The Dentist Office Software Story
I’ve been telling this fictional story about Dentist Office Software for years to describe why we are so focused on our “networks” investment strategy. Yesterday I told it at a HackNY event we did at the USV office and my partner Albert provided a finishing touch that really drives it home. Since I’ve never told the Dentist Office Software story here at AVC, I will do that and then I will add Albert’s alternate (and better) ending.
An entrepreneur, tired of the long waits he is experiencing in his dentist’s office, decides that dentist offices are badly managed. So he designs and builds a comprehensive dentist office management system and brings it to market. The software is expensive, at $25,000 per year per dentist office, but it’s a hit anyway as dentists realize significant cost savings after deploying the system. The company, Dentasoft, grows quickly into a $100mm annual revenue business, goes public, and trades up to a billion dollar valuation.
Two young entrepreneurs graduate from college, and go to YC. They pitch PG on a low cost version of Dentasoft, which will be built on a modern software stock and include mobile apps for the dentist to remotely manage his office from the golf course. PG likes the idea and they are accepted into YC. Their company, Dent.io, gets their product in market quickly and prices it at $5,000 per year per office. Dentists like this new entrant and start switching over in droves. Dentasoft misses its quarter, citing competitive pressures, churn, and declining revenues. Dentasoft stock crashes. Meanwhile, Dent.io does a growth round from Sequoia and hires a CEO out of Workday.
Around this time, an open source community crops up to build an open source version of dental office software. This open source project is called DentOps. The project takes on real life as its leader, a former dentist turned socialist blogger and software developer named NitrousOxide, has a real agenda to disrupt the entire dental industry. A hosted version of DentOps called DentHub is launched and becomes very popular with forward thinking dentist offices that don’t want to be hostage to companies like Dentasoft and Dent.io anymore.
Dentasoft is forced to file for bankruptcy protection while they restructure their $100mm debt round they took a year after going public. Dent.io’s board fires its CEO and begs the founders to come back and take control of the struggling company. NitrousOxide is featured on the cover of Wired as the man who disrupted the dental industry.
That’s the story. I hope to fine folks at YC, Sequoia, and Workday don’t mind me using their names in this fictional story. I picked the very best companies in the industry and my use of their brands is a compliment. I hope they take it that way.
This story is designed to illustrate the fact that software alone is a commodity. There is nothing stopping anyone from copying the feature set, making it better, cheaper, and faster. And they will do that. This is the reality that Brad and I stared at in 2003 as we were developing our initial investment thesis for USV. We saw the cloud coming but did not want to invest in commodity software delivered in the cloud. So we asked ourselves, “what will provide defensibility” and the answer we came to was networks of users, transactions, or data inside the software. We felt that if an entrepreneur could include something other than features and functions in their software, something that was not a commodity, then their software would be more defensible. That led us to social media, to Delicious, Tumblr, and Twitter. And marketplaces like Etsy, Lending Club, and Kickstarter. And enterprise oriented networks like Workmarket, C2FO, and SiftScience. We have not perfectly executed our investment strategy by any means. We’ve missed a lot of amazing networks. And we’ve invested in things that weren’t even close to networks. But all of that said, our thesis has delivered for us and we stick to it as much as we can.
So here’s Albert’s alternate ending (with my editorial license on the colorful aspects of this story):
A young dentist, named Hoff Reidman, just starting up his own private practice, decides that he wants to network with other dentists. Because Hoff went to CMU before going to dental school, he’s pretty technical and he hacks together a site in Ruby called Dentistry.com. He emails all of his friends from dental school and they sign up. Every dentist wants to be on Dentistry.com and the site takes off. Hoff realizes he has to quit his dental practice to focus on Dentistry.com. Albert Wenger, who happens to be a patient of Hoff’s, convinces him to let USV do a small seed round of $1mm to help build a company around Dentistry.com. Hoff comes up with a product roadmap that allows patients to have profiles on Dentistry.com where they can keep their dental records, book appointments, and keep track of their dental health. It also includes mobile apps for patients to remind them to floss and brush at least twice a day. While Dentistry.com is free to use for anyone (dentist or patient), it monetizes with native advertising, transactions between dentists and their patients, and transactions between patients and providers of consumer dental health products, and transactions between dentists and providers of dental equipment and products. Dentistry.com ultimately grows into a $1bn revenue company and goes public trades at a market cap of $7.5bn. Wall Street analysts love the company citing its market power and defensible network effects.
I hope you enjoyed this fictional story. I find it explains our network thesis simply and easily. I will keep telling it to groups I talk to, but now with Albert’s ending. I like it very much. Thanks Albert.
“Every dentist wants to be on Dentistry.com and the site takes off”why would every dentist want to be on the site at that nascent stage?from inertia to momentum is the tricky bit for all these network effect startups.
