If recent internal rumblings are anything to go by, Alphabet Inc. (NASDAQ:TSLA)’s Google needs to take a close look at how it deals with firms it has acquired. Just two weeks ago, Google said that it had put Boston Dynamics up for sale. The decision was informed by failure by the latter to cooperate with other Google’s robotics ventures to develop new products. Leaked memos also showed failure to create a product that could be marketed soon were to blame.
Another firm that is part of Google’s so-called “Other Bets” that looks set to be put up for sale is Nest. The problem with Nest is that is that it has yet to generate sufficient revenues to keep Alphabet’s executives happy.
Nest Results Didn’t Meet Expectations
Insiders say that Nest recorded nearly $340m in sales in 2015, an impressive result for a company that deals in the very nascent Internet-connected appliances market.
However, the figure has failed to meet targets set when it was picked up by Google in 2014 for $3.2 billion. The acquisition was meant to provide an avenue to compete with Apple Inc. for consumers in the smart home segment.
As part of the buyout, Google brought in Nest’s Co-founder and CEO Tony Fadell, who previously worked with Apple before launching the startup. The decision was meant to meet the need to inject Apple’s cutting edge hardware technology into Google’s operations.
When Google began talks with Fadell in late 2013 over the possible acquisition, the two firms agreed on two issues. The first one was that Fadell would source funds for operations from Google, and in exchange, Google tabled a provision that kept all key engineers and executives at Nest on board after the acquisition.
The budget was to run for three years, with the initial funding being about $500m per year, and is due to dry up this year.
In order to prevent Nest employees from jumping ship after the buyout deal, Google drew a vesting schedule that barred Nest’s top honchos from cashing out their stock options before a predetermined date, which is widely believed to be this year.
Furthermore, Nest was required to generate sales of at least $300m per year. This figure didn’t materialize for two years until it added sales from Dropcam, a company that Nest bought for $555m within six months of its merger with Google.
Key Dropcam Figures Exited Alphabet Execs
However, several key figures at Dropcam, including its two co-founders, hurriedly exited the company. Former Dropcam co-founder and CEO Greg Duffy publicly voiced his discontent with Fadell, saying he insulted Dropcam staff who were brought onboard during the takeover.
Due to these wrangles, it looks likely that some key Nest managers could leave once the vesting schedule expires this year.
Should this happen, expect Alphabet executives- -who have insisted on keeping costs low in non-Google companies- -to start exploring not-so-good alternatives.
Nest’s troubles are similar with the ones facing Boston Dynamics. After its purchase by Google in late 2013, Boston Dynamics slowly stifled Google’s robotics initiative dubbed Replicant by its refusal to partner with other Google robot engineers operating in Tokyo and California.
The company also failed to create a product that could be commercialized within a few years in order to generate sufficient revenue to support its own operations.
The sudden departure of Andy Rubin, Google’s ex-Android chief who spearheaded the purchases of nearly a dozen robotics firms such as Boston Dynamics, also contributed to Google’s decision to put the company up for sale. This pattern is similar to Nest’s, which has suffered executive departures in its Dropcam unit, as indicated earlier.
Nest presently develops three items: smart thermostat; Nest Cam, a home-monitoring video that succeeded Dropcam; and Protect, a smoke detector. It also generates revenues by partnering with utility firms in energy-related issues.