If there is one recurring theme I come across in talks with entrepreneurs, it is the defensibility question. How do you make your product defensible? How do you keep your customers or users for the years to come? How do you stand out and build up these unsurmountable walls of product defense?
At Earlybird, we strongly believe in “defensibility” as an essential value proposition of our investments. In other words (in Fred Wilson’s, to be precise), the software in itself is (or will become) a commodity over time.
The real beauty lies in the added value that goes beyond pure software features or functions. Only if we see this sort of value, we will consider investing into an idea.
Below is an excerpt of Fred’s seminal post on the topic, the Dentist Office Software Story, which I encourage everyone to read. The story represents developments as they have taken place in many established industries. Yet, it also shows the imminent risk of relying on features and functions alone. Instead, the added value should generate the foundation for defensibility. Some of these are induced by his beloved network effects, others can be found in industry dynamics or supply- / demand-side lock-in.
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 a college and go to YCombinator (YC). They pitch Paul Graham (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 on the 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.
What do you think? How do you defend your project or venture? Let me know in the comment section below.