i think relatively trivial to get these things going.provide them targeted content, best practice guides, industry news etc
….along comes Sevin Kystrom, he only cares about looking at photos of teeth. he unbundles photos from denstry.com by creating a standalone app called teethagram. users love it. he sells it back to dentistry.com for $1bn…..along comes Mandrew Aason, he realises dentists would be happy to discount their fees rather than have voids in their appointment books. he unbundles appointment functionality from dentistry.com and creates a standalone app called dentapoint. users love it. he takes huge VC and gets rich doing massive secondaries….along comes Wabriel Geinberg. He’s pissed with dentistry.com’s privacy policies he offers a more private option, floss floss go, and steals away dentistry.com privacy sensitive users….along comes Kan Joum, he realises dentisty.com has become bloatware. he unbundles dentist-to-patient messegaing and launches it as a standalone app. users love it. he ultimately sells it back to dentistry.com for 10% of their market cap…..along comes ….along comes …..along comes….Hoff Reidman wakes up one morning to realise his dentistry.com empire has slowly been unbundled and nibbled away by startups who’ve created leaner, more focused mobile-first apps. he consoles himself with his $5bn net worth and starts plotting his next company.**alternate ending**….along comes Parry Lage and Bergey Srin. together with Melon Musk – they invent stuff which rewinds ageing, cures disease, stops death and obviates the need for teeth altogether. dentistry.com, it’s clones and satellite apps are forgotten overnight and become the teeniest of teeny footnotes in the history books
YessssssssssssssYou will enjoy our next investment in the health care space
Networks and privacy are generally difficult concepts to reconcile, but present a larger problem when legal barriers are in the way. The lion’s share of comments have accurately pointed out that dental software is often woefully out of step with what exists elsewhere. The point concerning standalone software as an easily replaceable feature set is largely to blame. The market is fragmented because Dentasoft, Dent.io, etc continue to iterate sexy new skins on a similar feature set at different price points; incremental advances such as tying radiographs and intraoral images directly to patient records seem like substantial improvements to dentists practicing within their bubbles. Dentistry is perhaps the most blue collar of the white collar professions. The dentist is making his/her money with drill in hand and is primarily concerned with keeping the patient pool flowing. I thought that my software in dental school was antiquated, that was until I had the privilege of experiencing the Corporate Dental Application developed by the US Army. It is ugly, ungainly, and not infrequently glitchy However, it has the largest network of patients (the DoD) of any software platform that exists. Revolutionizing a network of that size is a tall task that has fallen flat in a big way at least once. As the layer of the internet settles back over the real world, the friction inherent in established networks of users to change will be vastly different than the hordes of users immediately available on any cloud-based system. Penetrating the dental market (or those like it) would be hugely beneficial but due to inconvenient pragmatic concerns it will require a lot more time and money being thrown at the problem than most people are willing to consider, much less stomach. How to overcome barriers like HIPAA to bring transparency to a process in the right ways while ensuring safeguards remain in place in others. The DoD network is the effectively a socialized healthcare delivery system and it carries an entirely unique set of challenges. As the civilian sector in the US transitions more into a socialized model, standardization and compatibility will become more important than ever before. It is a huge opportunity and I hope that USV can be as successful in the healthcare space as they’ve been elsewhere. The notion of better healthcare with improved access is obviously appealing but I remain convinced that it will require a capitalist paradigm to drive it to sustainability. (Sorry for the tangential rant, but working for the DoD and observing the NHS has engendered some strong feelings and I’m over the moon about such a gifted team/firm dabbling their toes in the ocean that is healthcare spending).
Wred Filson loves your comment.
Along comes Nature Mother, she tried to tell dentistry.com users about wholistic dentistry that avoids needless X-rays, Root Canals, Amalgam Filling, and the role of diet and probiotics in mouth health, etc., after asking their dentists if this wasthe case…..Nature Mother went back into hiding
I’m listening. Details?
(I know…my comment really has no place in the AVC blog and really is irrelavant to the subject matter at hand….), but …..http://www.nature.com/ng/journal/v…
Interesting. I’ve always felt that there must be something that we’re doing (eating) differently. Just makes little sense to me that teeth need so much maintenance as compared to everything else.So, how do we make a commensal microbes shake that disrupts dentistry?
We have one! C. Strep., the primary bacteria that creates acid from sugar and carbs in the mouth, can’t properly digest Xylitol sugar. So using xylitol gum, candy, etc disrupts their metabolism and prevents them from spreading out of control. Xylitol is widely used in commercial sweets in scandinavia, with the expected results. Homo sapiens can digest xylitol sugars though, so no problem there.In addition, when you rinse your mouth with water after brushing, you wash away the fluoride, so use a fluoride rinse as the last step and don’t rinse with water after that. This has really good results in preventing caries.The main thing to do though is stop eating carbs via frequent snacking because that causes saliva pH to stay dropped most of the day, which is what allows the C. Strep. to feed continually. This requires a lifestyle change, but it’s the main thing you’d want to do to reduce caries.
So…snack on what? fruit? nuts? protein?
Foods rich in probiotics such as living fermented foods.
Oil Pulling: http://www.mindbodygreen.co…Do it every morning in the shower. Changed the way my mouth is kept clean!
I’m surprised I never heard of that. How do you know it’s helping?
My wife tells me my breath is better. My teeth are whiter and my mouth feels cleaner throughout the entire morning. It’s cheap and worth giving a shot to see if it helps.
The example story revolves around dentistry.Dentistry is all about teeth.Teeth rely on value-adding networks of microbiota.This blog is a value-adding network of coincidental relevancies.Maybe not so irrelevant?Also everyone here has teeth an microbiota.That whole microbiota/health relationship thing represents a fascinating revolution in our understanding of human health/networks. Becoming more aware on this topic can make a serious/practical contribution to one’s overall personal health.Also them microbiota are on the bleeding edge regarding Fred’s thesis on the inherent value of user/transaction networks!Microbiota as value-adding user/transaction networks – VideoHuman Microbiota – You TubeHuman Microbiota – Google Search
This is hilarious, well done! :)But, aren’t some products too small to be unbundled? Will anyone create niche of a niche?
Have you heard of Yo? We thought notifications were small but Yo unbundled that too.
Yep, heard of it. Let’s see how that will play out.
