This story is fictional, I know the real one: the guy described really does exist (and he probably exists in just about every country). He was a dentist that taught himself how to program (domain expertise really counts for something in almost every profession) and built the ultimate dentist software (dogfooding it) in visual basic. He then marketed this software to his colleagues and it spread like wildfire, capturing a very large portion of the market in a surprisingly short time without spending a single cent in marketing, because it was exactly what the dentists needed.
Because our dentist/programmer was a smart fellow (he'd have to be, given that he's active in two different complex fields) he foresaw that selling the software once was a nice proposition, but selling it repeatedly would be even better.
Hence the annual 'maintenance fee', of about 1,000 euros per dentist using his software. Do you know how many dentists there are in nl?
So, instead of going for venture capital this dentist-wannabe-programmer built himself a money printing press that printed more money than he and his extended family will ever be able to spend. At the end of every year the maintenance payments roll in and he's laughing all the way to the bank. This money machine has been printing since the early 90's and does not look like it will stop printing any day soon. And no VC made a single cent on any of that. He's so solidly entrenched that trying to attack his position is a losing proposition.
I like the avc blog, but it would be nice if stories like this were grounded in reality rather than fiction.
I've seen (and supported) some dental software, and you're missing a detail: since your tooth-pulling coder is so solidly entrenched, no development beyond OS updates and imaging interfaces ever takes place. Therefore everyone suffers through mid-90s-era GUIs (and not the cutting edge from that time by any means!) until the dentists are all replaced by robots.
Here's the thing: for many so-called niche industries, the requirements change about as infrequently. People aren't even considering the 90s-era GUI - they have a tool that gets out of their way, they're familiar with it, and it gets the job done quickly and well.
I've gone this route replacing a niche software product running on MS Access with a newer, better, faster one. It met all the requirements. It fixed all their pain points. It followed the latest usability guidelines. If this office had adopted it and referred it over to other offices, I would have been as well-off as the dentist described by GP.
It fell flat. They paid me for the product, said it was really great, but ... none of their reps wanted to make the changeover. It was not that the learning curve was too high - it was that any learning curve was too high.
To clarify: anything different from what they were doing every day for the past 10 years meant that they had to think about the software they were using and not the job that they were doing. And that slowed them down - the fact that it would have been a temporary slowdown was irrelevant.
I've seen the same thing played out in my eye dr's office. THey had an old 3270-based system that they used via emulator - and they could fly with that. They knew all the shotcuts, didn't even have to look at the csreen.
Over the period of a year and a half I watched them get a new system in. It had all the same features and a ton more. And it slowed them down to a crawl.
They reverted back to their 3270 based system by the time a year had passed.
So you make an assumption that newer is better - but remember that's your assumption, and it's not one that the targe audience (ultimately the end-users, not just the people you're selling to higher up the chain) will necessarily share.
My wife is just out of residency running her own medical practice. She went with the latest-and-greatest electronic medical record system that's all either web of iPad based, with all her records stored in the cloud and fully integrated with similarly advanced billing software. It's pretty good, and does most of what we need well. It's definitely head-and-shoulders above any other software out there that's specific to her specialty.
Right now she's considering buying another practice, and during the pre-purchase process the ~65 year old doc was talking about how fantastic their medical record/billing software suite is. Does everything they could ever want it to do, everyone in the office loves it, etc..
So, I ask for a demo, and he loads up a Filemaker database running off the server in the back room. Looks like it was designed in 1996, offers zero web-connectivity, and they're 100% happy with it.
That practice would never consider "upgrading" to the software we use. We'd never consider the software they use. There's a generational gap in medicine and dentistry, just like everything else. The more young docs come out of medical school, the higher their expectations will be for things like GUI, UX/UI and mobile connectivity.
Depending on how you mean generational - if the implication is that younger generations won't be susceptable to this, then I disagree. If instead you mean that it's generational in terms of software generations and the systems we first learn to use - with that, I definitely agree.
