Acquired - Nest

0:00The color really does have an impact on your brain. Yeah, it's like with these billions of dollars, the technology companies actually hire psychologists to intentionally do this stuff. Welcome to season two, episode three of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. It's finally time to cover a no-brainer story here on Acquired, Google's 2014 acquisition of Nest.

0:39David, you pumped. I am so pumped. There's no shortage of research for this one. There's no shortage of requests for this one. And actually, it's pretty timely with the announcement coming out last week that Google is rolling Nest back into, or I guess for the first time into its main hardware business instead of running as an independent subsidiary. Yeah. I mean, the question is like, which Nest acquisition or divestiture is this officially?

1:08going to be about because there's the original acquisition, the rolling out into a standalone unit of alphabet, and now the re acquisition back into Google. Yeah. Well, and not to mention a half a billion dollar pickup of drop camel on the way. Not long the way. We just might cover that. That's true. It's true. So to make sure we're on the same page for the full episode, this is the original acquisition of Nest.

1:36Where they Google actually wired cash to the bank accounts of people who own shares in NIST. That's so prosaic then. A couple of announcements for listeners before we dive in. David and I have been playing around with a lot of new podcast apps recently and one of them that's pretty cool is Breaker. So if you're using the Breaker app and listening to us right now, or if you want to try it out, please comment on this episode. We're experimenting with how the rise of social podcast apps sort of affects discoverability and would love your...

2:12your comment on this episode to see how it compares to the effect of people leaving reviews on iTunes accounts. So maybe if we mobilize the acquired base, we can help discoverability of the show. If you are new to the show, you can check out our slack at acquired.fm, over 1,100 strong. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired.

2:40the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

3:09They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

3:28Lagora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

3:42And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test

4:34Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. So David, I think we've got one piece of follow up before diving in. Yeah. So we wanted to do a follow up on the Apple Beats episode, which actually kind of hard to believe was the last episode just you and me that we did together. That's right. We had so many guests and specials since then, which had been great. But in the interim, listener Devin wrote into us about something that we didn't talk about in the Apple Beats story. And that's that Dr. Dre has a history of assault back in his earlier days with NWA.

5:29And in particular, assault and violence towards women, which is obviously a pretty important thing and we should have mentioned it as part of the episode. So now in this case, it's somewhat of a complicated situation and we aren't really equipped and acquired to prosecute the specifics of this or any other case, really. But the documentary that we mentioned, The Defiant Ones, addresses it pretty well and pretty fully. So definitely, you should go watch the movie.

5:54for lots of reasons, but this is an important one. But that said, we do think it's important for us to acknowledge it, and we want to make sure we put it out there on this show. So thank you, Devon, for calling it out. Yeah, but I think, David, to just underscore your point, this just hit us like a ton of bricks when we got this email, because we didn't mention it once on the episode, and it shouldn't go overlooked. And we do a lot of founder glorifying on the show, and I think it's really important to look at the whole person.

6:24It's a good reminder that just like you said Ben, it's easy to treat founders and Silicon Valley folks as heroes. We often do on this show, but they're people like any other people and some have good sides, some have bad sides. It's just important to remember that. We'll try and keep that in mind with everyone going forward. Thanks again, Devin, for pointing it out. With that, let's move on to Google and Nest.

6:51So you definitely can't talk about Nest without talking about the well-known and at times controversial, although not as controversial as Dr. Jay co-founder. You know, whose name is basically synonymous with the company. Of course, I'm talking about Matt Rogers. Classic. Matt Rogers just always all over the news. Always all over the news.

7:16Matt Rogers is the co-founder and I believe chief product officer of NEST and we're going to talk a lot about Matt but no the person I'm referring to is the quote-unquote father of the iPod Tony Fidel which I presume most folks listening to the show have heard something about in the past but who is Tony? Well So Tony grew up in the 70s and early 80s, primarily in Detroit, although his father was a salesperson for Levi Strauss, the genes company based here in San Francisco. So they moved around quite a lot. But Tony turns out was really influenced by his maternal grandfather. So his mom's dad, who also lived in the Detroit area. And he was like this

8:08sounds like awesome kind of depression era like you know self-reliant like tinker sort of he was not an engineer he was a schoolteacher and a school superintendent but sort of proto engineer and he really encouraged Tony when he was growing up to like fix stuff around the house and do everything yourself and take things apart and understand how they worked And so this had like a big impact on Tony and then when he was around the age of 12 he discovered computers, and took that same approach to computers. So we got an Apple II, we took it apart, we put it back together, was totally obsessed with it. David, can I just pause for a minute? Some of the stuff that you find, it's like you grew up with Tony somehow. I was like, oh yeah, he was down the street from me, and it's just impressive. Well, we do a lot of research on this show. And a lot of this comes from Tony was part of

9:08I forget exactly what this organization is called. It's like the achievement organization or achievers or something like that. And you received a word from them and did a big oral history on Keta, his background. So we'll see if we can link to that in the show notes. But there's a lot of good stuff out there about all this history. And so he's hooked on, he buys the Apple too.

9:31He's hooked on computers. He ends up going to college at the University of Michigan. This is in the late 80s, mid to late 80s. And he studies computer engineering, which is a combination of computer science and electrical engineering. So he's getting both hardware and software in school. And then he also gets an education in entrepreneurship at school. He starts...

9:54Actually, not one, but three different companies while he's at the University of Michigan. The largest, most successful, which was an education software company that he started with one of his professors that was called, I think, constructive instruments. So he's got the hardware, he's got the software, he's got the entrepreneurship, he's a total Mac nerd and nut.

10:19And, finally, he also, he's a subscriber to MacWorld, and he reads the magazine religiously. And he hears about this, right as he's senior, getting ready to graduate. He hears about this stealth startup in Silicon Valley, that was a spin-out from Apple, started by a bunch of legends from the initial Mac team called General Magic, and Tony decides, I need to go get a job at General Magic and move out to Silicon Valley.

10:44So, David, before the show, we were texting and you alerted me to the existence of General Magic. I have a shame bag over my head of calling myself an Apple nerd and having cared about the company for a long time. I did not know about this company and it's insane. Tell us about some of the history of General Magic. Totally insane. So, this company was started in the early 90s in the Valley and it was like all the legends from the original Mac team at Apple. So it was Bill Atkinson, Andy Hertzfeld, Mark Porat, and Joanna Hoffman. Many, if not all of those, I think are kind of central characters in the Steve Jobs movie, which is another good movie you should all go see if you haven't.

11:34And they were all super well-known in the Mac community. And they left Apple to start this company, and it was totally secret what they were doing. So Tony and nobody else had any idea what they were actually doing. It was just that it was this dream team out in the Valley. So he graduates, he goes out there, and he basically talks himself into a job with General Magic. I think he was the 30th employee or something like that.

12:01And it turns out that what they're doing is they're basically, they have a vision to essentially build the iPhone. But it's like the early 90s. So it's like way too early for the iPhone. And the company actually turns out it would consume a whole bunch of capital. It would go public. It would fail. It would pivot a bunch of times. One of the things that comes out of it ends up being on-star. They'll like, you know, if you've ever driven a Chevy or a GM vehicle, they'll like connected roadside assistant thing.

12:31But the vision was to build a connected, an internet-connected PDA, personal digital assistant, that people could keep with them, you know, all throughout their day and their lives. It would be connected to the internet, could do email, could do phone calls. And amazingly, like some of the other people who worked at General Magic along the way, Andy Rubin, who started Danger and Android, Pierre Amidier, the, or Amidier.

12:57I never know if you had a... I'm a D.R. I think, yeah. I'm a D.R. Founder V. Bay, Kevin Lynch, who was the CTO of Adobe, and now runs Apple Watch at Apple. There's this ridiculous mafia of people that worked at General Magic, and each sort of, even though the company failed, took little pieces of its vision and made them reality a different piece of the ecosystem. Yeah, yeah, it's...