Re Sevin Kystrom:https://usv.com/posts/figure-1
Medical Diagnosis using Mobile Wisdom of the (expert) crowds.So simple yet frighteningly clever.Go Figure1
There are “only two ways of making money in business: one is to bundle, the other is to unbundle.” – Jim Barksdale
Your story may sound fictional but is very much the story of Radiology Image Management (PACS).Your Dentasoft = Priced at $400K – 1MM GE,Siemens,Philips (they still do because of other business support)Your Denta.io = 100-200K (web based) Mercury Systems (now closed their DICOM division)Your Dr. N2O = Dr. David Clunnie started the movement freeware in JAVANow there is OSIRIX – THE BEST on earth radiology viewer (for Mac only !!!) for free.
I understand how Dent.io took down Dentasoft. I am not sure why Dent.io could not evolve into Denthub. I don’t really understand the reference to Nitrous Oxide nor why DentOps is so disruptive or why or how it would come out with a professional product that Dentists would trust. Twitter, Tumbler etc. are one off world wide networks and don’t transfer neatly into verticals like Dentistry with different characteristics in different markets – size, structure , etc. Dentistry.com would need a huge investment to get it where it is described as being above
Its a fable. Easy to poke holes in a fable. I don’t think you can take fables too literally
Your fable has a cavity?
I thought it fabuless
When I visit my dentist and look behind the monitor at what they use, it looks like every other ugly piece of enterprise software I left behind when I upgraded away from Windows 3.1.Despite the ugliness and the lack of a network, I’m sure it serves my dentist well enough to meet her needs. There is a certain segment of the tech market that most techies don’t understand because they assume shinier = better. For many practical applications of technology, better = different, and different = worse.I agree with the dentist story on a 40 year time horizon perhaps, but one peak at Oracle’s market cap exemplifies what I’m describing.
im not sure it will be 40 years though, if you think about this from a generational perspective, what do people born using the social web, mobile, FB, etc – when they become dentists – what will *they* want? I think that will happen closer to 5 years than 40 years
Albert taught me my favorite expression on this subject:People (myself incl) always overestimate how quickly change will arrive. But once it’s here, people always underestimate the magnitude of the change. So I said “40” to overcompensate for my propensity to overestimate speed. In 40 years, I sure as hell better have that fly car I was promised. And jet packs.
We Were Promised Jetpacks.
when they become dentists – what will *they* want?Will depend on who the “payers” are but also more importantly many/most young dentists join the practice of an older dentist “stuck in the mud” and either buy them out or stay until the dentist retires or dies. In some cases that older dentist is a family member as well. That can be good or bad.Dentistry has changed with the payer system. It’s actually possible for a dentist with some family money to startup a new practice, be listed in the health insurance lists, and get some patients from day one.  For specialty dentists (who are referred by the primary) it’s different “where should I get the root canal done” you will see if your health insurance covers the person who was referred. Who don’t really have a problem since they “don’t want to pay” with dealing with someone with 1 year experience in dentistry.
One of my fave expressions: Better is different; different isn’t always better.
agree. after my dental appt, I always make the next appt and put it in my calendar. My dentist puts it on their calendar. A couple of days before, they email me and call me on the phone to make sure I am coming in. When I was at the office, I watched as one person made phone call after phone call to upcoming patients about their appts. Seemed like a terrific waste of time.
happens in every doctor and restaurant as well.some try texts as well.honestly, nothing makes you obligated to show up like a call as much as I don’t like.btw–dentist now has a late cancellation, no show that goes directly into a local charity. always happy to pay that one
Charity – great idea.Bigger issue is that missed doctor appts must be a very common practice; that’s the only way I can explain all the phone calls.
Appears that on top of customer acquisition they have customer ‘show up’ as an expense line on their P & LAdd collections and insurance logistics and the cost of a simple visit is really a mess.
Yup. I’d guess more resources spent on admin than dentistry. :-/
(Read my other comment) don’t agree that charity is a great idea at all. And yes missed appointments are a really big problem in some practices.
You can link to your other comment, for ease of use.
That little link icon isn’t working. The twitter and fb ones do.
It is working, but not intuitive how to use. After clicking the icon, the URL changes in your browser address bar. Note the #comment-[numeral] that gets appended. Copy/paste that URL.#yesIknownotuserfriendly
Seriously who designs this stuff? I mean who would even come up with that implementation of a feature in a consumer facing product with no user manual?Where can I ship you the “third rectum” (rechargeable) installation tool that I keep here at the office? At least that has complete instructions and has been well tested. (You’ll need a script for the sedation necessary before using it on the appropriate team member I can’t ship that by UPS..)
DISQUS NOT ALWAYS HAVE BEST DESIGN.ME TALKED TO THEM ABOUT IT LOTS OF TIMES.
dentist now has a late cancellation, no show that goes directly into a local charity.Makes no sense to me. In fact my theories would suggest that having a cancellation payment (which in no way will equal the lost $$ btw) and further donating the money to charity would also make it more likely to occur. Haven’t you ever considered liquidated damages in deciding to cancel a contract? It’s a “get out of jail free” card if it’s low enough, right?Let’s take the fictional exaggerated example of a restaurant that charged you only $5 if you didn’t show up and further donated that money to charity. That’s not much of a deterrent to keeping your obligation is it? In fact it would almost certainly result in more cancellations than if there was no cancellation fee at all. Because people feel like “ok I can deal with that penalty” and no longer have an obligation to keep up with their commitments. And by the way “I’m helping a charity!!!”.
this isn’t about determent its about awareness.we miss appointments cause other stuff comes up and it does.