For your wife, in ten or twenty years that all-touch cloud-based system will be as the Filemaker system is for the 65 year old doc, when the next generation of latest and greatest comes around.
It's not about the abilities of the technology, IMO, but about people's resistance to change for the sake of change. If what they have works well for them, there is very little impetus to accept change, particularly when technology is not their actual business.
Except that with a cloud-based product, she won't have a choice. She'll wake up a morning and the product will be different, she'll have to accept it.
Just like all the changes in gmail are not welcome by everyone, but you can't just choose to stick with the 2004 version.
Or, maybe, she'll get an email saying "we're sorry but we'll shut down the service, the company is closing". Or "we're glad to announce we're acquired by our competitor, see how you account will be migrated."
YES! I think the generational aspect of it is more that the older practitioners have been burned more by the new-fangled thing, and what's most important to them is a system they can trust.
There is a finite number of times that a small business owner can say the words, "I'm sorry, I can't schedule your appointment right now because our system is down" before never saying that again becomes their number one software-related concern.
The person I'm talking about was actually quite aggressive about staying with the times and was researching (when I first got to know him) how to embed live video in his application so surgeons could look over his shoulder at the patient prior to transfer to save everybody a (potentially useless) trip. I was very much impressed with this and the current release of that software has very little in common with the software of the mid-90's.
Quite possibly other dentists/programmers figured that they could sleep their way through all this but in that case they more than likely found themselves upstaged by a newcomer that did get with the times.
Programmers on HN have got to stop thinking that the most important part of a software product is how modern it is.
I can tell you after working with hundreds of different businesses and individuals that the things that HN programmers think is important about software is very different from what the end users think is important, especially in retail and service industries.
The question begging here is, can I find someone with domain expertise and dogfood a brilliant service for them which we can then live off, or is there something about being both a domain expert and a coder that enables you to see what could be if only ...
It's just that life cannot be that simple otherwise I want to start a VC that just finds clever coders with middle aged domain experts and fires out dozens of winners and dozens more also-rans
I can confirm that this guy does exist in most countries. I know a few dentists-turned-programmers in the USA and India who have been making and selling dental software since the 90's.
Instead of dogfooding it themselves, these dentists should hire professional software developers to build custom software and tell them what features to build based on their knowledge and experience. Then again, everyone is a critic.
Before you edited it I was going to ask you about this statement: "Instead of dogfooding it, these dentists should hire professional software developers and tell them what features to build based on their knowledge and experience. Then again, everyone is a critic."
Isn't that against the HN mantra that everyone should do the development themselves? Perhaps that is why you deleted that part?
So, that's not why I deleted it. I deleted it because I had the wrong interpretation of dogfooding it. Now that you brought it up, I'll edit my original post.
I'm not familiar with any HN mantra that you're referring to.
If fables are meant to be explaining how we think about the world then they should not directly contradict reality as we experience it. I understand that you're trying to paint a picture here but there is very little upside to the dentist profession in the picture you paint but plenty of upside for capital providers. As such it is a counter-example. A good example would show a win-win for the dentists and for the capital providers (and preferably the start-up founders too).
Many business models these days are 'x' on the web, where 'x' really does not improve by being on the web and practice management is a prime example of that. If you don't believe that try to explain to a dentist why they need redundant internet access to keep their practice running in case they have internet problems when right now they can do so just fine without any access at all.
Web apps have lots of upside but they also come with a set of requirements that is not always practical or even desired.
On top of that you discount domain knowledge which I think is a very important part of any successful business in an area like the one you describe.
Isn't part of what happens is that the expectations of customers change, so these providers (in this case, dentists) have to make these changes? It's not necessarily about providing a better experience for the provider (though it does do that in many cases), but a better, or 'expected' experience for the customer?
If customers expect to be able to book online (and as a user of services like ZocDoc, FreshDirect, Instacart, and Homejoy I do expect these things now), then providers who do (theoretically) provide these things will have an advantage of those who don't.
Not going to argue for or against the 'upside' part, as I do think that is debatable, at least in the short-term. A big part of this is avoiding 'downside' by not adapting, IMO.
