitz that Lebda is launching between now and Christmas. "Raising money is only as important as what it lets you do to get the word out," he says. "The biggest challenge is being able to tell our story and to differentiate ourselves from E-Loan."

 

LendingTree's software and field of competing lenders can mean 95% approval rates for borrowers
 

Lebda started the company in 1996 at his apartment in Charlottesville, Va., while a student in the University of Virginia's MBA program. As Lebda saw it, borrowers didn't have enough power in the marketplace, and he thought technology could help solve that. LendingTree has applied for a patent on software that automatically applies the standards of multiple lenders to a single applicant, referring the request only to banks likely to approve it. LendingTree rounds up enough banks so that almost any consumer can find someone to lend him or her some money on some terms or other, and let them squeeze each other over price. No one who deserves conventional terms will be punished for unwisely wandering into a consumer-finance office, while a credit-challenged customer will be directed to the right lender instead of being turned away. The technology -- plus a field of more than 80 lenders at any one time and the right of applicants to as many as four competing bids within a day -- means approval rates can top 95%.

That also helps make LendingTree's approach to revenue strikingly different from E-Loan's. LendingTree makes its money from two types of fees: the first, Lebda says, is the "several dollars" paid by lenders for each credit-qualified lead; the second is a fee of up to "several hundred dollars" for each loan closed, depending on what type of loan is involved. But LendingTree is never the lender, and Lebda says the model requires fewer people to generate the same amount of revenue than if LendingTree made loans itself. "We're not going to be the ones collecting your W-2," he says.

E-Loan, on the other hand, works from another financial model and set of assumptions about what has been wrong with the consumer borrowing market. Instead of brokering loans for a fee, E-Loan makes loans and then sells them in the secondary market, which is pretty much what conventional banks do. Chris Larsen, E-Loan's CEO, says Lebda has it wrong -- that LendingTree adds yet another middleman to the lending process, raising the cost of processing the loan. The hotly competitive bond markets are constantly repricing lending capital, so the transaction cost is the real problem, he insists. What the Web provides is the ability to hold down overhead, and that's what E-Loan is concentrating on. "The capital market is already incredibly efficient," Larsen says. "The problem is in distribution. A LendingTree model puts another step in the process."

 "DOMINANT" ONLINE LENDER? Until recently, both have been able to grow rapidly. Larsen says E-Loan closed just over 2,000 loans during the second quarter. Lebda says LendingTree gets 3,000 applications a day and closes 3,000 loans a month. Till its recent deal to acquire CarFinance.com, E-Loan was a pure play on mortgages, with an average loan of $188,000 and average revenue per loan of more than $2,000, Larsen says. Lebda's mix, by contrast, includes car loans, credit cards, and personal consumer loans. LendingTree doesn't disclose its average loan size, but it is smaller.

Even so, Lebda insists that "we want to be seen as what we are -- the dominant online lending market." He points out that E-Loan's second-quarter revenue was flat compared with the first quarter's. E-Loan has announced that the third quarter will also be sluggish as a result of falling demand for mortgage refinancing.

Whether Lebda's boast of "dominance" is true or not right now matters little for the long term. What happens next depends on marketing -- both to Wall Street and Main Street. LendingTree last week named finalists among ad agencies vying to direct its $50 million buy. Lebda will focus on 30 top radio markets through Christmas, as well as online ads, and hit the TV airwaves early next year. "Right after the holidays is a good debt-consolidation time," he says.

 

Not every investor thinks LendingTree needs to whip E-Loan. "The online lending business will be huge," says Priceline's Ness
 

But that marketing will go on alongside a more subtle, sophisticated battle for the favor of financiers and tastemakers. That's where deals to make loans through sites such as priceline.com, Bloomberg.com, and others come in. LendingTree has been priceline.com's only lending partner until last month, when the Stamford (Conn.) company added a deal with Alliance Capital Partners. Lebda says priceline.com accounts for only about 10% of LendingTree's applications. But Bloomberg and Priceline add value simply by lending their names to his company. That's also why Lebda admits he put a lot of emphasis on recruiting big-name investors for LendingTree's most recent venture round. "Thought leaders evaluate your company on the power of your partners," he says.

Still, not every investor thinks LendingTree needs to whip E-Loan. "The online lending business will be huge," says priceline.com Senior Vice-President Ben Ness. "People want different things. That's why there's chocolate and vanilla."

All of this high-level positioning means Lebda's job has shifted from Web-site minutiae to managing more nebulous perceptions. His time is spent largely at investment banks, research shops, and magazines. Gesturing toward communications director Deborah Roth, Lebda says: "I go where Deb tells me." He's not serious, though. Lebda's really going as far as his powers of persuasion will take him.

Mullaney covers E-business for Business Week in New York.


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RELATED ITEMS
To try the sites mentioned in this story, click here:
LendingTree
E-Loan
priceline.com
Goldman Sachs
CarFinance

To read BW's Sept. 6 Cover Story on E-Loan, click here:
"Inside an Internet IPO"





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