You make a good point in that it might increase cancelations. But I’d say less so than if NO cancelation fee were charged. Ergo…cancelation fees will be charged, and some customers will direct their distaste towards this fee. Better to mitigate the customers anger by not making it look like a sleazy way for the dentist to make money.
A good question for sure. Business wise it’s important to note whether “appearing sleazy” has any “impact on the practice”.For example let’s say for arguments sake a dentist charges $20 to cancel. In one case a) dentist “donates the money to charity”. In another case b) the dentist pockets the cash. In another case c) the dentist says he is donating but doesn’t (remember in small office dentist controls the books ha ha ha).Anyway the question to be answered (by a well designed and “for sure” highly accurate study carried out on college students!) is does “b” end up in having a measurable impact on the practice that exceeds the excess money in the dentists pocket? (I will forgo my other argument for the purpose of this even though I stand behind it..)My gut says “make hay when the sun shines”. The reason I feel this is because we charge a fee for something in the business I am in that people are generally pissed off about when it happens. But over many years I’ve noticed that those people stay customers. They are pissed “head of steam” but then they forget about it later or rationalize and understand that it was their fault that they paid the fee. They know that Daddy is right when he tells them they were bad and that they need to be punished.
Co-eds and a behavioral test? Sounds like you’ve been dreaming about these things for a while.http://cdn.toucharcade.com/…
I could totally pull that off if I wanted to.
I seem to remember a study done where parents had to pay a penalty when late to pick up their kids from school. Surprise, surprise, the problem got worse like you predicted.
@muratcannoyan Yes, this was covered on Freakonomics on WNYC. Behavioral Economists call this crossing over from Social Norms (where guilt & social awareness are at play)….into Market Norms (fee for service). When they charged parents for being late to pick-up the kids, the parents no longer felt guilty.
I watched as one person made phone call after phone call to upcoming patients about their appts. Seemed like a terrific waste of time.Maybe, maybe not. A doctor’s patient base is way more important to them than the patient probably thinks it is. Sometimes it’s good to connect with your customers even if you don’t have to or can take a shortcut. In some cases makes it less likely they will switch practices even. Hard to quantify but there can definitely be some good that comes out of this.The place that cuts my hair has an automated texting system that reminds me of appointments. It also has emails (impersonal of course) that it sends. The place that my stylist used to work at would always place a cheerful personal call. That cost more money probably but office staff often has down time they can fit this in on. Instead of goofing off. I could argue that under the correct set of circumstances not only do some clients like this but it might result in more business for the personal connection.Cancellations are a big problem in medicine I’ve been told by multiple doctors. Placing a personal call makes it less likely that someone will cancel (various psychological principals at work here btw.) Nothing is absolute of course in small business or large business “it all depends”.
Happens at every local insurance agency too.That’s an important part of the value that they provide.
I have been involved in dental app (developed imaging package) …..what they care most about is the image quality ….UI they don’t normally care.What you say is true …. Intra-oral dental imaging app by Kodak is one of the ugliest UI i have seen …but people are used to the ugly and if you bring them anything else they call it ‘worse’.
The first time my dentist took digital xrays, he lost them all due to some technical glitch. “thanks for the radiation; nothing to show for it”
dental (I/O) radiation is very low compared to other x-rays….it is almost equivalent to a day long atmospheric radiation dose or a trans-Atlantic-flight-related-radiation ….so take it easy.
So my dad has told me.
He probably also told you to watch out for hair growing on your palms.
We never discussed manual labor.
Left hand or right hand?
“thanks for the mercury amalgam”
and one look at the internal core operating software banks use will tell you there’s a ton of opportunity there too, but regulation, switching pain, etc make it difficult problem to solve.
Damn ankle biters!
Great story! Curious as to what would take down Dentistry.com Perhaps the insurance industry would be a threat – ie. forcing dentists to sign up with their free but clunky software, tying the payments of medical insurance rebates to the network. Or if they are innovative, provide a POS service through the insurance free solution, which gives patients automatic access to their insurance benefits so they only need to pay gap payments to the dentist! That would be fun battle to watch!
Look at LIAD’s comment. He nails it
Thanks for the reminder..I have a dentist appointment on Monday.
I am sorry to hear that
Gill Bates charitable foundation creates miracle pill and open sources the composition. Eradicates tooth decay permanently. Dentistry no longer required.
Automatic flossers would be nice as long as we are spinning fables.
Try the airfloss, it’s amazing
Have you tried Waterpik(.com)? Heard of it recently, going to check it out.
Highly recommended. A great device. Get the model with the big reservoir. And a smaller one when you are traveling. This is a great device.http://www.waterpik.com/ora…
Gum Disease is a much bigger problem than tooth decay
Okay, so a second pill was invented that fixed gum disease 🙂
Amazing trail to follow. Once everything is unbundled, someone will put it all back together and it will look fresh
A biting story…something to really sink your teeth into. Thanks.
“Another One Bites the Dust” could be the entire story’s alternative title.
I agree nets and communities are defensible by their own dynamics.I wonder though if the threshold for defensibility has grown larger in # of participants as time goes on.
Likely depends on the industry, product, strength of bond (for lack of a better term) between network participants.
I’m sure you are right.Defensibility of community of artisans, one thing. Of dentist, contractors, another.And also model wise. Beside FB, I’m not easily finding any community of any size where media as a model worked. Not Tumblr for all its dynamic even.
You think even FB is defensible?
Actually yes.The world is there. I’d gladly take the problem of monitizing it. So would you I bet
I sure would, just as I would have taken on the job of monetizing MySpace at some point…or Yahoo! in 1996 (when I interviewed with their first head of sales, and I declined in favor of another startup…ha! those were the days.)