The whole point is that expectations do change but so slowly that there is 0 incentive for a dentist to switch their practice over from what they know and what works well to your shiny new software which works with mobiles, tablets and so on.
You do have a market: new dentists. But old ones are just happily going to roll along with their gear until either they or the gear dies of old age. And then they or their heirs will sell the practice to a new dentist, who will have to wonder about re-keying all the old data into your shiny new software or to focus on what he's best at: dentistry.
It doesn't boggle the mind at all. People want results and income, not elegant software. The more it does the more it gets in the way. Better crap software written by a domain expert than great software written by what a programmer thinks a practice needs.
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 might have good reason to like this new entrant, but the Dent.io founders have no relationships in the dental profession and they don't know how to sell to the more than 100,000 dentists practicing in the United States today. Because of this, and because dentists are reluctant to change the software that is used to manage their operations, which would require staff retraining, Dent.io fails to make much of a dent in the market.
Although there are some 'straw man' aspects to any story like this, I think it's pretty clear that in today's startup economy the USV thesis about network effects is pretty valid. That said, I think the more interesting question is when we will evolve a good way of monetizing networks.
Advertising is OK for now, but clearly it doesn't work for all scenarios. For instance, a dental application would be a terrible place for advertising as people don't want ads anywhere near medical records.
I once went to a talk by USV and heard something along the lines of this: the first big layer of the internet was the infrastructure layer. The best companies to invest in were Cisco and those who were ahead in that field. Then the infrastructure enabled the provider layer, and AOL and other providers were the big ticket. Then came the application layer, when people like Google started to build interesting applications over the internet. The newest layer is the network layer, which has some overlap with the app layer but is where players like Facebook and Twitter come in.
The question is: what's next? What layer will leverage the networks to useful economic extent like all of those other layers have in the past? Whoever has an answer for this will be very, very rich and famous.
Monetizing a dental network would actually be surprisingly easy...you charge dentists for new patient appointments. With the average lifetime patient value being over $1k, charging $20-$50 per appointment will get a lot of traction among dentists. Additionally, using the data in dental management systems to help automate the operational aspects of a dentist's practice is something that dentists are more than willing to pay for. Companies like Lighthouse 360, Intuit (Demandforce) and SmileReminders all make a ton of money sending email/postcard/text communications to patients on behalf of dental practices. It's not uncommon for services like these to cost $100-$300 per month and be worth every penny.
Where would the network come in? Well, it turns out that the software made by the companies I mentioned is mostly applicable to any industry where patients schedule appointments, so you can cross market between, say, a hair salon and a dental practice to try to get patients of the dental practice to make appointments to get their hair cut and vice versa. A company that integrated with all the major management systems across industries could create a site similar to Yelp! which would help customers find and select local small businesses.
I do wish the original author had written about an area that he actually understood. The dental practice management system market is among the worst to try to disrupt. The entrenched players are terrible and yet there's so much friction, that it's almost impossible to dislodge them. All the innovation is happening from companies that build integrations to pull relevant data out of those management systems to do the interesting stuff.
What layer will leverage the networks to useful economic extent? I expect it will be a new network type that natively supports exchange of value... blockchains/bitcoin. I think we're about to find out just how many ways there are to monetize everyone's attention, and how much that's actually worth. Unfortunately there's no guarantee we'll like the answers.
I can't shake the feeling that only one of the examples needs VC investment to function and succeed, and all of the others could be bootstrapped or take minimal investment.
Investing in and promoting startups that can only exist with VC funds sounds like a fair enough strategy for a VC.
I'm not convinced that the interests of founders and VC are always the same.
To be fair, he is explaining the USV investing model. He is not saying that this the only type of business to build...he is saying this is the type of business we can comfortably invest in.
VC investing isn't right for every business and every business isn't right for VC's. That's just fine.
This article disappoints me because it seems to boil down to:
BAD: making money by selling software
GOOD: making money by selling ads
So how do you make money selling ads? By getting a bunch of users and auctioning off their private information.
