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The Nest Acquisition

Ajit Deshpande - - 0 Comments

Last week saw one of the largest venture-backed private company acquisitions in recent memory, when Google purchased smart thermostat and smoke detector maker Nest Labs for $3.2 billion. As has been widely reported, Nest boasts a rockstar team of more than 300 employees, led by former iPod guru Tony Fadell. The company is estimated to be shipping approximately 100,000 of its thermostats every month, which at $249 per thermostat translates to an annual revenue run-rate of approximately $300 million.

A number of interesting viewpoints have emerged post the acquisition. First, does this represent the second coming of energy technology? Probably not… In many ways, Nest represents the same business approach that has made Apple and Tesla successful – develop a high-end device that offers amazing user experience, and over time build and nurture a loyal, high-margin user base. So, while a case could be made that Nest’s smart learning algorithms offer say a one to two year payback over traditional programmable thermostats, likely that is not the key selling proposition. The key selling proposition is one around design, just like for the iPod. Second, did Google overpay in this case? Again, likely not… Google the company is built around web and mobile driven marketplaces and two sided networks, yet the company has astutely identified the internet of everything (connected cars, home endpoints and the like) as the next secular megatrend, and the way to participate in this megatrend beyond pushing Android OS is to focus on product design, something that Nest Labs uniquely offers today. And along the way, even if Nest can sell its thermostats and smoke detectors into 3% of the United States’ 135 million households, that itself represents between two and four billion dollars in revenues to Google.

The first step towards the Internet of Everything gaining broad-based prevalence is to achieve scale within its infrastructure layer (end-points and their cloud-connectivity), which in turn is a segment that consists of a host of large corporates as well as startups such as Opus portfolio companies GainSpan and Arrayent. Can Nest become the rising tide that lifts all boats within this infrastructure layer? That seems like the bet that Google is making, and if the bet works out then Google’s billions will have been well worth it.

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