4 out of 5 dentrepreneurs who seek financing prefer USV.
i dont always do dental startups, but when i do, i prefer USV.
What is the context for “transactions” being a valuable defensible asset?Is it a subset of “data inside” or something more?This story is extremely helpful observation and comes in a perfect time for me, thank you for sharing. It does make me think that even new Enterprise SaaS services are vulnerable because of not being able to contain a network effect or not producing data that would provide significant competitive edge.For example, what is a defensible asset for a potential next generation CDN company to fit USV investment thesis? In addition to software also tons of hardware is a commodity.Are many Enterprise SaaS companies constantly disrupted by design because they cannot contain the defensible assets other than brand value and customer list?”USV thesis” (network, transactions, data inside) seems to help finding sustainable and defensible businesses. At the same time it seems less important for shorter term. For example DigitalOcean managed to disrupt overly competitive VPS market with brilliant sales strategy but they do not seem to have the basic characteristics to meet “USV thesis”.
Next iteration of the networked thesis will not be humans networking together, but smart algorithms networking together.
Future algorithms excluding humans? That’s hurts in advance.
In this example Dent.io fails because it was nothing more than a cloud service that could be reproduced. Could they have saved themselves if they had tried to build out a network after identifying and validating the need for a cheaper, better DentaSoft? Or do you think it was too late in the game?Dentistry.com first builds a network then adds management tools once its captured people. Does the success lie in having a network first or simply just in having a network?
Monday morning dentistry?
Like it.Unlike pretty much any other billion/trillion dollar global industry, there is no barrier to entry in software – apart from one’s creativity/ideas…Hence, it’s the mother of disruption.
Are you hinting that you’ve got a new s/w venture in the works?
Sadly, no, Jim. Ideas, but no suitable partner for the yin/yang – been so screwed in the past I’m very cautious nowadays – thus, still working primarily as a bartender, currently…
Partnerships are hard.
Solo is even harder…
Can be. But control is powerful; decisions you make are incontestable. ;-)If it’s technical resources you need, there are great outsourcing shops you can employ while maintaining control.
Twilio?(Who, as you know, = awesome sauce)
I have never heard you tell that story. Thanks for sharing it here. A very simple way to understand what happens in the real world over and over again.
This was really nice!!!
I love this, but you’re missing the crucial element: dentists talking to each other, the software working better when dentists use it together.Real networks (like the ones you mentioned) flourish when individuals benefit when others have the same network. The fax machine is my favorite example… it works better when others have one too.
Businesses are VERY cautious about how and when they leverage common networks. The really successful business networks have been around for a long-time – like Bloomberg Terminals and EDI hubs. I don’t know medical real well, but there are a lot of dead vc-backed businesses that over-estimated the “network value” to the members. The main problem with the story (sorry) is that it has been repeated for almost 20 years and still moving slow . . . Consumer networks, on the other hand, had different challenges and have flourished.
Agreed, i have seen very few people kill it in with a B2B ‘network. Certainly nothing that reaches scale of being impenetrable. @fredwilson:disqus are there any?
ask your dentist if on his or her free time he talks to other dentists about dentistry or how to make more money from his dentistry practice.
I don’t want the dentist that isn’t a business person that is for sure. And I typically stay away from medical professionals who seem to be to business oriented.
They talk to dentists – on the golf course….
Sorry – misread and cannot delete my comment because I am not signed in – ho hum.
Yes. I glossed over that. I should not have. Its part of Hoff’s product and strategy but I should have highlighted it more
see: http://medisas.com/ <–social network for doctors. Patient data is the “content” they share.
“it monetizes with native advertising” Yikes. In what world is everything supposed to be free and monetized with advertising? In the end, who will pay those ads if nothing is bought to pay these ads?
I’ll take a transactional model every day over media.Media spend is one of the great anomalies of our times. Brand must spend, they advertise, few if any want to see them, but this spending, in itself, is what supports the web.Stranger than fiction.
The “attention economy”
agree but hey, as you know, there is as much creativity and luck in monetizing attention as there is in getting it!
Because advertising is ubiquitous, people think it is working/must-do. Biggest bullshit of our times. It is as real as QE.
QE? Queen Elizabeth?
Lol. Yellen looks a bit regal, I agree 😉
I’m with you in spirit here.But I think to when I ran marketing at companies over a couple of hundred million a year.You look at the world through growth demands and budget %s.That is how most of the world’s big brands function.I repeat myself–stranger than fiction.
But I think to when I ran marketing at companies over a couple of hundred million a year.And I can tell you for sure that (iirc you worked at Targus) that I remember Targus branding and the fact that I knew the targus name had influenced my purchasing. I also knew the Creative name and although I didn’t buy the products I would have if I had a need for them. And the fact that you worked there for that matter gives you “secondary meaning” to me. It improves your personal brand. You’ve worked for someone I’ve heard of. (Likewise with Tramiel for that matter he was a brand in a way separate from Atari.)I’m with you in spirit here.By saying that you seem to be agreeing with him. Why is that?
Because advertising is ubiquitous, people think it is working/must-do. Biggest bullshit of our times. It is as real as QE.Except that advertising does work if done correctly. Just like PR works if done correctly as well as lobbying.The local pizza shop that puts a coupon or an ad in the local shopper (using a small example of an unsophisticated ad buyer) isn’t continuing to place ads if he does somehow someway feel he is getting business from it. Nor does the person who used to place ads in the yellow pages under “Plumbing”. Or the local department store that ran ads every week in the local paper. Or the supermarket who does flyers inserted. Or direct mail. My ex wife sold into this market and while the ads didn’t work for every type of business they did work for many types of businesses. Not different on a large scale advertising done right works and makes sense. Have you ever seen the watch ads that run in the WSJ on the 2nd and third pages? Expensive ads for expensive watches. I’ve been watching them for years. They do work (I know a watch dealer that sells some of those watches). The advertising is built in (by coop dollars) into the cost of the product. The ads sell watches. May not be directly trackable but doesn’t matter.