I wish more people in the position to fund software development would support a model where your users are your customers and not just eyeballs to be sold to the highest bidder.
Barriers to entry are what capitalism is all about. (Real world capitalism, not the utopian capitalism from Econ 101.)
Patents, R&D, trade secrets, network effects, natural monopolies... all of these are competitive advantages that capitalistic companies want to have. It's the reason that "nobody else can provide what we do". Otherwise you're just trading commodities and you won't realize economic profits.
Now I'm not ascribing any morality to this. You can call it evil if you like. Just know that this definition makes 90% of businesses "evil".
Don't forget regulation. Complex regulation with a large compliance department to dot the i's and cross the t's is a great way to keep new entrants out. Why do you think there are so few new banks?
A better way to look at it is... If you put your users first, and create a site with enough utility and value to bring in a massive network of people..You'll be worth much more even if you have to start by monetizing with ads...but don't worry, eventually you can sell products and services between dentists and patients, dentist and vendors, and patients and retailers.
TL;DR put people first, your users are your defense. Monetization will fall into place if you have a network effect.
you left out the transactions part which is in the same sentence as the ads part. i would imagine, if this fable were true, that dentistry.com would make maybe 20-30% of its revenue from ads and 70-80% from transactions. that's about the ratio at Etsy. ads drive transactions so it's a good model for everyone.
One of my previous dentists, who is also a computer enthusiast, told me he switched his office from some proprietary software to http://www.opendental.com and he is completely ecstatic about it. He specifically said he likes the fact that Open Dental is open source, so it gets a lot of the little details done right as it receives contributions from the dentist community. He even demo'd some of the features on his computer for me :)
So I do think that Fred's story is anchored in reality. This open source disruption seems to be taking place.
I realize this is pretty naive of me, but I'll ask in the hopes of learning something:
Why does a VC care about sustainability or the company getting disrupted? Wouldn't they just want to grow fast and big enough to get a return and move on?
In order to get a return, someone with lots of money (or many people with some money) must believe that there is a future in the company. Yes, technically a VC cares most about the point between initial investment and liquidity event, but in a rational market (HA!) the liquidity event is most valuable when the company has a solid foundation and growth path.
Software products may be a commodity (although I'd argue this point to an extent), but the companies that run them are not.
Price is one variable in the purchasing-decision process, but beyond some point, it really falls down the priority list for large businesses. This is why the phrase "Nobody ever got fired for hiring IBM" is so telling. Companies like stability and are willing to pay a premium for it.
To that end, if you find that adjusting price alone allows you to steal signficant market share, then you are competing for the least-desirable customers (ie, those that can't afford the product).
Companies that are deciding between Cognos and Microstrategy will compare prices, but there are many other factors that contribute to the final decision as much or more than cost. If I come in and offer a BI tool built on my laptop that I charge $10k a year for, I don't think I'd get the time of day from their customer bases.
Incidentally, if you're looking for a niche software opportunity, you could do worse than appointment software for dentists. I spent a fair amount of time speaking to dental practice managers about that specific product idea (I was teaching myself to place cold calls, not really interested in it).
Almost all dental office managers I spoke to 1) used something called Eaglesoft (www.eaglesoft.net) and 2) hated it.
I have to comment because my wife is a dentist and I have considered entering the dental market a couple of times because the software is pretty terrible. I think there is one founder (SikkaSoft??) who has a similar story.
A couple of interesting things about the Dental market:
1) Customers are resistant to change because they want to spend their time focused on the dentistry not solving IT problems. One of the leading dental software providers, Eaglesoft, has a really bad UI/UX. Each screen looks like it was designed by a separate team of engineers and has never been updated. On the other hand, dental staff get used to the quirks of the UI and it's not clear that Eaglesoft could totally redo their product without a revolt from customers.