13:22Awesome. We did know when we started digging today history for this that this was going to be as much an apple episode as a as a Google episode, but with Tony Fidel, you just can't you can't stay away. You can't stay away from it. So Tony works there for three years in his first job.

13:39And it kind of becomes clear that the market is not ready. The technologies are not ready for essentially the iPhone. So he leaves, but he's not done. He goes to Phillips, the big Dutch electronics manufacturer. He becomes the youngest senior management member there. And he essentially tries to do what General Magic was trying to do, build a connected PDA.

14:04inside Phillips, and he spends four years there trying to make it happen also. Fails. And he kind of develops a reputation as it's unclear like how much of this was is just who Tony is and how much is he was intentionally trying to cultivate this persona but he's like the brash like young like Silicon Valley hot shot in this big staggy company. He gets a reputation for like yelling and screaming during meetings and all sorts of stuff. At one point I guess fast company does a does a profile on him and they ask him, you know, So what would you be doing if you weren't in tech and he says I'd probably be in jail? Which is probably not true, but you know, there we are. That was the reputation he was cultivating. So it's not working, this whole connected PDA thing isn't working within Philipsy there. A couple of years later, 1999, Napsters around the internet's really taking off music and MP3's earth thing and Tony's like,

15:08MP3s like this is the future. I want to get involved in this. I need to go get in this industry. And so he takes. Isn't there some crazy story about like Toshiba made these tiny hard drives, but they didn't exactly know what to do with them. And somehow Tony's like, Oh, I know what to do with them. Well, that was not Tony, but that was John Rubinstein. We'll get to that in a sec. But so Tony's like, I want to get into music. You know, he could go to Apple. He could do all these things.

15:35He's like, I'm gonna go to real networks, which is the company in Seattle. Yeah, baby. Right in the back yard. Speaking of Mafia, the Mafia of people that came out of real is pretty insane too. Particularly in the Seattle tech ecosystem, you look around, particularly all the major successful consumer companies and the real networks Mafia is probably the most dominant source of talent in the region over the last 20 years.

16:05the Aquana of Mafia, of course, too. But anyway, Tony takes a job at Real. He lasts all of six weeks. Remember, he's like the controversial executive here. He stays at Real for six weeks, something to happen. And he decides, you know what, I'm still going to pursue this MP3 thing, but I'm going to do my own startup and do it on my own. So he leaves. He starts a company called Fuse Systems and his Approach to MP3s is he wants to build hardware to play MP3s, but he's not yet thinking about, you know, portable iPod-style hardware. He wants to make, like, audio file quality rack-mounted, like, stereo hardware, like something you would keep next year, you know, receiver in your home hi-fi system. Next to your home pod. Yeah, next to your home pod, exactly. He's just, he's habitually, like, 20 years ahead of the world.

17:00So he does that he starts the company like I said in 1999 Things go along he raises some money But then the comm crash happens and and it's 2000 2001 the company even with Tony's you know reputation is not able to raise money. He's running out of cash. He's trying to figure out what to do And so one weekend, apparently, he's skiing. He also loves skiing. This is gonna become a recurring theme here. He's skiing in Tahoe, and he gets a call on his cell phone, and he picks it up, and it is John Rubenstein from Apple, who is the SVP of Hardware at Apple. And John had been, was a veteran of next, so he joined next when Steve Jobs was at next, then came with Steve back into Apple and was running Hardware at the time.

17:49And so John and Steve have been thinking about the music space for a long time. This is now the spring of 2001. They just launched the iTunes software. The store wasn't out yet. And they're looking for...

18:07potential to build a hardware player to go along with it. And they couldn't quite find the technology to do it. And then apparently the story is that John and Steve are separately on business trips to Japan.

18:20And John's meeting with Toshiba, and they show him this 1.8 inch hard drive that they have. And they're like, we don't really know what to do with it. Like you're saying. And John's like, I know what to do with this. So apparently Steve was also in Japan at the time. John calls him out and he's like, we gotta get together. They get together for dinner at a hotel and he's like, I've got it. We can do it. A thousand songs in your pocket. Toshiba has the hard drives. We can make it happen. And so Steve's like, all right, go ahead. And John finds out about what Tony had been working on calls about. He's like, Tony, you're the guy. You got to come in here. We need your help. Can you come do a consulting project for us? And Tony's like, okay, you know, I need some money because I'm running out of cash at my startup. He comes in, he does, starts the consulting projects and he quickly figures out that like this is

19:07Like the most important thing in Apple going on here. So he spends six weeks, he puts together a whole plan for what components Apple needs to build this hardware, all the software coming together.

19:21And he actually builds a Styrofoam model of what the iPod could look like. That's amazing. That's super similar to the story of the original palm. The founder of Palm ended up carving it out of a block of wood. And then for weeks, bringing around this block of wood to meetings and pulling it out of his pocket to pretend to take notes on the block of wood to see, does the form factor work for me? Yeah, it's a product design. It starts with tinkering. That's right.

19:50So the other project they he presents to the whole senior leadership team at Apple and they're like, okay, great We want you we want to hire you to come do this and tell these like well, but I've got this startup and I've got all these employees and Which let's be clear like how was he doing a consulting gig while running a startup like for anybody running a startup like imagine going and taking on a you know, incredibly important product even for like a month and a half at a company like Apple. How does that work? Yeah. This is where the research gets a little unclear. This is the problem with, you know, when you're listening to Tony tell the story only from his side. I couldn't find anything out there of how the employees of Fuse felt about this. It feels like there may be like a very strong COO presence or something. Yes. Yeah. Well, you know, so anyway.

20:43Apple and Steve and John Rubenstein are like, great. We want to hire you. We don't want to acquire a fuse. We want to hire you. And after a bunch of thinking about it, Tony says, okay, fine. So he shuts down fuse and he goes to work in the spring of 2001 for Apple. And basically, like, This becomes the focus of the entire company for the next couple months because they want to get the product shipped for the holiday season. And they do. It's pretty amazing. It's like 10 months from when Rubenstein sees the 1.8-inch hard drives at Toshiba in Japan until they shipped the iPod in October of 2001. That's mind-blowing. Think about the number of Kickstarter that take three years and then don't ship a product.

21:32I mean, to be able to do that in 10 months. Totally mind-blowing. And I promise this is all leading to Nest eventually. So Tony stays on at Apple after they ship the first iPod. He ends up working on the next 18 versions of the iPod. And in 2006, John Rubenstein retires and Tony replaces him as SVP of the iPod division. So he's reporting directly to Steve, one of the senior managers, most senior managers within Apple.

22:00And so, just before that happened, I promised that Matt Rogers would come into the story eventually. The famous, famous, famous Matt Rogers. He, the iPod team, hires an intern from Carnegie Mellon, who shows up in, I think this was 2005, and it's Matt, and he shows up.

22:21And he gets, they sit him. I don't know if he was the first intern or one of the only interns on the iPod team. They sit him next to the printer cube and they basically make him do all of the grunt work for the iPod team. And Matt loves it. He does a great entrepreneurial thought leaders talk with at Stanford a couple of years after he started nest and talks about this and how He was just so happy to be working at Apple. So happy to be working on the iPod team. He was like fetching printer paper. He was traveling around the world, handling logistics for like installing firmware on the iPod shuffle with all this stuff. So he makes a big impression on Tony. And apparently at the end of the summer, Tony gives him a cash bonus for his work during the summer, which like the Apple and the iPod team had never done before. That was the only person to have this happen.

23:18So he graduates, he comes back to work for Apple and for the iPod team. Right as Tony is getting promoted to being the head of the whole thing. And this was in 2006. And at the same time, this is when the iPhone is starting to get worked on within Apple. And this is so cool, reaching back to other of our episodes here. And it was fun to read about this.

