Google just announced the bombshell $3.2 billion acquisition of Nest Labs, the upstart home automation company started by former iPod and iPhone leader Tony Fadell. That's a big deal: Nest is one of the few companies to blend state-of-the-art hardware, software, and services to really change the way people think about mundane products like thermostats and smoke detectors, and the company plans to accelerate the business with the help of Google's scale.
Nilay: So I’m surprised you decided to sell — two years ago when we first met you told me that building products wasn’t as important as building a company. What changed?
"It’s about the future and what we can do together."
Tony Fadell: For me, this isn’t about a financial transaction. It’s about the future and what we can do together, so I’m really excited about taking the vision. Because they really like the vision that we have and the product roadmap that we have and they can implement it. They’re going to allow us to — Nest can remain Nest. We need more capital, we always do, but when we have somebody who really understands the vision, it’s like, go.
Two years ago, I actually remember this really distinctly — it was a very motivating Tony quote — you told me that the whole point was to not build products, because products and services will fade away. The point was to build a really great business. That to me was Tony, that was what you guys were doing. But now you sold the business. Why?
Well, we’re about creating the business. We still have a long way to go to create this business, and I‘m also not naïve to the fact that we’re going to need substantial resources to fulfill what we set out to do. This is not just spinning up a server and all of a sudden you have scale, and using other people’s infrastructure for software distribution and all this other stuff.
We’ve got to fight hand-to-hand combat in retail spaces. We have to go in and literally build tons of infrastructure for customer support and servers and all those things. I want to focus on building the differentiation for our customers, not take a sideline to building infrastructure that’s not customer differentiating. When I’m busy focused on those things, the competition is starting to nip at our heels.
"You see every company wants to be the Nest of something, some unloved category in the home."
I really want to build a great business, and I think this is the best way to build that business. If we would have kept going alone — you see every company wants to be the Nest of something, some unloved category in the home. I wanted to double down, and this is the best way to double down.
Don’t say double down. It’s the kiss of death.
Okay I won’t say it. I appreciate the advice.
When did you guys start talking to Google? Obviously Google Ventures was one of your investors. When did you decide to sell?
Oh no, we had multiple term sheets, multiple things from various investors, great investors, but this business opportunity was just too good. Too good from the independence piece, from the financial piece, from what’s going to be great about the team and for our customers.
Obviously you have history with Apple, you’re in the Apple store. Were they in the mix?
I’m not at liberty to talk about those things — but Google was our best business opportunity to create this business and really have it take off.
"Google was our best business opportunity to create this business and really have it take off."
Obviously, you’re in the store, you’re one of the most popular connected devices in the Apple Store. Are you worried about your retail relationship, or is that just whatever?
Well look, at the end of the day, customer choice is essential. And we don’t make products that compete with Apple, nor make products that compete with Google. Our customers come in both iOS and Android flavors, and I hope our customers can still buy the products they want to purchase wherever they want to purchase them. I hope they see it as a positive thing where we’re headed, because we’re going to be able to invest even more.
We’re going to continue to make our products iOS compatible, as well as Android compatible — as we always have.
Interview with Nest co-founder Matt Rogers at CES 2014.
So how long are you and Matt tied to Nest? Are there any golden handcuffs? Is there an amount of time you have to be there, and what’s the earnout?
One of the absolute key things of this was — and Larry and I sat down, and Matt as well — we all sat down and he asked, "How long are you in this for?" I said I retired before. I don’t want to retire. I want to build this vision. I set out to build this vision over the last decade, we’re only three and a half years into this. I’m ready to go the whole way.
That was very key about why they wanted this whole thing. They don’t want just a business, they want a great team that can lead the business so they can scale beyond. Taking the business and having just a normal team manage the business — that doesn’t let them scale. They want the whole leadership team coming over who can run this stuff.
Is the entire company going over or just the leadership team?
The whole company. Everybody.
And all your IP and patents?
"Everything is going to remain very much like you see it today."
Every single thing — there’s nothing left on the table, it’s not going anywhere else. The whole thing; we’re fully invested. And we’re not going anywhere — we’re going to stay in our offices, we’re going to have our brand, everything is going to remain very much like you see it today. Post-close, it’s not going to change as dramatically as you think.
Did you negotiate directly with Larry? What was the process here?
Remember, we’d already been talking. The very first time we showed them the Nest product, or showed Sergey the Nest product, was in early 2011 because of a suggestion that we should really show Sergey. And ever since then they’ve had an active interest in what we do; it was through Google Ventures, and ultimately we wanted to do some partnerships on some technology pieces and that’s when they wanted to step it up and do even more and that was great, but we thought there could be even more done. And that’s when they made their case, not just financially but through resources, for why Google was the best place for us.
I can’t tell you any more, but we had tons and tons of conversations. This wasn’t based on the number — the number came at the end. This was, "Can we get what we need to scale our business and build our vision?" And they presented such a powerful case that it was meant to be.
Are you confident they’re going to be hands off? The analog that comes to mind here is Motorola. Is that kind of the model, or are you even more independent or less independent?
"It’s somewhere between YouTube and Motorola."
No, I’d say more. it’s somewhere between YouTube and Motorola. It’s not as much as Motorola, because they don’t even have Google badges. So we’re more towards Google than towards the Motorola kinds of things.
Where do you and Matt report? What’s your relationship with Google?
I report directly to Larry and Matt reports directly to me.
I’m not gonna say never. I’m not gonna say never.
But you’re not going to share data with Google down the line.
Right. At this point, there are no changes to our terms of service, and that’s it. That’s all I can say.
What are you going to do with the fire truck? Are you just going to go on a fire truck spree with the Google cash?
I sure hope so.