2) A pure cloud based solution would be super awesome except that you still need to integrate with a bunch of hardware, e.g: you need to tell the digital x-ray to take a picture. On the other hand, the need to operate on premise servers for dental offices is a giant ass-pain. Also the Dental market is still windows based which really sucks. (have you tried administrating windows servers? yuck)
3) Since this is a fairly mature market there is a bunch of vertical integration. Patterson (which owns eaglesoft) wants you to buy their kit which runs with their software, I think Schein is a distributor for dentrix so they have their own stuff as well.
4) While no dentist likes paying the maintenance fee for their software, it's really a non-issue when you come to the P&L statement.
I think one possible way to disrupt this market is to do a mashup of Athena health and dentrix/Eaglesoft. My understanding of Athena Health is they run your back office so you don't need staff to do billing and deal with insurance companies. I don't think there is someone who does this well in the Dental space (but I could be wrong). At a certain office size you need a full time staff member to run Billing. As long as the cut that you take is less than the cost of employing a billing department, it's a win.
I work in a pharmacy, the quality of the software we use is so low that it's depressing. From the GUI to the non-existent automation, everything is pathetic. You have to manually issue THE SAME data over and over again.
Not to mention that every-single software company keeps it's data in obscure formats in order to avoid third parties accessing the data. It's like if the 2000-2010 changes that took place in the field didn't touch the Greek pharmacy/medical software and most of them keep operating in the 90s closed source principle.
There are some new SaaS about medical offices around. But they are so ugly that it's scary... Small market I suppose.
In these niche markets, to succeed you need to understanding the business well. Having something that is technically good is secondary.
Sure, if you can nail both that's better, but the "domain expert with some vague computing knowledge" beats the "technical expert with some vague domain knowledge" any day.
Add to that the fact that tech people often want to work on sexy projects like social/mobile/bigdata/api/whatever, it doesn't help bringing quality products to these users.
So your software can get disrupted if you don't continually re-invent to it keep up with the times.
Your social network or social app is actually way more fickle and less defensible than he thinks. Think about precursors to Facebook like Friendster and MySpace. Suddenly they became uncool and poof they were gone.
If you look at teen's perceptions, Facebook.com is next up on this sad list of has beens. That's why they're paying through the nose to diversify out of that product. AVC has found no magic bullet with their strategy.
> So we asked ourselves, “what will provide defensibility” and the answer we came to was networks of users, transactions, or data inside the software.
I've always found investment philosophies like this to be too overgeneralized. When I ask myself the question of what will provide defensibility, I can't think of a good answer other than "it depends".
The question really is "how much does it depend?". I think it depends enough such that it's best to just look at each company on a case-by-case basis.
I concur. It seems like it's missing loads of history. Remember when MySpace was the juggernaut with a huge network of people? Then practically overnight they became a joke. Same with Alta Vista, and a million other companies.
networks seem invulnerable, but they are just as vulnerable than anything else. A network cannot keep growing, and it also cannot bleed users or it will lose stability. so inevitably it ends up in a position that it has to keep buying out competitors
This doesn't strike me as the best example. I don't really see the network benefits of the final offering. And practice management software is notoriously sticky.
This article actually highlighted that my development of a web app has gotten sidetracked by the lure of VC investment and general tech startup mentality which has thrown me way off course. I know my industry and should be "dogfooding" it rather than trying to build something that's impressive in the tech/startup space.
Because our dentist/programmer was a smart fellow (he'd have to be, given that he's active in two different complex fields) he foresaw that selling the software once was a nice proposition, but selling it repeatedly would be even better.
Hence the annual 'maintenance fee', of about 1,000 euros per dentist using his software. Do you know how many dentists there are in nl?
So, instead of going for venture capital this dentist-wannabe-programmer built himself a money printing press that printed more money than he and his extended family will ever be able to spend. At the end of every year the maintenance payments roll in and he's laughing all the way to the bank. This money machine has been printing since the early 90's and does not look like it will stop printing any day soon. And no VC made a single cent on any of that. He's so solidly entrenched that trying to attack his position is a losing proposition.
I like the avc blog, but it would be nice if stories like this were grounded in reality rather than fiction.