23:41as is now kind of widely known there were two competing projects to become the iPhone purple one and purple two yeah and so I think I think the iPod I think Tony's was purple one and it was the plan was they were going to take the iPod software and hardware and push that towards the phone and so Tony Matt everybody's working on that and then competing within the company Steve also had It's got four still, take OS10 and try and shrink that down to fit it onto something the size of a phone. And famously, the direction that Tony goes is like using the iconic click wheel for the iPod and that's the primary interface to the phone and Scott goes with the touch interface.

24:32And this is all now talked about when the 10th anniversary of the iPhone happened last year. Both Tony and Scott, you know, did a bunch of interviews and talked about this. And apparently it was like pretty bitter rivalry within the company between these two teams. I bet. It's interesting too thinking about like, you know, now when we reflect on like Apple's revolutionary interface, it's multi-touch. Like that they invented this.

24:56incredible, capacitive touch thing that is the dominant way that people interact with technology now, but they had already done that once before. Tony and team with the iPod, the click wheel was completely revolutionary. Completely revolutionary. Compared to the Rio player and the Walkman that came before it, it was a completely different experience. Companies rarely have that dominant of an innovation twice.

25:24or you could argue multiple more times after that too. Yeah. It's pretty amazing. And it all comes from different people within Apple. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF than everyone would not. And you're done. But in an AI first world, that doesn't hold up anymore.

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27:24Obviously Scott Forestel's team with the multi-touch wins the battle the battle of the codename purple iPhone future the iPhone And and this is this was just shocking when I saw it. We're gonna link to this in the show notes So if you watch the demo in January 20th January 2007 when Steve Jobs announces the iPhone like probably the most famous Steve Jobs moment in history The when he's walking through how the phone app works and he's going through the favorites. He's showing how you can add favorites, the favorites tab and it's all visual and this is all new. And then he talks about like, oh, and you know, it's easy to remove somebody. And he removes a contact from his favorites. The contact he removes is Tony Fidel. No way.

28:13cold, flooded. It's brutal. And of course, nobody knew, but apparently, you know, there are a bunch of interviews now, after it's not, this is all come out there. Like all the engineers, at least on the iPod team, like knew that they knew exactly what that meant. And so as, you know, foreshadowed by Steve and the demo, within the next couple of months, Tony is gone from Apple.

28:43And so he's, it's now late 2007, 2008. He's left Apple. His wife who he had met at Apple, they both leave. And they're like, all right, we're done with this. This is too much. We're gonna spend some time with our kids. They have young kids. They do two things. One, as you mentioned, Tony had always lived skiing. He loves Tahoe. They decided they're gonna build their dream vacation home in Tahoe. And they're gonna travel all around the world.

29:13make up for all this time, they'd spent, you know, at Apple working super hard for the last 10 years. So they start building the Tahoe House, and then they're traveling around the world. They start spending a lot of time in Paris. They end up buying an apartment in Paris. But when they're working through the Tahoe House, Tony's like he's kind of like going back to his grandfather and like as he talks about it and like you know tinkering wanted to be involved with everything you can't help himself and he's like all these products everything that's going into the house it's all like total BS like these things suck like I can do so much better so he's he's thinking about that he also wants the house to be super green and energy efficient he's finding it really hard to do that and and he ends up one day he when he's back in the valley and he's

30:01from Paris and he's working on the Tahoe stuff. He gets lunch with his old intern with Matt. And it turns out that Matt had also bought a house recently in the valley and the house was like from the 70s and had all this old 70s style equipment in there. And Matt's also trying to kind of retrofit it, having a super hard time and Matt's like, You know, he's having lunch with his like bosses bosses boss who he was the intern. He's like, we should start a company together, which which is we gotta do this. That is the strangest feeling after you leave a company and someone was like a mythical person from on high that you only saw speak to a thousand people and you know, you may have had one or two interactions with but like then then to just like all the pretenses gone because you both left the company and you have this is happening to me just a couple times and you're like, oh my gosh, like the

30:52It's weird to collapse all those levels of management and then just have like a human to human relationship with someone. Yeah, I mean, you're talking about a guy who is literally once in Steve's jobs favorites on his iPhone. So Tony's like, yeah, I don't know. I'm kind of enjoying this, you know, Paris thing, but you know, maybe maybe like you work on it and you see kind of what's there. So Matt throws himself into this. He's still at Apple.

31:20He starts doing a ton of market research. He gets Tony excited. They're talking to installers. They're going and looking at homes. They end up talking to somebody in the EPA who's done a lot of thinking about how thermostats can influence energy consumption. That was still at Apple during this. That was still at Apple during this. So he's pumped. He's trying to get Tony excited.

31:43And then supposedly as the story goes, told by Tony, one day he's back in Paris. He's just dropped his kids off at school, I think. They're at a French preschool and he's walking along a bridge by the Louvre. And he looks at the Louvre and he thinks about all the great stuff and great creations in there. And he's like, you know what, I'm not done. I want to get back in there. And so he calls Matt up from a bridge over the set. What a setting right there. What a setting. And he's like, I'm in.

32:12We're doing it. So Matt leaves Apple at this point, rents, of course, a garage in Palo Alto and starts tinkering on stuff. And apparently in those early days nobody even knew that Tony was involved. They wanted to be super, super stealth. So it was just Matt.

32:33Tony moves back to the Valley in June. He and his wife moved back. He becomes CEO, and they decide that they're going to name the company Nest because the goal is, I don't think they've even landed fully on doing thermostats yet, but they want to reinvent the home, and they're talking about, like, what can we call the company? They're talking about the old MTV show, Cribs, and they start riffing on that, and that's how they come up with Nest, apparently. It should have just taught a crib.

33:03I know they should have called it Crips. Maybe it would be, you know, they would be doing better in Google. Whoa, David, let's, you know, we're not at that part yet. We're not at that part yet. So they recruit.

33:16a killer team from Apple, folks they've worked with, they recruit some folks from General Magic, and then they make one really key hire. They're able to land Matt's thesis advisor from CMU. It's a woman named Yoki Matsuoka, who is a pretty incredible person. So in a couple of years since Matt was at CMU, she'd left academia to co-found Google X with Sebastian Thruin.

33:46She was a robotics expert at CMU and then actually at the University of Washington in Seattle. And so she co-founds Google X with Sebastian Thune. She also gets awarded the MacArthur Genius Grant for her work. And she'd been in Google X about a year, and Tony and Matt are able to recruit her away. And she joins as VP of Technology in the super early days at DEST. And then Sebastian, he's like Of course interested by this so he ends up getting involved he becomes an advisor to the company as well So there's a lot of while he's while he's still running Google X while he's still running Google X. Yeah

34:26So September of that year, 2010, they raised a $9.5 million Series A from Kleiner Perkins and Chasta. And then they get to work. At this point, they've decided that the thermostat is their entry point into the home. They want to build a whole generation of both products, hardware products, to make the home more intelligent, but also the software layer and the operating system that's going to...

34:50that's going to bring it all together. So they raised their series A, and then apparently in early 2011, so they don't ship the product until they take a whole year, October 2011, they ship the product. In early 2011 though, Sergei Bryn, the Google co-founder, sees an early demo, an early version of the thermostat, and apparently he's blown away. He thinks that like, immediately this is going to be the next, you know, after, after smart phones, the home is going to be the next operating system. Uh, he wants to acquire the company right away. Um, and, uh, and the company said, no, uh, so that was the first time Google tried to buy the company. Well, perhaps my grade at the end of this episode would have been higher if it was, uh, bought at that stage. Yeah. Well, we may be, we'll have to save it for what would have happened otherwise. That's right. Um, and, and so it's worth like touching on, you know, now,

35:41This doesn't seem as revolutionary like of course the smart home, you know It's it's in many news stories. There's many great companies. It's a lot of funding around this now clear ecosystem plays with Google home and Alexa and all that This is ridiculous at the time like I remember seeing their landing page and it's like it's Apple ask and it's beautiful and it's got the thermostat on it And it's you know announcing like at some point we'll ship this thing and you can get information updates here and Just the the me a cycle around this was just ripping it apart like this is the peak of Silicon Valley, you know buying their own BS Are you kidding me like this? This is not innovation like really thermostats thermostats is the next frontier and It was just kind of prescient. Yeah, well, and I feel like

36:27There's a lesson here because the same thing happened with Rover, which started right around the same time, almost exactly at the same time. There are all these tech crunch articles like Airbnb for dogs, like this is a sign of the apocalypse, Silicon Valley is over. Well, and people thought Aaron, CEO of Rover, Aaron, initially, people thought it was nuts for going and doing this. Yeah, I mean, Aaron had a super successful career at actually, you know, someone.

