Why Nest might need another huge funding round

Nest Protect

Smart home startup Nest has been using design to reinvent unloved products like the hated smoke detector and neglected thermostat. It’s no small feat and turns out it needs a lot of funding to do so, including scaling a consumer electronics business, launching in new sectors and fighting off the unhappy incumbents.

Just a year and a half after raising around $80 million, Nest Labs is reportedly working on closing some $150 million in funding (or as high as $200 million) led by Yuri Milner’s investment firm DST, according to Re/code. The valuation of the round could be between $2 billion and $3 billion, which would mean that Nest’s valuation has about tripled from the $800 million valuation I heard for the company’s last round.

If this reported round closes, Nest could have raised between $230 million and $280 million from just these last two rounds, with a possible another $50 million to $80 million raised before launch. I know it raised at least “tens of millions” before it launched. Nest doesn’t comment on funding so it’s hard to tell how much it has amassed since its founding, but I would guess, with this funding, it will have at least gotten over the $300 million mark.

Nest ProtectThat’s a decent chunk of change for a company that officially launched only a little over two years ago. Re/code said other investors were vying for the deal but that Yuri Milner’s firm DST clinched it, and the round will include current investors Venrock, Google Ventures, Generation, Lightspeed, and Shasta.

Nest needs a lot of money to scale its current businesses, to launch new products, and also to fight lawsuits that have cropped up. Nest was hit with another (its second) patent lawsuit in November from BRK, which makes the First Alert smoke detector. The first was from thermostat maker Honeywell.

Nest 2G_3-4_Dramatic_autoaway

Part of the funding no doubt will go to scaling its current products. I’ve heard that Nest has been growing its thermostat business quite nicely. A year ago I reported that the company was shipping 40,000 to 50,000 of its learning thermostats per month. If its valuation has tripled since its last funding, its thermostat business has done well.

But when it comes to the Protect smoke detector product, it’s unclear how much of a hit that device has been. The price point is rather high ($129) for a smoke detector, and the reviews have been less enthusiastic than they were for the thermostat. Nest might need to invest more heavily in actively marketing and building distribution for the smoke detector, beyond the strong word of mouth and buzz it partly relied on for the thermostat. I’ve asked Nest for more details on shipment and sales numbers for its smoke detector product, and I will include those if I learn more.

Nest Protect

Since Nest is reinventing older products based on smart design (the thermostat and the smoke detector), the company could end up falling into a sort of hits-oriented business model. One product could be a big hit, while another doesn’t touch a nerve and make that emotional connection that they need. Nest CEO Tony Fadell spoke with Om at our recent Roadmap conference about the power of design to reinvent these older products.

Nest also will likely launch new products beyond the thermostat and the smoke detector in the future. Researching, creating, launching, marketing and scaling those new products quickly will all require more funds.

With the launch of the smoke detector, Nest seems to have moved beyond working just on green products. It’s clearly aiming to be a large consumer electronics company built in the vein of Apple but for a next-generation of connected devices. To get there — or even to compete with Apple — Nest needs to be big. And it needs funds to get there.

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