On Google, and Nest

Wednesday, January 15, 2014

On Google and Nest

Google’s M &A arm has been plenty busy in the past fewmonths to say the least. The purchase of Waze in June of last year was followed by Bump, Flutter, a slew of robotics companies culminating in the purchase of Boston Dynamics (of terrifying youtube fame). Today they’ve just announced theacquisition of Nest labs, the home automation company for some 3.2 Billion dollars. Given that the company has but two products in the market at the current time and is involved in an industry that Google has had ZERO stake in thus far, it seems to be a strange buy, on the surface at least.

For starters, Nest very recently completed another investment roundwherein they picked up 150m dollars in capital. For a company with less than 500 people, only 2 products in the public domain (announced or shipped) there seems to be little need to cash out (and this is a cash-only deal).
So what was it? What turn of events could have possibly led to this decision?

There is the investor-founder relationship which could well have been a rough one. We’re not exactly sure what sort of profits or sales number the company had been hitting and with such premium products (the learning thermostat starts at $249.00 and the smoke detector at $129.00) it’s entirely possible that the founder were getting a lot of pushback from investors for failing to hit certain targets. This could lead to hostile takeovers, difficulty raising further capital and has the unfortunate side effect of distracting the executive team from their goal(s) to grow Nest into a viable business.

Other alternatives include the need to get into more homes in order to create an even better product for end users which is difficult for a start up attempting to disrupt what is an admittedly slow-moving and innovation-averse industry like home improvement. Like many other small companies, it's possible that Nest realized that despite the importance of having a brilliant product and a web presence, the target audience of this product are likely to buy them in brick & mortar locations. This in turn necessitates significant logistical expenditure. Coupled with selling a physical product is the need for customer service, widespread marketing, packaging and all the other odds and ends that come along with such a venture.

How then, does a small company, selling expensive, albeit good products go about fixing these problems? Partner with someone else, or get acquired by a company that doesn’t mind selling products at or below cost. We all know of one company with extensive experience in moving into new industries, selling below cost (or for free) while using the data gained to support its primary business, Google.
Of course, one of Nest’s key investors has been Google Ventures, the Venture capital arm of Google. Which leads one to believe that they got some inside information that made the prospect of owning the entity that is Nest far too tempting to pass up. Fair? Probably not. Good for the end-user? Unlikely. Google can easily buy, subvert & shutter any competing product(s) or stop others from hitting critical mass through acquisitions much like the Nest and Waze purchases. This makes me wonder why anyone would sign on with an investor like Google, regardless of assurances about firewalls and independence of their VC arm.

Regardless of what happens next for Nest, it’ll be interesting to see whether this push is part of some long term Google goal to do everything, be everywhere and be indispensable to your day to day life. Take a minute to consider what the world would look like if Google’s impact in the home or the world of physical good and services mirrors its impact and control on the web. It’s a sobering thought.


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