36:51similar to Tony, although I think Aaron's personality and Tony's personality are polar opposites probably, but Aaron was the youngest GM at Microsoft ever. He came from a corner of when Microsoft acquired that, and that he would go work on Airbnb for Dalek, so it's crazy. And yet, both of these companies turned out to be quite important. Fiddle from reinventing consumer electronics to becoming a thermostat maker. Yeah, well.

37:18when if somebody makes fun of your startup, you should probably take that as a compliment. If people care enough to make fun of your startup, it's still likely to fail, but if people aren't making fun of it, you know, for sure, it's not going to be huge. Yeah. So the next year, October 2011, as I mentioned, they launched the product nest learning thermostat. There's a ton of buzz, ton of hype. They raise a $55 million series B, which remember, this is back October 2011. Like we're not yet in the steroid era of super rounds for startups. This is one of the early, like a $55 million series B is a lot for a company that just launched a product. But it's all on the back of this hype and the quality of the team.

38:07And the fact that they're making expensive hardware. Startups are making, yeah, I mean, it just feels like it's a super capital intensive business to do that R&D in production. Yep. It definitely is. And so the lead of their series B is you guessed it.

38:30Google Ventures, one of the first big investments out of Google Ventures, which at that point was a relatively new operation within Google. And they would actually, they would end up owning at the time of acquisition, foreshadowing a little bit 12% of the company before even buying it. Yep, yep. So that was at the end of 2011. 2012, they launched the second generation of the thermostat, which is compatible with a bunch more homes and wiring systems. It gets up to, I I believe with that version up to like 85 90% of home-wiring systems are compatible with the Nest, the second version of the Nest. Then January 2013, they raised their Series C. They raised $80 million at a $800 million pre-money valuation. And it gets announced that they're shipping on the order of 50,000 thermostats per month, which at a price of $250 per thermostat puts them

39:27well over a hundred million dollar annual revenue run rate. Now, as you pointed out, and this is hardware revenue with a bunch of costs and expenses associated with it. This isn't Facebook here. This is not Facebook, but still, that's pretty impressive. About 15 months after launching the product and what does that, less than three years after starting the company or just about three years from starting the company, no less than three years, at a hundred million dollar revenue run rate.

39:55And I believe not profitable. I think they went all the way through the acquisition and years after maybe even today, it's not totally clear, but not profitable revenue. Yeah, not totally clear, but it seems unlikely, especially given how much money they were raising, presumably they were doing that for a reason. And so then later in 2013, they launched the second product, which was hotly anticipated. They'd always talked about the vision of being a fully connected home.

40:25And it's funny like the same thing happens. It's a smoke detector, smoke detector, and carbon monoxide detector. And everybody's like smoke detector. Come on. This is what this is next next next product. And we'll come back to the smoke detector later. But that was October 2013 in January 2014. So a couple months later.

40:48It gets reported that Nest is now going to be raising a monster round from DST, from Yuri Milner's investment firm that invested in Facebook and many others. They're going to be raising over $200 million at a $3 billion valuation. But instead, on January 13th, it gets announced that Google is finally acquiring the company for $3.2 billion in cash. But Ben has pointed out they already owned 12% of the company.

41:16Yeah, and at this point, still only 280 employees. I mean, to be purchased for that price, making hardware with supply chain and full operations logistics, retail on their website, channel to retail partners, full R&D team, only 280 employees, it's impressive. It's 11 million bucks per employee.

41:44It is, it is. And remember too, you mentioned channel, that means Best Buy, that means Lowe's, that's Home Depot, means not just building the relationships with those retailers, but getting product and shelves, keeping them stocked, all this stuff. It's not easy doing this stuff. Totally. So it's announced.

42:11And the terms of the deal are pretty interesting. Nest is to remain wholly independent. So Google is still Google at this point. There's no alphabet yet. But they announce it very clear. This is going to be like YouTube. Tony's going to remain CEO, the management team, Matt and Yoko and everybody else are going to stay independent. I'm going to have their own offices. Which is very much a Tony demand. We're not getting bought by Google to be integrated in me to have a boss. I get my own P&L. I get my own budget. We have our own office.

42:44And remember, of course, Tony is the veteran of First General Magic and then Phillips and then Apple, where he's seen all these corporate politics play out. And he's had a lot of success, but he's also ultimately lost the game in every case. And so supposedly there was a...

43:02a term in the deal. It's not public, no way to know, but it's been reported that there was a term in the actual documents that Nest was given five years run away, ended up completely independent of any financial goals. So essentially as much financial resources as they wanted.

43:21to with the goal of building the OS layer hardware and software for the connected home and no accountability for any sort of profitability or revenue growth, supposedly in the deal. And then is it later that they wanted them to hit $300 million a year of revenue?

43:40There was some targets set there at some point. Yes. Yes. Okay. So that was January 2014. That was basically the high water point for Nest. There are at least for Nest and Google's relationship. And here's an interesting data point on that too. So from Google's 10Q that they filed with the SEC a few months after this happened, they talk about how they came to value the deal. And so they say the fair market value of our previously held equity interest was $152 million, so that's that 12%.

44:1551 million bucks was cash that they acquired so from the last fundraising round or however they were generating cash at Nest 430 million was attributed to intangible assets 157 million to net liabilities assumed and 2.35 billion dollars attributed to goodwill that is primarily for the synergies expected to arise after the acquisition so you know, this is not a multiple of current cash flows or anything like that. This is a, we believe there are serious serious synergies with Google and that's why we're doing this. Yeah. And interesting. What did you say? $51 million in cash at the company of the acquired? Yeah. Okay. So and they had raised at that point about a hundred and

45:02$4,550 million. So that means they'd burned roughly $100 million on the product. Now we don't know what their cash flow was like at the moment in time they were acquired, but I think it's safe to assume they were not profitable and burning a lot of cash. Even with a relatively small amount of employees, as you mentioned. Okay, so that was January, 2014. Now the bad news starts. April, 2014.

45:32They have to halt sales of the second product of Nest Protect of the smoke alarm and carbon monoxide system because apparently there was a way for the alarm to accidentally be disabled through... You had one job to do. Yeah. And so it's a pretty bad thing if your smoke alarm doesn't go off. So they have to recall all the units that are on the shelves at all their retail partners. Fortunately for...

46:01units that are already installed, they're able to do an over-the-air software update. But not a good way to start under a new ownership of Google. Then the next thing that happens to start there with not protecting your customer's homes is June. In June 2014, Nest Acquires Dropcam, which was a very cool company that made WiFi-connected cameras that you could drop around your home hence drop cam. And apparently Google Corp Dev, Google the parent company had been pursuing this deal for a while, and then kind of sent it over to Nest and said, hey, we want to acquire this. Why don't we make this part of Nest? And Nest says, okay, they acquire it. And it's basically a complete disaster from a cultural standpoint. So- It didn't the founder leave immediately.

46:58Well, not immediately, but there's even more drama than that. So, so, Draftcam, the founder of Greg Duffy, he had worked for Zobney, which is inbox backwards. That was one of Y Combinator's first companies in one of the first batches of YC. And that was like reported, right? Like it was like a Gmail plugin CRM type. Yeah. Yeah, it was like a, I think it's like an outlook. Yeah. Yeah. And I actually got it confused with.