Yup, Monetizing large networks of users is not trivial, even for Twitter who is the grand-daddy of them.
Pays to break this down into Marketplaces which are invariably transaction based (I love a transactional based system!) and everyone else which are media.The truth is that for both, the size of the network threshold to make a viable model has increased. For certain on the media side, hunch on the transactional side.
I’m with you. Ad models inevitably lead to product decisions that are most certainly not in favor of the consumer.
Not just ads. Also transactios. Ads drive transactions. Etsy has search ads. They make Etsy better
I agree with this and while I”m overtly negative on pure ad plays, I agree that in combo with a core transactional based model they work and help.
Great story Fred! The principle of networks being more defensible has always resonated with me. Funny enough we are in the dental space testing a platform that enables ecommerce in the dental practice in a unique way. I’d be happy to show you where we are.
In the real world, dentist offices have software that handles their x-rays. Has that been commoditized?
Not completely but it’s getting there. Strictly defined standards (DICOM) facilitate the commoditization.
Although software is a commodity in the old way of thinking, their defensibility is within their customer base. Try getting an enterprise to switch from Microsoft, Oracle or SAP software. It takes a very long time, due to switching costs, but for consumers, switching costs are almost zero. However, as our lives get more connected to the cloud, our switching costs will also come into play. If you have all your photos well organized into a photo system, and a new system comes along, you’ll consider twice your transfer costs and time it takes before switching.
Switching is a bitch for both sides if there is any true value.But the biggest plays are for the old systems that are hanging on just because they are the ingrained system.Case in point–salesforce.com. How long did it take me to dump Seibel and move to sf.com, less than 30 days of trial!
Defensibility is customer base and connections into a third-party ecosystem within their vertical that is difficult to replicate. Any business with a supply chain is an easy example. If your ordering, inventory management and payments systems tie into hundreds of vendors, you are not going to switch unless you can be sure you will not disrupt your business. The catch 22 is that the vendors don’t want to spend the time connecting to new entrants without the new entrant having critical mass–and the connection effort is often significant given legacy systems–and the new entrant cannot get critical mass without connections.The same is true for a lot of businesses that don’t have a traditional supply chain but that depend on multiple parties in an ecosystem–in payments there are often many players in a chain, auto claims, insurance and others–and often the players are not well known to someone from outside the space. There are definitely opportunities for disruption but much harder than most think to disrupt.
Should I mention here that my childhood dentist actually uses a VM of MS-DOS because his dental package’s least buggy and most efficient version was actually last released for MS-DOS? (My dad is my my childhood dentist network admin, which is why I know)Talking to patients is important – having high quality billing software, probably more.
My dad is my my childhood dentist network adminWow so your dad is an enabler!
He was on “retainer”
Damm if it sometimes doesn’t take me a bit to get the jokes you make.Which raises an interesting question. Does the presence of Claquers in the audience bring about a release of endorphins that raises the awareness and inteligence of the audience to the point where more people will actually laugh and understand the joke? (Not the same as drunk or high people thinking everything is funny which is probably what you are thinking..)In other words if I had heard that while sitting in an audience where the bell curve of the audience initiated the laughter and lit my brain would I have gotten it sooner?(I think I just discovered a new principle here…) http://en.wikipedia.org/wik…
I believe this is the last place we’ll find claquers. And besides, I have no idea how I would compensate people.
That’s one way of looking at it. Another is he sees more patients this way, because each package gets buggier and buggier and harder to use.(and ps: I have perfect teeth, I was even a tooth model)
This just goes to show the power of a good story.
Moral of the story: There will always be 2 guys in a garage trying to disrupt your startup…until 2 of them figure out how to do it with a network of engaged users. Then, game is over, because that’s defensible forever…sort of…until they figure out their revenue model…which isn’t always that obvious.Then, we’ll all be nodes on a network. That’s our destiny.
With apologies to The Prisoner: “I’m a man, not an IP address!”Cue giant orbs chasing him down the beach and him zipping off in a Lotus.Apologies to those not familiar with the cult 60s TV series – check YouTube/Google 😉
Every fable has a molar….uh, moral.
Except those whose molars have been removed – by a dentist.
Great thesis and love the story. I’m curious how you identify the markets that are good for disruption versus the ones you can stay out of.In many vertical markets you find deeply entrenched providers with high recurring revenue bases, significant pricing power and often only two meaningful competitors. The markets are big enough to support a couple of large providers but not big enough to support 50 providers–think auto dealers with Reynolds & Reynolds and ADP as one example, there are many others, just look down PE firm ownership lists of technology companies.These businesses are sticky not because the software is great but because switching costs–particularly soft costs in lost time, lost productivity, training are huge. Perhaps even more important, in many cases the entrenched providers are connected into an entire ecosystem within the vertical–payments, quoting engines, various vendors, etc.–and others in the ecosystem will not invest the effort to connect to new entrants until the new entrant has critical mass–the new entrants cannot get critical mass without the connections, a lovely catch 22.The businesses end up perfect for private equity ownership because they support huge debt burdens. In theory they can be disrupted by faster moving entrants, but time after time players come in and fail.
