Wow. So today's big news in start-up land is Google's acquisition of Nest for $3.2 Billion. Yeah, that's a lot of dough. For those of you who don't live and breathe on the cutting edge of consumer gadgetry, Nest is the start-up founded by Tony Fadell, late of Apple, running the iPod engineering group...and Portal Software where the iPod had its origins before Apple, bringing it to its fruition as the most sought after gadget (so far) of the millennium. What Next has been building, refining and selling is an internet connected, programmable thermostat. Nest has been offering this gizmo since 2001 to both critical acclaim and market success. In late 20013, Nest also began selling a connected smoke detector, too, offering a glimpse of where they might be headed. While, unfortunately, their latest software update (transmitted and loaded automatically (via the previously mentioned internet connectivity) bricked the device (techno-geek slang for "rendering the device inoperable"), Nest didn't seem to suffer any significant harm to its brand as a result.
Fadell and co-founder Matt-Rogers (also formerly of the Apple iPod and Portal Software teams) will reportedly join Google to run the acquisition in the near term, which is pretty standard operating procedure for such things. Would you have much confidence in the acquisition if the founders fled? Considering their shares of that $3.2 billion (plus likely incentives from Google), they'd be fools not to work hard toward the longevity of their creation. Likely, their payday is as much about seeing their creation successful in the long run as it is about acquiring 15th century French chateaus and custom built Porsches. Nest will continue on as its ‘own brand identity’ and continue to be led by Fadell. The deal hasn’t closed yet as it has to meet regulatory approval.
Mostly likely Fadell and Rogers did not sell Nest to Google to enhance their riches (you can imagine they did well with their iPod proceeds) but rather were attracted to the scale, speed and commitment that Google will bring to what Nest is doing. Google very much wants to be in the center of the general populous' connected life and will allow Nest/Google to do things on a scale and time frame they couldn't otherwise do. And, oh so much better than being acquired by the likes of Sony or General Electric. :-) Top ranked venture capital firm Kleiner Perkins, and Lightspeed Ventures who also had the vision to back Nest, are the ones who were motivated to make this sale for the money. They reportedly got a 20X return fr their investors . For Kleiner Perkins, that's a $400 million return on a $20 million investment...a "twenty bagger" - the kind of thing that definitely gives you some gravitas among the VC crowd.. This is the momentum that turns the crank on our industry.
Google has an interesting project called PowerMeter, which monitors power consumption over time which could have some cool applications here and is an obvious choice to roll under Fadell and Rogers' control. The acquisition could also provide Google with a good bump in their patent portfolio. In December, Nest said that it had 100 patents granted, with 200 more on file with the U.S. Patent Office and another 200 ready to file. As someone whose done a lot of patent writing and filing, that is HUGE. Nest has been the target of some fairly high-profile patent suits and threats from legacy manufacturers like Honeywell over its thermostat and BRK over its Protect smoke detector. Google will likely offer shelter from further suits with its wide range of patents across a variety of technology arenas.Hell, just having Google's legal team in their corner (and the dollars backing it) should make the opposing counsel slither back into the ooze whence they emerged. I think the bigger question comes back (much like the questions about GMail, the NSA and the power such control brings) is "what will inviting Sergei and Larry more broadly into your home via Cat 6 or WiFi really mean?"
Far more interesting, to me, is that Square's evaluation hit $5 billion this month. Again for those of my dear friends and family reading who don't breathe in the wonkiness of Sillycon Valley, Square is a company that makes a device you can hook up to your smart phone or tablet to swipe credit cards and accept remuneration. The woman who cuts my hair uses it to charge me and its great for her - less of a fee than the banks charge, quick, easy and convenient, tied into her own means of managing her small business' finances; no longer beholding to the big banks to run her business.
Make no mistake: though their hook is a lovely little piece of hardware that attaches to your favorite mobile device, Square is a payment processing house. Their power lies in their ability to disrupt a very traditional, very large and lucrative business. Square’s growth has been a story of sustained momentum: they boasted a laudable payment-processing run rate of $1 billion in the middle of 2011. Now Square is expected to process some $30 billion in 2014. This is legitimate growth as defined in absolute(let me repeat $30 billion this year) as well as relative terms. That's the kind of growth that makes the banksters drool since its not only got enough zeroes to please their stockholders and other constituents but is all legal and actual value creation. Clearly, they've had a period of hyper-growth, but that's really benefitted their investors who bet on, err.. believed in, their ability to achieve it. My observation of those who live and breathe the investment trade leads me to believe Square will have heavy gravity for either a final round of investment or a boffo acquisition by the likes of Visa, MasterCard, Chase, etc. Given their history of being first movers on incorporating disruptive technology into traditional banking, loos for European entities like Credit Lyonnaise to jump on this one.
FULL DISCLOSURE: I have good friends who work at both Next and Square. One of the great delights of working in the Valley is getting to work with some of the brightest, hardest working, innovative and creative people currently walking the Earth. So, my perspective may be a bit skewed if, for no other reason than, I'd like to see them all get a good return on their hard work in making these cool things work.