47:25Plaxo, which was trying to do the same thing, which was Sean Parker who just started up after Facebook, or no, before Facebook. Anyway, so that's kind of the DNA that Greg Duffy, the founder of Jopcam, came from, was like, right out of school, joins this YC company in the first batch. He's there for two years. He starts Jopcam. A lot of the folks at Jopcam would then go on to like, plenty of other like, you know, new startups in the valley afterwards. So it's kind of a young, like, you know, scrappy team.

47:55Super different from like the Apple DNA that Tony and Matt are bringing to Nest. So basically nothing happens. They had this roadmap and the next major product that Nest was working on was a security product, like a home alarm system. And Dropcam had also been working on a security product, I think called tabs. But Nest put drop and that was like pretty close to launching. Nest puts drop cam security product on indefinite hold moves everybody over to working on the nest product and it just keeps getting delayed and delayed and delayed and doesn't ship until like a year goes by and and Greg, Deffy, the JaffeCamp CEO, he's really frustrated. He sends a memo to Larry Page saying that Tony is- That's so good when someone feels like he did. Always email the CEO directly. Email the CEO. He emails this all reported on and then later published. He emails Larry Page and basically says-

49:00Tony is completely mismanaging Nest. He should be fired and I should be the CEO of Nest. Oh god, we've seen this story before. Yeah, and it's, uh, predictably does not play well for anybody really. Uh, first of all, Greg. So Greg, uh, pretty immediately after that leaves the company, Larry, Larry sides with Tony. Um, and, uh, and as the story gets even worse, so Greg's leaving and Tony then is interviewed in an article by the information and he badmouths not just Greg but the whole draft cam team and says that they were quote not as good as we hoped it was a small and not very experienced team so just completely throws them under the bus not not not not pretty

49:47In response, Greg rates a media article, which is still out there, basically taking all of his complaints that he emailed Larry about with Tony and Nest and publishing them, publishing them for the public, and implying that Tony took essentially all of Steve Jobs' personality traits, the yelling and the screaming, without his, you know, product sense. That's right, I remember that. Yeah, fun stuff, so.

50:15Once again, we're not here to apply in one way or another unacquired, but certainly made for a lot of drama. So I'm here for, I mean, yeah, speak for yourself, David. So now what you were referring to earlier, Ben, all while this is going on, another big thing happens at Google, two big things, actually, first.

50:34they hire Ruth Porat to join as CFO. And Ruth had been CFO of Morgan Stanley before coming to Google. And a big part of Ruth's coming, as was talked about, and I think it's played out in practice, is bringing a lot more structure to Google and particular financial discipline. So she's part of the whole sort of restructuring of Google into Alphabet. And that happens at towards the end of 2015.

51:02Now apparently when that happens, all of those agreements between Nest and Google got redone. So the five-year runway, the lack of financial accountability, if it existed in the first place, it certainly doesn't anymore. Once Nest gets pushed out as its own independent company under Alphabet. And part of this too, if I recall, was that during the acquisition there was super, super heavy incentives for the management team and key engineers to stay at Nest, right? I think they couldn't sell their, no way, it was a cash deal. So maybe they just didn't get Google Stock Awards or something for an extended period of time. Or it could have been Nest Grid. But yeah, I do remember, it was an abnormal sort of abnormally long retention period.

51:57And I suspect that is definitely the case because now some now some just weird behavior starts it starts occurring so At the very end of the year there starts to be rumors that Alphabet's looking to sell nest that nest hasn't been able to ship products They're not realizing their vision of you know what Google an alphabet really care about which is like the operating system for the connected home And and Tony of course is really unhappy about this but for whatever reason maybe retention reasons he stays at he stays at Google he starts also working on the Google Glass team on redoing Google Glass to be you know less dorky literally looking to maintain the same w2 so he gets whatever bonus needs to happen you said it not me and they also they got so serious into trying to sell nest it had like a project code name called a malfy project a malfy

52:54That's interesting. I didn't see that. It failed to find a buyer though. Yeah. Wow. And then the icing on the cake, the kind of last straw on the camel's back here is in May of 2016, a Nest employee files a complaint against Google with the National Labor Relations Board saying that Alphabet and Nest fired him because he was posting on Facebook about all the leadership issues at Nest. So it's just a firestorm. And then the next month in June 2016, Tony finally leaves Nest. And since then, you know, whether all of these problems were on Tony, on Google, on Greg and drop cam, who's probably some responsible responsibility is shared amongst all of them.

53:49But things do start to turn around at Nest, so they bring on a new CEO, Marwan Farwaz, to replace Tony, and Marwan... came actually first from the cable industry, but then he was part of Motorola and part of Motorola when Google owned Motorola, flashing back to our HTC episode and Android and everything here. And he was part of the division that made set top boxes and cable modems within Motorola. And so he worked with Rick Osterlow, who was head of Motorola under Google, now has come back and is Google's SVP of hardware. So they have a working relationship.

54:25And once he joins, things start to move a little farther. So first big thing that happens, which we're definitely going to talk about in tech themes, Google itself launches Google home in late 2016, which is their Echo, Amazon Echo and Alexa competitor.

54:41Now, interestingly, totally separate from Nest. So it was Google's hardware division that worked on that. Not Nest. Which when you, when you start reading blog posts that are trying to rewrite history a little bit, they talk a lot about the sort of the shared DNA and collaboration and how we couldn't have done it without working together. And I think over time, they became much more integrated. But yeah, certainly certainly was a little odd when Google Home God announced it had nothing to do with Nest. Yeah. Yeah.

55:10But in the meantime, Nest finally ships a new camera, a new drop cam product, Nest Cam Outdoor. And then they follow that up with Nest Cam IQ, which is actually starting to use some of Google's expertise here. They use machine learning to recognize faces and the drop cam. So for security features, you can tell if it's someone who's supposed to be in your house or not supposed to be in your house.

55:34Late last year, they launched a lower priced version of the Thermostat, I think called the Nest E, Thermostat E or something like that. And then they also finally launched the security product, Nest Secure, after a bunch of delays, along with Nest Hello, which is a smart doorbell camera, sort of like the Ring Doorbell. And then all of that happens, sort of like inspired by.

56:05All of that happens. We mentioned at the beginning of this whole history, Matt's thesis advisor at CMU, Yoki Matsuoka, who was the VP of Technology, when all of this drama really started going down. She actually left Nest in 2015, and she went to Apple of all places.

56:27And then in 2017, she left Apple, came back to Nest, rejoined Nest as CTO in 2017, right before they launched the ML version of the camera. And now she's Nest CTO again. Wow. Man, the horse trading here is pretty amazing. Everybody cycles through Apple and Google in some way.

56:49In some way and general magic Yeah, well let's let me take a minute here to talk about some of the the financial numbers that have all throughout this time and sort of how is nest doing today and how how did it? You know how was it doing sort of from 2014 on? You know, it's difficult to know exactly there's some there's some leaks that have happened so we know those things there's things we can infer by looking at the large percentage of Google's other bets category, which come from Nest Revenue. And so let's dive into those a little bit. So I mentioned there was a mark that Nest was supposed to hit that was $300 million a year in revenue.

57:31In 2015, they did hit that. They had 340 million in revenue as reported by a leak out of the division. And that includes the drop cam revenue. So a lot of people were speculating they probably weren't going to hit that alone, but having drop cam helped them sort of bolster and hit that goal.

57:48you know, things, it was an expensive division to run. It stayed very separately. They've got all this turmoil. So, you know, in 2016, they were looking to explore a sale. It didn't happen. So, okay, let's look at what, in 2016, 2017, what actually happened in the other Betts category. So, for the first nine months of 2017, It did quite well. The revenues grew by 45% and other bets up to 794 million and RxC and we're on pace to exceed a billion in 2017. It's pretty fair to assume that happened. And it was reported in 2016 that Ness had contributed about three-quarters of the other bets revenue. And while the other segments of other bets are growing, there's certainly nothing revenue generating on the scale that Ness does revenue generating. So you know, we... And YouTube is not...