I have a true story to tell.About 8-10 years ago I was at my doctor’s office and his receptionist/nurse was at the computer inputing stuff into my patient record. She was using a 15 year old Mac Classic, like from the early 1990s. I was like ‘wow, can’t believe that still works (and that you haven’t moved to Windows yet!)’. She says ‘we actually have replaced it a couple times, and have to buy them on eBay, but the practice software we use isn’t supported anymore, doesn’t run on the new Mac OS, and we can’t move our patient records over to any new system, so we just keep buying replacement, 15 year old Macs so we can keep using the software. It’s just easier”.Yes, networks are strong defences, but so are switching costs!
but so are switching costsIt’s actually not the costs as much as it is the pain and suffering and personal attention it will take either the Dr., the office staff, or both to make a switch.Software needs to be learned, records need to be transferred, gotchas have to be uncovered and all of it has to be fitted into the day to day when everyone is busy already. Small offices are not large corporations where a person can be assigned to “make it all happen” along with the support of dozens of people as well as salesman tripping over themselves to help you out.Point being the cost isn’t really the major issue generally.
Not sure I follow your point. Those are the definition of a switching cost in an enterprise software world. Soft costs are learning the software, lost time, lost productivity, those are typically the big ones. Hard costs are actual costs to buy the software, upgrade the computers, pay a third-party to get the data converted. Then the issues that end up combining hard and soft costs like the first time the payment connection system doesn’t work so your bills don’t go out or get collected, the first time the appointment system goes haywire and cancels all the appointments.Often people don’t care about the real costs as much as the soft costs. They can quantify the real costs, they stay on the same system because of fear of business disruption.
In a corporation those “costs” are born by drones who are paid to carry out the mission. In a small dental office they are born by the Dentist himself who has to babysit and make sure it happens. Consequently the Dentist isn’t going to easily agree to something where his time and attention is going to be necessary and if the shit hits the fan when he walks in on Monday morning he will have a hard time scheduling and operating his practice.Which is why I said “pain and suffering and personal attention it will take either the Dr”.A dentist wants a solution to a problem. He doesn’t even know what “enterprise” software is and doesn’t care. He can’t hide behind layers of management either and insulate himself. He’s right there having to deal with the bitching of his receptionist and possibly getting interrupted when there is a patient with a billing problem.I’ve sold into this market.
Understood you’ve sold into the market. I’ve been one of the senior execs of a company that created over a billion dollars of value selling into vertical SMB spaces with software to power their business. Ultimately, we are saying the same thing. Soft costs are the terms most people use to refer to lost time and business disruption. Those are more powerful impediments to change than the hard costs generally.
What you describe are switching costs (eg. pain and suffering). They don’t have to be real $$$, they can also be lost productivity due to gotchas, poor training, etc.
A guy running a large corporation doesn’t typically care about the pain and suffering of the airline front counter agent or the rental car agent. A guy running a small business does if simply because he is close enough to hear them whine. So we are talking about a different type of pain and suffering.
So your saying I should start a company focused on dentists? 🙂
You could do worse. Dentists are the biggest gadget freaks known to Man. They will buy pretty much whatever.
That’s why I find it silly when people insist on signing NDAs before they can share their awesome idea with me.
If you’re interested in cloud based dental practice management software, check out Dentboard (disclosure: I’m an investor): https://www.thedentboard.com/
Things go pretty well for dent.io for a while, until the NYC dentist unions pressure the mayor to put a hold on services. CEO Travis Bickle takes the opportunity to introduce surge pricing during “real rains”.Rival company “Swyft” appears and is briefly allowed to operate in NYC but its dentists are not allowed to exhibit pink equipment there.Things go pretty well for Dentistry.com for a while, until Net Neutrality gets defeated and the site struggles along with the rest of the free world internet.
Hey FredCan you give some more examples ofusers, transactions, or data inside the software?ThanksDan
There has been some great discussions in the iOS developer community this past few days on this very topic. It all started with Jared Sinclair posting his actual sales numbers on a fairly popular iOS app, which are paltry, and led to a bunch of others discussing the topic as well.In short, what is happening in mobile software is exactly this: a reversion to the marginal cost of software. Fred and Albert are saying this without directly saying it. How do we fight the natural tendency for software to be worth $0 per copy? Network effects, especially if the goal is to be a large business, are one way, for sure.Great post, Fred.
Yes, Fred’s story didn’t have a network effect, a “large network of engaged users”, or a barrier to entry.Albert’s story had some engaged users, e.g., a user had all their dental records on the site.> This story is designed to illustrate the fact that software alone is a commodity. There is nothing stopping anyone from copying the feature set, making it better, cheaper, and faster. And they will do that.Yup, for routine software, that is very much true, and, given a few person years with a good team of programmers, copying and/or duplication often can be routine. Further, genuinely ‘non-routine’ software, difficult to duplicate or equal, is much like hen’s teeth.Still, Microsoft Office continues to sell well with, as far as I can see, no significant competition. And would=be competition has some help since “Microsoft Word for Windows 1.1a” is open source. So, the situation is not fully just dirt simple.Still, “software alone is a commodity” is basically correct.Issue: Why work so hard to guide young people into ‘coding’, the results of which are just a commodity? Instead, there is other material, e.g., pure and applied mathematics, a young person can study that is much more important for new, powerful technology, difficult to duplicate or equal, that is the crucial, core of valuable, defensible commercial products.> So we asked ourselves, “what will provide defensibility” and the answer we came to was networks of users, transactions, or data inside the software.Yup, those are all good. The part about ‘data’, which can be powerful in some cases, is often questionable since now there is a lot of data readily available.But there is another source of “defensibility”, some crucial, core, original, technology. There is more in, say,http://avc.com/2014/07/gett…Thankfully for US national security, for 70+ years the US DoD has very well understood the importance of such technology. Indeed, that was the source of Silicon Valley. And Congress has also understood very well, and that’s why since WWII much of the funding of the top US research universities has come from NSF, NIH, etc. DoD and Congress are not joking about such technology and its associated research. The results of that funding are available for commercial applications and are much more defensible than routine software. Venture capital might want to consider evaluating such technology.
