Marketplaces, Lead Generation, and Brokerages

When we first started Fundera we described it as a "marketplace for small business loans." It took me several years to understand that what we were building was not a marketplace per se, but really a brokerage. Over time I developed an appreciation for the nuances of what makes an internet marketplace a marketplace. Frequently, we confuse business models that are really online brokerages or lead generation sites with the term marketplace. While the distinction is somewhat subjective, I believe there are several defining characteristics of each, and the type of business model one has matters because there is a hierarchy of inherent value.

Lead generation is the easiest model to distinguish. If a site relies on selling leads (i.e. CPL) or being paid for driving high-intent traffic that buys something (cost per acquisition, or CPA) to make money, then its business model is lead generation. There are many different types of lead generation sites, and they can be quite lucrative businesses, particularly in markets where paying customers (i.e. the businesses that buy leads) do not have performance marketing as one of their core competencies. Lending Tree is an example of a company that is excellent at leveraging the CPL business model. They have many different forms on their website across a variety of different financial verticals (e.g. mortgages, personal loans, insurance, etc.). These forms collect basic contact and demographic information about consumers interested in those products. That information is then sold to providers of those products through an exchange auction that matches buyers with leads based on customer profiles and willingness to bid on those respective profiles. In some CPL models a lead is sold to multiple bidders, and in others exclusively to one bidder (usually for a higher amount). This model can produce lucrative results for the lead generator, but sometimes sub par experiences for consumers if their information is sold to too many buyers.

The CPA model relies on a visitor taking an action, expressing explicit interest in a particular seller's product, and then completing the purchase themselves. Another financial services example here is Credit Karma whose model is surfacing relevant financial products like credit cards to consumers based on their credit scores. If a consumer likes and wants the card and applies for it and is approved, Credit Karma is paid a fee for finding that customer for the credit card issuer. Usually these fees are much higher than a CPL fee because they are only paid once a transaction has been completed and the provider has found a new customer. At Fundera, we employed this model when we expanded into financial products beyond SMB loans. Customers would come to our site when they were researching small business credit cards or checking accounts, and we would recommend these products through content-first experiences via affiliate links. If a reader liked an option enough to click on it and buy it, then we were paid a CPA fee.

Most lead generation businesses rely on models where they buy low and sell high. If a business finds a vertical where consumers have difficulty identifying the right product, lead generators can aggregate supply to help consumers make easier decisions. We see this in financial services and travel a lot. The downside of lead generation businesses is that they can be a race to the bottom if they're in a crowded and competitive market. The barriers to entry are essentially aggregating supply (i.e. buyers of leads or businesses willing to pay for new customers) so there is little in the way of defensibility. The other downside is that they are very transactional businesses, and the lead generator very infrequently has a relationship with a customer. This means that for a shopper, it's usually a one-and-done experience. This requires the lead generator to be on a perpetual treadmill of buying and selling traffic, constantly searching for new arbitrages to scale. Another important distinction for lead generation businesses is that the final purchase and transaction takes place off-site. While there may be marketplace-like experiences where visitors can search and browse for things to buy, ultimately they are directed somewhere else to get the thing they need to purchase.

The best lead generation companies usually have some combination of a distinguished and highly trusted brand and a proprietary channel or value proposition they use to acquire customers that competitors cannot replicate. These companies typically have staying power and defensibility, are highly differentiated, and immensely more valuable than competitors.

Marketplace businesses are fundamentally different than lead generation businesses in several different ways. First, the end-to-end customer experience and transaction takes place within the marketplace. This is an important distinction because the customer associates the entirety of the purchasing experience with the marketplace, and ultimately the relationship is between the marketplace and the buyer. While similar to lead generation companies in that sellers of product will pay marketplaces fees for helping them to acquire new customers, marketplaces have other ways of monetizing by adding in additional services to enhance the customer experience for buyers and sellers (e.g. payments, insurance and guarantees on purchases, buy now pay later options, marketing tools for sellers, etc.). Layering on these services is only possible because the entire experience takes place on-platform.

