(Excerpt from Modern Monopolies by Alex Moazed and Nicholas L. Johnson)
(Fred Wilson) he has told what he called the “dentist office software story.” The story, “a modern day fable about defensibility in the software business,” begins with an entrepreneur who’s tired of having long waits at the dentist’s office. So, in typical entrepreneur fashion, this person decides to build management software for dentists’ offices. He brings it to market and sells it at a price of $25,000 per year for each office. Even though the software is expensive, “dentists realize significant cost savings after deploying the system. The company, Dentasoft, grows quickly into a $10mm annual revenue business, goes public, and trades up to a billion dollar valuation.” But the story doesn’t end there. Next, two young entrepreneurs go to startup accelerator Y Combinator and create a low-cost version of Dentasoft. Their product, Dent.io, includes more modern software and a mobile app that allow dentists to manage their offices remotely. Dent.io gets to market quickly at a price point of $5,000 per year. Many dentists switch to the newer, cheaper entrant. Dentasoft misses its quarterly forecast, and its stock crashes. Meanwhile, “Dent.io does a growth round from Sequoia and hires a CEO.” Next, an open-source software project called DentOps springs to life. A hosted version of this project called DentHub becomes popular. Dentasoft files for bankruptcy. Dent.io struggles, and the company fires its CEO.
Wilson explained, is that “software alone is a commodity. There is nothing stopping anyone from copying the feature set, making it better, cheaper, and faster.” This is where USV’s investment thesis comes in. USV realized it did not want to invest in commodity software, so Wilson and his partners asked, “What will provide defensibility?” The answer: “Networks of users, transactions, or data,” Wilson explained. “That led us to social media, to Delicious, Tumblr, and Twitter. And marketplaces like Etsy, Lending Club, and Kickstarter.”
The founder creates 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.” The platform is free to use for anyone and monetizes through a combination of advertising and taking a cut of the transactions it facilitates. As a result, “Dentistry.com ultimately grows into a $1bn revenue company and goes public [and] trades at a market cap of $7.5bn. Wall Street analysts love the company citing its market power and defensible network effects.”