58:42Not included in other bets, right? Correct. I believe that rolls up under Google. I think that's right now, but I haven't actually read Google's 10K in a while. I'm not sure if it's definitely not other bets, because it's a ton of revenue. At least as far as we could tell a year or so ago was about a break even business at YouTube.

59:04Despite the growth revenues, these businesses and other bets continue to lose money. Again, in the first three quarters of 2017, they reported 2.44 billion in operating losses and Google's operating profit rose by 20.

59:19by 20% to over $24 billion. So if you look at, you know, the other bets is losing $2.44 billion. Google's operating profit as an entire, you know, or actually just the Google division is $24.1 billion. So, you know, losing a colossal amount of money in other bets, you know, that's a largely attributable awaymo and a lot of the other sort of major R&D things they're doing. But, you know, I- You got to imagine this too. Yeah.

59:48Yeah, because there's three, four new products coming out at a pretty rapid clip here from Nest and a lot of hardware R&D to get there. But it is, we should look and say conservatively that Nest is doing over a half a billion in revenue now annually. And that's gotten better. And the last year, I think, looked really promising for them.

1:00:13They're starting to do more integration with Google Home, but they still feel largely like two separate ecosystems. And in fact, Nest, Nest integrates quite nicely with Alexa. And it's kind of an accessory to the, that's hilarious. Lady A bin. Yeah. Lady A. That's right. That's right. That's right. I woke her. But yeah, you know, I think.

1:00:36We'll get a lot into talking about the sort of vertical horizontal strategy there, but Nest products doing well is it contributing to the operating system of the home effort on Google's part, you know, TBD? Well, I mean, this is the perfect seg into the finally the end to the history and facts here, which is that in the first week of February in 2018, there is an announcement that Nest is getting acquired again.

1:01:06It's just getting acquired by Google, moving from the Holy Separate Division under Alphabet in the other Bet's category, being integrated back into Google as part of the hardware team led by Rico Estilo. And there's going to be much tighter integration now between Nest, all of its suite of products, and Google Home, and everything that's an Android and everything that's going on, going on from a hardware standpoint within Google. Interestingly, So Matt Rogers, the famous co-founder, who actually seems like a really awesome dude, was he stayed at Nest throughout all of this. The day after that announcement, he announced that he was leaving. So he'll now be leaving Nest, and both founders are gone, and it'll be fully within Google. He's transitioned to a full-time investor, right? He's going to be an inventor.

1:01:57I think that's the plan for now. Now interestingly, Tony. So when Tony left left Nest back in the summer of 2016, he resumed where he was before starting Nest. He moved back to Paris. So he and his family moved to Paris. And he's been very vocal that he's going to live in Paris indefinitely now. He has started his own venture investing practice with his own money. He hasn't raised any outside money called Future Shape. And he's all in on Paris and very, he's given a bunch of interviews, very, very anti-silicon valley. And you can sort of imagine that. I mean, he's had such negative experiences with the biggest companies in the valley. So it would be super interesting to see how this all plays out. He's funding companies in Europe and in the US and in the valley. Some of his portfolio companies have had

1:02:53run-ins and fights with Apple, with Google. So he's still very much part of the season. Been hanging out in Paris. Wow. Leave the gloves on, but just hang out far away from the fight. Yeah. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:04:44So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right, acquisition category. All right, let's. This this one might be even harder to harder to tell than the history and facts here. Yeah, I mean, so what it comes down to for me is what Google said they were going to do and what they did. And so.

1:05:12You know, I mentioned earlier in kind of foreshadowing my feelings about this. Mass of amount, you know, 2.35 billion of the 3.2 billion of the purchase price was attributable to synergies. You know, we believe that, you know, we'll combine these businesses in some way and it'll bolster our existing business. So when you start walking through Google's existing business, it is we make a ton of money on search ads because when people have intent to do anything on the internet, then they go through Google and businesses pay the Google tax to acquire those people as customers.

1:05:51And so that's their business. It's to be horizontal and broad and touch as many people as possible and get as much data about all people as possible so that they can more effectively advertise to them. Google's core business, it's super different than Apple's business of making hardware differentiated by software that they charge a premium for, you know, it's not that business. Nest was making sort of the high-end hardware That's that Apple had made. I mean Tony came from that business understood that really well and So when I look at this this synergies it you would think that what they do with Nest is integrated into Google and help build that Corpus of data and that ecosystem of being a Google user so that they can better have their core business and advertise what they actually did was You know as a separate business unit for this long

1:06:48try and and hedge their bet and say where does our next you know multi billion or multi hundred billion dollar innovation come from maybe it's an Apple like business that exists next to a Google like business in this subsidiary portfolio called alphabet and it actually is not a synergy with the Google business that that you know feeds data in there and it's a it's the separate thing it is realizing Tony Fidel's vision but they flip flop back and forth on it so many times that I think that $2.3 billion was just super value destructive. If they were going to have Nest and do with Nest what they did, they should have acquired it for a couple billion less, or they should have gone harder at this strategy of synergy. So I'll say what they ended up buying was a business line and massively overpaying for it.

1:07:41Are you saying there's a vertical and horizontal issue here? Yeah, I mean, I think, to me, as I was thinking about this, like, and I believe me, we had a long time to think about it during that history and facts. I think the problem is that Google didn't really know what category they were buying when they bought it, right? And there's a compelling argument for each one, but make one and carry it out.

1:08:08Yeah, yep, yep. And if you think about how it started, this whole relationship started. Well, it really started when Yoki joined the company and Sebastian Thruon was turned on to what was going on here. And then when Sergei saw the prototype, and I think what it seems like that Google got excited about, rightly so, is this idea of this could be the next computing platform, you know, after, after smartphones. Right. And, and that probably was the right thing to get excited about. But I don't think they thought through, like, how to, what the right way to attack that is. And I was thinking about this, like, the parallels between the Google Nest acquisition and the Facebook Oculus acquisition are, like, really apt, I think, because in both cases, like, what was, what was hot at the time were these

1:09:05You know, quote unquote, Facebook style acquisitions of we're going to buy these promising companies. We're going to let them be independent. We're going to give them a ton of runway, you know, the Instagram style, the WhatsApp style. But I think the difference is like those worked because fundamentally those are not.

1:09:23platform companies like those are networks and services built on top of computing platforms but what Oculus and what Nest were trying to do they were trying to build new computing platforms and when you're trying to do that when you're trying to be a you know a full full stack hardware software, OS company along the lines of Google or Apple. You need as much resources as possible and you need like the best engineers in the world and the best product people. And if you, you know, there's a hardware element, the best folks there too. And so I think leaving them separate was kind of like not realizing the best vision. And now you see like Oculus is now integrated into Facebook.

1:10:06And that's, of course, now integrated back into Google. I think if you're going to make a platform play, you've got to have the resources of a platform company. Yep. And there's one thing when I was doing research for this, there's a Stratechray quote that's like just too fricking spot on not to use because it's a brilliant framework. So if you think about, if you think about what Amazon did with Alexa, like they just, hang on, I got it, let me turn her off.

1:10:36If you think about what Amazon did with Alexa, they said there's gonna be a home operating system, and there's gonna be a center control point for that, and we believe it's gonna be voice, and so we're just gonna build the central controller, and then there's a whole ecosystem around it, and they just went right through the middle.

1:10:54Right? They said, this is it. This is the heart and soul of this thing. This is the digital hub. And when you look at what Google strategy was, we don't know exactly how that ecosystem will play out. We know there's going to be an operating system of the home. This feels like a good vector into it. But what they ended up doing was kind of...

