Pacific Smiles Dental: Building a powerful network

Paul Biddle

Celeste Funds Management

When we assess returns and industry structure, we try to determine how we think a company can grow and why it will be able to effectively compete with other players with similar products or services. In evaluating a business, we seek to understand if the business might be subject to a network effect. 

There are several definitions of a network effect but the way we think about it is, as people increasingly use your products and/or services does this create a flywheel effect that brings more consumers into your business which further expands your network. 

The biggest example used here is the internet. If there was no-one using the internet, then the ability to transact on it would also be small. As internet users grew, it attracted content, commerce, information, and interaction.

This, in turn, attracted more people and the offering expanded and hence the cycle continues. Other examples post the growth in internet users would be common names like Facebook in social media and Amazon in online commerce.

So, what does this effect have to do with small companies and how can companies that are not traditional tech names also deliver a network effect?