LendingTree: An original dot-com darling grows up

While visiting New York last month, LendingTree.com founder and CEO Doug Lebda was informed by a professor from his college days at Bucknell University, "You were always trying to find a different way of doing stuff. It was annoying."

It has also been successful. The business model created more competition and moved the leverage from the lender to the buyer. Since its inception, in 1998, LendingTree has played matchmaker on more than 30 million loan requests and facilitated some $214 billion in closed loan transactions.

Lebda's different way of doing things now faces a stiff challenge: Can it stay different enough with the rapid changes taking place in the loan market?

Charlotte-based LendingTree has certainly been through a lot: A dot-com boom that went bust. Acquisition by media mogul Barry Diller's company IAC, which was later spun off to join Tree.com in a second IPO, just as the housing bubble that was great for its business burst. But LendingTree is still going—and maybe even growing, through a constant reinvention of its online-loan business model.

"If it's a 'middle-aged' company, it is so with the opportunity to go back to being a high-growth start-up," said Kerry Rice, senior analyst for Internet and digital media at Needham. "It has a few miles on it. ... It's seen good and bad times and really worked hard to reposition itself to be in a path of growth."

For a long time that mission had been simple: trying to pair consumers with the right lender for purchasing that new house or in getting a better deal than an existing mortgage. When it launched, LendingTree.com was like a digital version of that aunt who's always trying to fix you up with a nice girl or boy because you should have been married by now—alongside the early travel sites that changed the way we book hotel and airfare. Now that aunt is attempting to remain not just relevant but vital in an era of peer-to-peer lending growth that is changing the nature of the relationship between loan seekers and investors.

As with many innovations, it all started from one man's problem, Lebda's personal frustration at securing just one loan: his own first mortgage.

After leaving Bucknell University in his hometown of Lewisburg, Pennsylvania, with a bachelor's degree in 1992, he went to work for PricewaterhouseCoopers in Pittsburgh as an auditor and consultant. While looking to buy a condo there and going through the arduous process of trying to secure a mortgage for it in 1994, Lebda realized that if the process was that difficult for someone with his financial acumen, then there must be a massive market of others with the same desire for a better way. Working in the energy sector, he saw money as a commodity, just like oil or gas.

As his professor inferred, Lebda wanted a different way of doing things.

And that's when his yearning for an open and far less painful marketplace for mortgage loans began evolving into the concept that flipped it to where the lender courted the buyer instead and what would become LendingTree.

By the fall of 1996, though, Lebda was in the MBA program at the University of Virginia's Darden School of Business, coincidentally something he wouldn't complete until this May. While there, everything he learned was seen through the prism of his mortgage marketplace idea. It consumed him. In a leap of faith, he put business school on hold.

The business was launched two years later with co-founder Jamey Bennett, whom he knew from Bucknell and who had previous experience as the founder of BookWire, a marketplace to provide publishers with multiple printing quotes. They each put in $2,500 to start the company. Another $20,000 came in over time from friends and family. A year later the concept, originally christened as Credit Source USA, was gaining traction, and Lebda moved from Charlottesville to Charlotte. In 1998 the rebranded LendingTree.com went online. Bennett would leave the company in 2000 after its IPO, which was enhanced by the company's new tagline, "When banks compete, you win!"

The IPO was successful, but like most Internet-related businesses, the stock suffered greatly in the crash that soon followed.

"Fortune magazine used to come out every month with [a chart of] the dot-com implosion, and we were always the one closest to the sun that was going to get sucked in, but we stayed focused and hit our numbers. Everyone at the company pulled together, and by 2002 things started to turn around."

Unlike most dot-coms, that's because LendingTree actually had a business model with something to sell.

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In 2003 the company was acquired by Barry Diller's IAC in a stock swap valued at a handsome $734 million, which allowed for acquisitions that further strengthened LendingTree. Lebda left to run all of IAC in 2005 but came back after the company was spun off in 2008 as mortgage-backed securities nosedived and the real estate market quaked.

Gut-punched twice, LendingTree still stands, and the company is now far leaner after shedding its own mortgage and real estate units, but far more agile.

Big banks have always eschewed the labor-intensive work that goes with servicing millions of individuals, Lebda said. The new players coming into the lending market see the world differently than banks, and potentially as disruptive to banks as Apple was to IBM, these new automated-lending and peer-to-peer platforms could provide real stimulus for small businesses and individuals while taking that business away from less agile banks, Lebda said.

"Banks have traditionally wanted to do things at scale," he said. "It's a lot easier to lend a company a hundred million dollars than it is to lend 10,000 people $1,000. That requires a certain level of automation, and I think banks have been ill-equipped to [do that]."

More so, traditional banks are risk adverse. "You don't get in trouble for saying no to a loan; you get in trouble when one goes bad," Lebda said.

Lebda looks at the institutional capital—hedge funds and other money managers—who are looking for additional ways to generate returns and the advent of peer-to-peer lender technology that is filling a void. The lure is potential returns that are better than the bond market or Treasury bills, and the benefit to the consumer is lower rates and instant approvals. And it's going to grow.