1:11:11Creating the the side entry the same way that Microsoft wanted to own the living room And so they created a gaming console that that fit into an existing market and tried to branch out from yeah And so Ben Ben Thompson's quote in in Stratekery, which I think is just a brilliant brilliant point is in any new market It pays off to simply aim for the sweet spot Amazon echo is unabashedly trying to be the key interaction point for an automated home Nest is more of an attempt to slide through the side door and it's so It's such a simple way to think about it. If there's an existing market, you have to figure out how you're going to flank and an attack from where you think the market is moving rather than where it is today and then Trojan horse your way into it. If it's a brand new market, smart home people have been trying to make a smart home for 30 years and it just hasn't happened. We're in this era now with IoT in the home that

1:12:05It's it's finally here. It's a reality. And this is the the timing is exactly right to do it. And so if you're going to do it, then just aim right up the middle, create the center control point, you'd be the bundler. And then, you know, then you own the ecosystem. And I think it's easy to say now by a couple of, you know, pundits who do a podcast, but like the the really hard to see at the time and Google did sort of this side entry strategy, and now is doing the Google Home thing so they're going for the central control point. But years later, lost a lot of market share, lost a lot of ecosystem development, and in fact, Nest their own thing is integrating with their biggest competitor who's out ahead in the lead. Yeah. Well, I think it's also like all of the history in fact is instructive here that like the way...

1:12:58If you're going for that straight down the middle, the new operating system and a new market, you need the restart, like startups are not best equipped to do that. You need the resources of a big company. I'm thinking like back to Tony when he was launching the iPod at Apple, like the iPod worked because of iTunes and the iMac and it was part of the digital hub, right? The iPod in and of itself, there were plenty of startup MP3 player companies of all types, but like Apple worked because it had the whole ecosystem and the operating system. And similarly, with Amazon and Lady A, I won't sit off here. With Amazon and Alexa, it was all of the divisions within Amazon that came together to build Alexa. One of my best friends from undergrad was

1:13:51was an early PM on Alexa. And they were working on it for years before the first Echo shipped. And he came from AWS and a lot of the team, a lot of the early Alexa team and Echo team came from that part of the company, not to mention the Kindle and the devices and then all of Amazon's whole ecosystem. It wasn't like we're going to make a point product. It was from the beginning like, you know, this is a, this is a computing ecosystem. Yeah. And so like for Google, and Facebook with Oculus to then buy these companies and leave them independent. To me is like when this is the goal is not the right way to do it. David, I think that's a great point. I was trying to think of counter examples and listeners maybe you can come up with some and email us acquiredfm at gmail.com.

1:14:37I don't actually, I was gonna make the point of like, what? Come on, startups can totally jump start an ecosystem. But a lot of times when you think about this, it is like the second or third innovation after a company already gets their foothold. It was when they started that ecosystem. You had a great point with the iPod. Even looking back with Microsoft, I mean, Windows was after they already had a strong foothold shipping docks on IBM PC and a variety of other PCs. Like, it's often the second or third swing is when you take a new ecosystem. When you build the platform, yeah, and look at Facebook and Google, which have certainly become platform companies in their own right, but their first products were network opportunities and network products really built on top of existing platforms, you know, on top of the web in both of their cases. Yeah. And it was only then after they had that, that they then turned it into a platform.

1:15:37And to put it into perspective too, how much getting this head start that Alexa got really gives them an advantage from Google Home. There was a 2017 report in September that there was about 20 million echoes that have been sold versus about 7 million Google Homes. Then over the holidays, Amazon announced there were tens of millions, so we should assume minimum 20 million sold over the holiday season. And so you're looking at, I don't know, 40 plus million compared to maybe 10 or 15. It's a pretty, you know, assuming they both keep growing on the same curve for a while and, you know, Google doesn't do something that is like totally 100% better and causes people to switch or to, you know, forget about Alexa, it feels like a winner has been defined here. And particularly, friends who went to CES this year said, freaking everything had a works with Alexa badge on it.

1:16:35Well, even Mike, you know, you're your lady that keeps activating in the background, right? Like you've got it all in Sonos in your house, you know? Well, yeah, the cool thing. So personally, I'm not willing to make the bet yet on like, uh, it's funny how like Sonos lets you hedge because they are going to be rolling out Google home. Um, you can, you can flip it back and forth between the two ecosystem. So I haven't committed yet. Oh, interesting. I didn't realize. Oh, yeah. Sonos has changed in their strategy. They decided to be Switzerland.

1:17:04Ah, interesting, but the Google Home on other devices isn't ready yet, right? I don't think so. And an AirPlay 2 isn't out yet either, so Sonos doesn't, it will start bundling in AirPlay 2. I'm assuming not Siri, but we'll be able to work in the Apple ecosystem a little bit. But it's interesting, like it's such an important head start for Amazon and Alexa, right? Like right now, they're the only game in town for third party computing devices to use the assistant. Totally. Totally. Yeah.

1:17:34Interesting. All right. Well, I feel like related, you know, what would have happened otherwise is kind of in this camp. I think the interesting thing for me to think about is like, would any of what we just talked about have been different in terms of category and strategy if let's say that Sergei had gotten his way and acquired Nest in 2011 when it was still so young. Yeah, and it didn't have a strong Well, I mean, already had Fidel. It's not like it didn't have a strong culture of its own. But maybe then maybe Tony and Matt would have become leaders within Google. Yeah. Well, here's the thing is like what we glanced over is like the the innovation for the home was voice. Like hands down that that is the that's the bundle point for the home. Yeah. And

1:18:25Nest wasn't there. Like Nest was doing this very cool smart internet-connected appliances thing, and they'll, you know, they're, let's say they developed 20 or 30 of those. Like, at what, how long would it have taken for Nest to realize, oh, the center of locustic control is putting a voice thing in the middle of the home? And Amazon figured that out. And of course, Google had Google Assistant on the phones, and Siri existed on iPhones. But like, actually, it wasn't Google Assistant. It was, whatever, the okay, Google thing.

1:18:53The Amazon was really the one to realize that that's how we win the home and so I'm not sure that either acquiring Nest earlier or bundling Nest into Google instead of keeping it as its own thing earlier would have necessarily yielded Google producing the Google home one or two years earlier Yeah, although this is I was just thinking about this and looking back on my notes to make sure I got the history right If Google had acquired Nest in 2011, it would have been a very similar playbook to when they acquired Android in 2005. And Android, if we remember our history and facts correctly, when Andy Rubin was running it as a start-up, the vision was not phones, but to be a Linux-based operating system for digital cameras. Which sounds really nice. They had the right technology and the right, you know,

1:19:49market, but the wrong approach to it. And then it was within Google that it has got reshaped to become Android. We know today. These general magic guys are like 90% of the way there, but just need a form factor pivot. Clearly, none of them can exist as independent companies. I don't mean that as a dig like they've done amazing things. But I think it's all part of the same theme though, right? Like when you're talking about building a platform, it's just so hard to do it as an independent company.

1:20:19Well, you know at the very least I would say buying it earlier There's two ways that this could have gone better for Google buy it earlier so you pay less money for it and then you can execute a similar strategy or Bundle it in with Google and just have one strategy and understand exactly what you're building and why Rather than then sort of making a separate new business line bet on it. Yeah, I don't know The question I have no data on is like, what happens to Nest if Google doesn't buy them? And maybe, I mean, it would, well, they were raising that big funding round. So they probably wouldn't be able to continue. Sure. But do they come out with an Alexa Google home type thing? Like do they, do they figure out how to be the ecosystem in your home? Or do they just become the best peripherals to integrate with someone else's ecosystem?

1:21:12It's hard to do without AWS or Google Cloud Engine on the back end because so much of the voice interaction is driven by the server side, you know, I don't know. Tech themes. All right. Tech themes. Let's do it. Okay. So my first tech theme, which is just reminded me, this whole thing as I was thinking about it reminded me so much of is the famous, the famous quote, the Steve Jobs quote, which he stole from I'm flanking Ben, you're going to remember the guy you stole it from, but, you know, if you really care about software, you care about hardware too. Yeah, the Alan Kay quote, you know, when you're talking about, when you're talking about computing platforms, like, it's not just software, it's not just hardware, it's not just services, it's all three altogether. And I think that's like, to my mind, a big thing that like, who knows if nested remained independent if it could have gone after all that? But,

1:22:13It was too focused on just the hardware and not enough on the software and not enough on the services and not enough on the ecosystem altogether. That's a great theme. It's interesting too in the last couple of years how it's become not just hardware and software but hardware and services or hardware software and services. And I noticed services are effectively software just running on a different...