Some of the most valuable and iconic businesses in the world are internet marketplaces. One of the key defining characteristics of a defensible marketplace is the uniqueness of supply. Uniqueness can mean several different things. It can mean reliability like Uber has with near consistent ubiquity across cities around the globe. It can mean vastness of options like Amazon. Or it can mean finding things that are truly distinct to that marketplace like esoteric vacation homes on Airbnb or crafty and quirky gifts on Etsy. The uniqueness and differentiation of supply is one of the things that ultimately attracts demand and creates network effects and defensibility. Over time copycats emerge that try to compete for the same supply so marketplaces are forced to innovate on creating delightful experiences for buyers and sellers, expanding product offerings and services for marketplace participants, and expanding into adjacent markets to bundle offerings for buyers in order to increase LTV (lifetime value) so it can afford to outspend competitors on CAC (customer acquisition costs). Airbnb is an excellent example of a marketplace flawlessly employing these strategies as incumbents and new startups began to copy its business model. Searching for vacation rentals on the site is a genuinely delightful experience, renters are provided with incredible insurance and cancellation policies along with trip planning tools, homeowners are given incredible levels of customer support and services to maximize bookings and revenue (e.g. professional photography for listings), and the marketplace now provides add-on experiences ranging from luxury enhancements to affordable and fun tours around your airbnb.

The differences between lead generation businesses and marketplaces are vast, and to fill that void there is the brokerage model. The brokerage model is what we employed at Fundera. There are several distinctions between brokerages and marketplaces, but a key one is automation versus people-intensive. Marketplaces are fully automated. You can complete a purchase as a buyer without ever speaking with a person. Everything is magically taken care of for you by software. But in instances where buying something is a very intensive process, a human intermediary is usually needed to help facilitate the transaction. Getting a small business loan is a good example. Whereas I can simply find a vacation rental on airbnb or a neat piece of art on Etsy and instantly buy it with my credit card, I can't simply buy a small business loan. I have to apply for one by providing a lot of information about myself, my business, and documentation ranging from bank statements to tax returns and more. Then I have to decide between a variety of complex products and offers with differing terms that I'm eligible for. In instances like this where there is a high amount of friction to make a purchase, people are often needed to help complete the process.

There are many other products where a brokerage model is required to facilitate a transaction such as online insurance and mortgage agencies. Usually we find these in complex financial products that have some type of regulatory or compliance component. These transactions simply do not work without a person helping a customer along, there is just too much friction. This isn't a bad thing per se. There are actually a lot of good things about it. Brokerages are able to manage almost the entirety of the end to end customer experience, and as a result they can form a relationship with the customer. Usually, if they're customer-friendly and mission driven, brokerages can earn the trust of a customer through this experience such that the customer continues to return to them for recurring needs like getting another loan, refinancing, or getting another adjacent product. These high-trust relationships usual mean that brokerages can achieve strong LTVs. Also, since the purchasing process is more complex the associated brokerage fees can be lucrative, and have terms where the brokerage is paid in perpetuity whenever a policy or loan is renewed. These can be phenomenal and defensible businesses, particularly when the brokerage builds a brand and a large customer base it can continuously service over time. A synonymous term to brokerage that describes these models is Customer Origination, wherein the business is effectively originating a new customer, that is completely and entirely onboarding them into a brand new product, on behalf of a seller.

The downside of a brokerage business versus a marketplace is that humans are required to facilitate transactions. Nobody has to be in the office, at their desk, or on the phone for a marketplace to hum. It does so 24/7 all on its own. But a brokerage needs people to power it, and therefore cannot scale as quickly and as much as a marketplace (of course there are other limitations to scale like TAM). Also, brokerages usually do not have unique supply like a defensible marketplace. The products brokerages sell usually feel like commodities: money, insurance policies, interest in real estate, etc. This is not necessarily a bad thing, it's just the way it is.

Ultimately, all of these models connect buyers and sellers and are viewed as customer acquisition channels by their paying customers, but different attributes of marketplaces, lead generation businesses, and brokerages ultimately determine how good of a business they are. This is by no means an exhaustive list of attributes, it's just my first-pass at a visualization of them:

If you had three businesses that all sold the exact same thing, did the same amount of revenue and EBITDA, but employed these three different business models, the marketplace would be most valuable, then the brokerage, then the lead generation model. That said, it is very possible to build absolutely phenomenal, large and profitable internet businesses using all of these models. Many companies have already done so and will continue to do so. But distinctions matter when evaluating opportunities and thinking about how to enter a market and what to build and invest in next. Marketplaces, brokerages, and lead generation models all have their place in the world of internet businesses, and frequently the lines blur between them. They're constantly evolving and in many instances it can be inaccurate to pigeonhole a company into just one bracket. But being realistic and objective about what type of business you have as an entrepreneur and investor provides an excellent frame of reference for how you can think about strategically growing and evolving over time.

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