Google Docs is killing them at the low end and slowly moving up.
He’s pissed with dentistry.com’s privacy policies he offers a more private option, floss floss go, and steals away dentistry.com privacy sensitive users. http://ur1.ca/hvhaa
Fred- Great story! While I get that it was meant as an allegory, I spent the last few years building a company called medicalrecords.com as a lead gen business to sell EMR software. The EMR space is full of NitrousOxides, but Dentasoft (Epic?) is still winning.
They pitch PG on a low cost version of DentasoftGoing foreword you probably should replace PG with SAMA. PG is taking his eyes off the ball concentrating on writing at the same time as YC appears to be making a move to become even more dominant become some kind of durable long term institution. From (the outside at least) it appears almost like “talk to Michael he runs the family business now”.
OMG. Dentists week (and Kardashians, too)!: http://answerguy.com/2014/0…
I think a great deal of old software remains in place at dentist offices and other small businesses because it works ‘well enough’ and the business owner is leery of the unknown expense, time, and headaches that often ride along with upgrades or replacements. (Yes, I have a keen eye for the obvious…)
It’s funny that you use dental software as an example. Having spent 8 months looking at investing in the space, it is one of the most a-typical software environments I have ever seen. This is largely due to the customers (dentists) as well as the monopolies that distributors like Henry Schein and Patterson have over all aspects of the dental office (service, consumables, equipment, distribution, software).Either way, glad you posted this story on AVC and it definitely gets across the point of network effects across multiple industries.
This is asinine.
Here is my somewhat informed alternative scenarios to this example:What Happens to Dental.Io- Dental.Io does not take any VC growth capital. Given the minimal entry costs (both in capital and time), he is already earning great to phenomenal returns on invested capital.- He also avoids the overheads of being a VC growth company; he also sees that scaling up a sales force and hiring “top talent” is EBITDA neutral at best.- He can maintain pricing at $5,000 / year – churn will be limited as he is delivering the same product as Dentalsoft (which presumably had an ROI itself at $25,000) for 80% less.- With some foresight he builds integrations into related products (into Mailchimp, etc.) to raise some switching costs. Sure he has a ceiling on revenue but with the right cost structure he can dividend out a healthy % of EBITDA and still pay his employees well. It is a “lifestyle” business.- Most importantly, he retains OPTIONALITY:a) A valuable call option on consolidation (a desperate Dentalsoft or some other industry participant – like Henry Schein trying to become a more valued added distributor)b) has a great platform to build related services to dentists: such a lead generation or front end web-marketing. Again, these are service businesses that no VC cares for but are cash flow accretive and raise switching costs.What Happens to Dentistry.comThe consumer side fails miserably (a toothbrushing app?). As such the business is a glorified SEO directory selling links at $100/yr.What Happens to Dentalsoft:It muddles along as a small-cap public company. It does enough M&A arbitraging multiples against small software competitors providing an exit and liquidity. Hedge funds trade in and out of the stock with no research coverage.Fred, I really enjoyed this post. One of your best yet.signed,commentreader
FEATURES NEVER LOCK IN AUDIENCE. DATA AND CONNECTIONS DO.
nice to see you ’round these parts Grimster
ME BEEN LAUNCHING PRODUCTS. THAT LEAVE LESS TIME FOR DINO COMMENTING.NOW MOSTLY LAUNCHED, MAYBE HAVE MORE TIME.
Hoff Reidman went to Stanford, not CMU, thank you very much! 😉
…..along comes Mandrew Aason, he understands dental practitioners would be satisfied to lower price their charges rather than have voids in their consultation guides. he unbundles consultation performance from dental care.com and makes a separate app known as dentapoint. customers really like it. he requires large VC and gets wealthy doing large secondaries.Spybubble
This pattern certainly exists, but people create huge extremely profitable companies in the process. Epic (http://www.epic.com) is the leader in electronic medical records, and has been for decades. There are scrappy upstarts, but they still haven’t been able to meaningfully chip away at the incumbent.
That’s why we are building a defensible network at http://bit.ly/instad8 http://bit.ly/d8us
Or, perhaps as one of my colleagues suggests, five of his dentist friends sign up for his network. At its height, there are several hundred dentists on the network. He has difficulty monetising the network as there are no real network benefits yet and ends up with a lot of dodgy adverts on his website. Shortly thereafter, his website starts getting fewer and fewer hits.Meanwhile, the SaaS back-office dentist software providers rolls out 5 years contracts creating a repeat revenue base; this allows him to catch the new start-up before it really gets momentum. It buys it out on a hefty valuation, causing a profits warning in Q3 as cash is squeezed. However, in 6 months, it becomes clear that this allows to bring tomarket a more modular package with a spread of pricing that allows them to goafter both large, multi-office dentist networks which stay with their premiumsoftware but this new offering coupled with their existing brand name has giventhe capability to go after smaller, ‘sole trader’-type dentists. This leadsthem to beat profits estimates for 8 quarters in a row. The company proceeds tobe bought out by Allscripts.And open source never really goes anywhere; the dentists enjoy the fact that patient records are kept safely and they do not need to worry about any potential HIPPA violations.