The winners and losers in Google’s acquisition of Nest

Nest

The designer who helped create the iPhone at Apple is now officially going to be part of Apple’s arch rival: Google. That’s right, on Monday afternoon Google and Nest announced that the search engine giant plans to spend $3.2 billion acquiring the smart home hardware and software company.

This is one of the bigger deals to go down in recent years in Silicon Valley, and there are a lot of winners and losers that will emerge as a result. Here’s my take:

Nest Protect

Winners:

Nest’s founders: Founded by entrepreneurs Tony Fadell and Matt Rogers (also formerly of Apple), the company only launched a little over two years ago with grand ambitions to redesign unloved devices like the ignored thermostat and the hated smoke alarm. Creating an entirely new product category for these sectors is difficult and expensive, and it could have failed on many levels. But it didn’t: the founders got the launch product right, and drove such high demand for their thermostats that Nest’s valuation soared from $800 million in late 2012 to the $3.2 billion it went for today.

Moderated by: Om Malik — Founder, Gigaom Speaker: Tony Fadell — Founder and CEO, Nest Labs

Tony Fadell — Founder and CEO, Nest Labs

Nest’s investors: Nest’s $3.2 billion acquisition is no doubt a win for Nest’s investors. Nest’s investors include Google Ventures, Venrock, Kleiner Perkins, Al Gore’s investment fund Generation Capital, Lightspeed Venture Partners and Shasta Ventures. Here’s Lightspeed Partner’s Peter Nieh blog post on the deal.

Nest has always been quiet about how much it’s raised over the years, but we know it raised tens of millions before launching, and, as we first reported, another round of $80 million towards the latter half of 2012. It was reportedly working on closing some $150 million in funding from Yuri Milner’s investment firm DST, but the Google deal could have trumped that round before it closed.

Without DST’s deal, Nest would have raised (conservatively) a total of somewhere between $100 and $130 million. With the DST deal, it would have been closer to $300 million raised (though, like I said, I’d speculate that didn’t happen). However, by either of those standards, $3.2 billion is a good return for the funds raised.

KPCB's Partner John DoerrCleantech investors: Some of these investors — like Kleiner Perkins and Venrock — needed a big win following some of their more difficult bets in the cleantech space. Nest showed how a cleantech investor can make a good return if the investment also looks more like the digital sector (some call this cleanweb). Nest’s smart thermostat can reduce a home’s energy consumption, though that’s not necessarily why people are buying it.

The Kleiner Perkins brand: It’s important to reiterate: Kleiner will be shouting this one out from the rafters. Looks like they already are.

Overall home energy consumption: Technologies that manage home energy consumption just hit the big time. A couple years ago Google shut down its home energy software experiment PowerMeter. But now Google is back squarely in the energy software space, and perhaps this impending deal was the leak behind Google’s fresh look at energy recently.

Yes, Nest isn’t just an energy software and hardware company — its evolving into more of a consumer electronics and internet of things company — but it has one of the most interesting, sophisticated and coveted home energy tools out there. If Google is able to give Nest the resources it needs to get its thermostat and software out there at a much greater scale, that means lower energy consumption ahead for homes that adopt it. And that’s a good thing overall for the world and for lowering carbon emissions.

The Nest thermostat.

The Nest thermostat.

Hardware startups: From a venture capital perspective, traditional hardware startups have long been considered difficult to scale and too expensive in which to invest. Over the last year or two, hardware startups have emerged as the cool players out there (like they were at last year’s SXSW). Such a good return for such a young hardware startup underscores that this trend has officially come into its own.

Google’s design and robotics ambitions: Google has been focusing heavily on using design to remake its product lineup. The company just scored a team of some of the hottest designers and the hottest design products in Silicon Valley. Google also has clearly been interested in robotics and AI for awhile, and Nest has been using sophisticated smart learning at its core, working with robot guru Yoky Matsuoka.

Losers:

Apple: There’s been an urban legend swirling in the Valley for years that Nest would one day be bought by Apple, and Fadell would return to the fold of the iPhone maker. Even if that was completely untrue, Nest is one of the most Apple-like and Apple-inspired startups out there. Not only do its founders and key execs (like Apple’s former top lawyer) formerly hail from Apple, but it adopted many of the operating practices of Apple. It would have been a good fit with Apple and it would have given Apple a foothold in the connected home devices market.

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Companies that have sued Nest: Nest just got a lot of funds to fight any lawsuits that it’s been delivered, like the ones from Honeywell and most recently BRK, the company behind First Alert.

Traditional thermostat makers: For decades thermostat makers have relied on a commodity product that had little smarts and no cachet. Nest has put the thermostat on the map as a device that can not only be sold at a premium, but can be the smart hub in a home. Now that Google is buying Nest, it only underscores the elevated status and possibilities of the thermostat.

thermostat

Slower-moving smart home device makers: Nest isn’t just a thermostat company, it’s looking to make a variety of products to connect the smart home. What Fadell and his team have been doing — combining design, smart algorithms, data and slick hardware — leads the industry, and now Google owns that. Any company that was worried about Google competing in the smart home now has to worry even more.

Consumers worried about data: Google, the king of collecting and using your data, now has a peephole into the physical space of your home. Do you want that?

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