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The JOBS Act of 2012 made it easier for individuals to invest in the equity of small businesses, and Lebda claims "small business are the most unbanked population of the business world." Peer-to-peer lending companies, including Prosper, LendingClub and On Deck Capital, are funded by institutions and individuals looking to cut out the banks as middlemen.

"What we're hearing from some of our biggest clients, particularly in the personal-loan space, is that they have more capital to put to work than they have consumers who want loans, and that creates an opportunity for us to create an open marketplace and give consumers a choice."

All of this is potential business for Tree.com, the parent of LendingTree.com.

The first few months of this year were an interesting mix for the online mortgage matchmaker. With rates rising, even minutely, the core business of housing-market loans continued to experience a substantial transition from refinancing to purchase. Business for the parent Tree.com was up from last year, but so were losses. The $40 million in revenue for the first quarter of 2014 is 43 percent higher than last year, but the loss of $6.7 million is $3.7 million more.

Expenses elevated to $45.9 million for the quarter, up 62 percent from $28.3 million a year ago, a good portion of which was attributed to an additional $10 million in selling and marketing costs as the company rolled out new television ads.

Responding to the growing reliance on wireless phones and tablets, they launched a new mobile app in May because mortgage shopping should know no restriction of time or space.

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LendingTree also took a hit in March when a court ruled against them in a patent-infringement claim filed in 2010 against Zillow and others regarding the company's methods for bringing borrower and lender together. That helped raise expenses as legal costs increased by $6.7 million from a year ago.

The company's stock has been dinged twice this year—first on the patent suit in March and then after its most recent May earnings (the company will report earnings again on August 6. Shares of Tree.com are down near-22 percent year-to-date through August 1.

Yet Lebda, 44, couldn't seem more confident as he's leading a transition of the business he started while in graduate school 18 years ago to meet the new and evolving lending paradigms.

Perhaps that's because Tree.com's revenue from non-mortgage products more than doubled, growing to $5.8 million in the first quarter, a 107 percent increase from the $2.8 million a year ago. That's now about 14 percent of revenues, and Lebda sees it growing even more. Additionally, in the past year (from June 2013 to June 2014) personal-loan revenue has increased approximately 720 percent.

"We launched reverse mortgage, credit cards and personal loans last year. Our business model is pretty simple: We have a cost to get a customer in the front door; we advertise and bring them in. So if lenders are demanding customers at a level we can profitably afford to attract, then we'll do it," Lebda explained.

"The mortgage industry operates very much like the airline industry or the hotel industry, believe it or not," he continued. "You have a fixed amount of capacity. You can only process or close so many loans in a given month. When lenders have all they need, they don't necessarily need us. When that volume dries up, they need us more."

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The company is continually exploring new ways to diversify its revenues. When you go to LendingTree.com, it's about home loans, auto loans, and the credit cards/personal loans Lebda mentioned, but a look at the Tree.com site signals an even broader approach to their matchmaking agenda, with brands such as LendingTree Education (online universities), LendingTree Auto (car buying/financing) and LendingTree Home Pros (home services) that will pit them against competitors like Plus-U.com, Cars.com and AngiesList.com.

This year, Lebda said, LendingTree is looking to roll out small-business loans. "The lenders are asking us for volume. ... We are going to continue to grow in those new verticals."

"We changed a lot of our technology platform to make it easier to add new products," Lebda said. "And we've made it easier for the consumer to fill out the forms. Now that the lenders are there, we just have to step on the marketing gas and it's just a matter of advertising. As soon as it gets profitable to do it, we dial up search campaigns and display campaigns and offline campaigns. Our personal-loans campaign has roughly doubled from six months ago."

For Lebda, as long as he can keep lenders competing, everybody wins, especially Tree.com.

Needham's Rice, who worked at Hambrecht & Quist during the height of the first dot-com wave, said in 1999, "It was all about bandwidth and fiber and building out the concentric circles of fiber, and then the economy went south and the tech bubble burst and the fiber stayed unused for a long time." He thinks that Tree.com's business is in some ways analogous. After all of the twists and turns over the years, a skeptic could say the company will never reach the size people had expected it to originally, but on the other hand, it survived a couple of big macro negative trends, and it wasn't until 2009 that more and more consumer-related products and services truly shifted online.

"I still think there is a good amount of secular growth to the online channel and to benefit Tree.com," Rice said. "It's a 20-year-old company, but when you think of the penetration, it's still very small in the lending market. So it has a long life ahead of it and lots of opportunity," he said.

Lebda, who said his two greatest influences are the sales skills and work ethic of his father, who sold high-end cookware in central Pennsylvania, and the entrepreneurial advice of business writer Jim Collins, the author of "Good to Great" and "Built to Last," whom he met at Darden, offers a few lessons from his own experience.

• Look for the pivot. You have to be open to change. You need to be able to make the decision of when to stick to your guns and know when to change, because early ideas evolve into different opportunities.
• Understand that your customers are people; they aren't spreadsheets or market segments. Put the product or idea in front of potential customers. You'll learn much more from doing that than through any other research and analysis.
• To be an entrepreneur, understand that it will be incredibly hard work but also incredibly rewarding. You get the chance to create a company that you want to work for, with your values and your dreams.

—By Steve Goldberg, special to CNBC.com