Doug Lebda likes to think differently.
Lebda, who founded the online lending aggregator Lending Tree, uses what he calls Effectuation as an alternative to the traditional business startup approach. He talked about the core principles of effectual thinking Wednesday at University of North Carolina Wilmington as part of the university’s Business Week program.
Effectuation differs from the traditional causal thinking approach to business development in that the entrepreneur starts out by inventorying assets – what’s on hand – rather than determining a goal and figuring out what it will take to meet that goal. Lebda said the concept was developed by Saras Sarasvathy, a faculty member at University of Virginia’s Darden School of Business, where Lebda studied.
Effectual thinking is common among successful entrepreneurs, Lebda said, citing Sarasvathy’s research involving what she called expert entrepreneurs: people who had a record of successful startups.
“It’s a way of thinking; a method that can be applied to any area of life,” he told an overflow audience in Cameron Hall auditorium. “It could be as important as the scientific method over time.”
Five principles underlie the Effectuation process. Lebda related his own entrepreneurial journey with Charlotte-based Lending Tree in illustrating those principles.
1. Bird in the hand: “Think about your personal balance sheet,” Lebda said. “Who are you, and what do you have? Whom do you know?”
He likened this way of starting a business to a chef who is asked to prepare a meal using only the ingredients and equipment already on hand. A causal approach would be for the chef to determine what meal to prepare and then to assemble the equipment and ingredients needed to achieve that goal.
In his case, Lebda made a list of every asset he had, from his skills to his network of contacts, that would enable him to launch an online lending marketplace.
2. Affordable loss: Instead of focusing on profits, determine what and how much you can afford to lose in the venture, Lebda explained. The loss might be financial, or time or sacrifice of other important parts of your life.
Lebda gave himself one year, taking a break from graduate business school to see if he could turn his idea into a viable business.
3. Crazy Quilt: Talk about your concept to anyone who might be able to help you and give you feedback, but really listen only to those who are willing to get skin in the game, Lebda said. The result? A "quilt" of connections, ideas and, ideally, resources.
The most important question he would ask others, he said, was “What would it take for you to invest $10,000?” Lebda added that the requirements laid out by potential investors were a great source of learning for him and led to his making several improvements in his business plan that resulted in early investments. He also forged barter arrangements, learned what he could get for free and honed his sales skills.
4. Lemonade: When unexpected negative things happen, figure out how to turn them into positives, Lebda said. “Pivot. Find out what is right around the corner -- it’s a new market, a new opportunity.”
When Lebda realized he was having difficulty signing banks up to be part of Lending Tree’s base of online lenders, he talked to an official at one major bank, who explained that his bank didn’t have the technology to accept online loan applications. Lebda ended up building a new website for the bank. That job wasn’t aligned with Lending Tree’s business path, but it netted a nice profit, cemented the relationship with that new client and opened the door to helping other banks with their websites.
5. Pilot in the plane: While businesses try to predict the future, it is sometimes more important to be in control of current conditions, just as an airline pilot must stay on top of what’s happening even when the craft is on autopilot.
“I stay very close to my clients,” Lebda said.
In answer to a question from the audience, the Lending Tree executive said that Effectuation is a way of seeing the world and generating options.
“I’ve come close to bankruptcy four times, and each time it was a thrill,” he said. “We’re always learning and solving problems, and it’s made us better.”