1:22:39piece of hardware then coming down to yours. But earlier, when I was saying Apple's business model is hardware that's differentiated by software, it's differentiated now by software and services. And it's so the game has changed and the table stakes are now all three of those when it was just the two when Alan Kay came up with a quote. Yep. Yep. That's my first one I got. And then the other one we've also talked about, which is in some ways I think you could listen to what we're saying here. And if you buy it, It could be discouraging for startups. But I think it's actually just more like a lesson about how to how to stair step as a startup, you know, to borrow another Ben Thompson term. Which is that you can't start with the platform in mind, but you can start with a product and a product that has a network effect. And then you can use that to then in the next generation, bridge in to.

1:23:34the platform. And you've seen this, I mean, again, this is how Google this Facebook started. As you pointed out, this is really how Microsoft started too. Apple as well, all of them. Netflix couldn't start producing shows without having previously cheaply gotten all the rights the other shows. And before that, have done the DVD distribution business to bootstrap the customer base. Like, you need to do a network effect product first. And then you can have a platform that you can build on top or adjacent to it.

1:24:02Yep, and I'm thinking again about snap right like we haven't talked talked about snap in a while, but We argue the degree of success here, but like I think the strategy was right like snapchat is a app with a very strong network effect And then can they they've built off that and then can they can they leverage that into becoming a broader platform? Like they tried with spectacles unsuccessfully. But I still think there's something to what they're doing with AR versus what any of the other big platform companies are doing. You could argue that they are the most successful AR company out there right now.

1:24:51and will they be able to stair step up? Sorry, anyway. Well, one for me was timing. I remember the first time I went and visited Microsoft before working there and when did I go 2010, 2011, seeing the smart home, and that was a thing that had existed for years and years and years, and there was always this promise of getting to the smart home, Many companies had failed at delivering on that over the years and One thing I've been sort of thinking myself is like why now like why is it actually coming to fruition now? Why are there Sonos with Alexa littered around my house and you know, I can unlock my front door with my phone and What is it that finally made it hit a tipping point where it's it's a real market now and Nest

1:25:47Nest nailed the timing. I mean, strategy'd be damned. And maybe their strategy was just be the best peripherals and not on the ecosystem. But you know, they really nailed it with, they were about six to 12 months ahead of when people really wanted this stuff, but they weren't five years ahead. And they're really starting to hit their stride, I think, with all the products that people want. Like, I don't think people, like people no longer move into a house and think, okay, I'm gonna go get an ADT security system. Like, people now, for the first time, and I think we're still in the early adopter phase, but it's like, well, of course I'm gonna get something that integrates with my, you know, whatever my ecosystem is. I'm not just gonna go with the status quo thing. So, I don't know, what do you think? Is it cloud computing? Is it, why now? Why today?

1:26:47Long silence. I don't know. I mean, this is why I'm trying to think in retrospect. I think we can look back on it and we can say sensors. We can say certainly the smartphone was a big part about that you can like control your nest from your smartphone and that existing because you wouldn't have cared before that you could control it from anywhere else because that anywhere else would have been like a website.

1:27:16Yup, and you know, I think one of the pieces of the positioning and functionality that Nest got really right was this idea of being a learning smart home device, not a smart home device. It learned from when you were home and when you were not home and all that stuff. So I think those are enabling factors, but I also think when Matt and Tony started working on this in 2010, nobody could have...

1:27:42See, maybe you could have seen the smartphone piece, but this is really what makes really great product-oriented founders is that ability to take some seemingly disconnected pieces, assemble it together, just like Tony did in the six-week consulting stint with Apple for the iPod and say, We can take these pieces, put it together. This is why the timing is right for now and why consumers will buy this. And it definitely works. They sold a lot of thermostats. And I think it's because of that vision. It's a good point. Any other tech themes? That's what I got for now, but I think that's a good second to creating. Yeah.

1:28:33I'm so negative on this. I don't know if anybody could tell. It's a fine business. It wasn't the big play. They started doing the big play pretty late and internally and centrally. They overpaid by a couple billion dollars for the small play. They created a lot of turmoil and PR stuff and internal politicking.

1:29:02I think this is a D. Yeah. Well, to me, think about grading. The biggest, the biggest opportunity cost here associated with this whole saga was being really slow to respond to Alexa. And like, I'm sure, you know, when Google Home finally did come out and was done primarily through Google and whatnot, you know, I mean, end of 2016, like, Wow, that's crazy late. Crazy late. I mean, not as late as the HomePod, you know, which is both late and terrible. It sounds like, I mean, good sound, but like terrible as a voice assistant. Hey, we'll see. We'll see. We'll see. Apple has a different strategy than Google and Alexa have here. So I don't know if it's right or wrong, but I think it's distinct enough where I don't think it should be what people are trying to make it out to be, which is like Apple releases their exact competitor with these guys.

1:30:03Right, right. Fair enough, but still, I mean, HomePod aside, Apple doesn't have a credible competitor to Amazon in this market, and it's got home either. You know, nor does Microsoft, nobody does. So, but arguably Google should have been... Is there actually a Cortana piece of hardware? Like there is actually some kind of thing. I just haven't... I said credible competitor.

1:30:28I'm sure Microsoft does have some sort of competitor. It's competing product, but yeah, I think again, it's impossible to know, right? But like to me, the biggest miss here is not the money they spent on Nest is not the corporate drama is not all this stuff. It's like, why did it take until November 2016 for Google Home to come out? Yeah. So I think I'm Sort of with you too on this one not because I'm gonna go agree with you on a D not because Nest is a terrible business not because Tony and Matt weren't super fact it's probably a good business. I mean, it's probably good business and yeah, and like the product Innovation is great, and you know, and I think they do have a really solid team there as we've talked about but like

1:31:27It's not where Google needed to be competing. Yeah. I mean, from a financial analysis perspective, like, I do wonder, it's probably higher than a D if you're like, if you just think about like, okay, in 20, if you in 2014 dollars, if you pay two point or 3.2 billion for something and presuming that their growth continues, like, when will that investment sort of pay back? And what will the, you know, if you look at it like out of 15, 20 year horizon, like, maybe it actually was a great investment, but I just think strategically for Google. Wrong bet. Yeah, a lot of wasted time. All right, well, there we are. There we are. Nest. Nest. In 90 minutes or less. Car routs. Car routs.

1:32:15So I started listening to my new favorite podcast this week. It is called Do Buy Friday and it is a weekly challenge show hosted by Merlin man Alex Cox and Max Temkin and Alex Cox and Max Temkin are from cards against humanity and Merlin man is the famed author of the productivity blog back in the day 43 folders. He's on a bunch of the sort of grubber talk show type type.

1:32:42podcast. He's hot dogs, ladies on Twitter. He's got another couple of shows. He's on a bunch of podcasts, but he's pedantic, quick, brilliant and like is very, very into like productivity hacking and tools and stuff like that. And it's like the podcast is hilarious. You'll get almost no utility value out of it, but it is like three very smart people who are very quick, who are You know, just talking about like a lot of the things that apparently make me light up. So, I highly recommend it if you like less serious versions of acquired with less content, less utility, but like a lot. It's just three people who really enjoy each other's company, and it's really fun to listen to.

1:33:31We're not that serious here on acquired. No, we've gotten more serious that you listen to the early episodes. Did they even like Google it? Yeah, now we're the opposite of that spectrum. Well, give us some feedback in the Slack. Tell us what you think. That sounds awesome. Also, Merlin Mann, what a great name. He's so good. Oh yeah, it's an amazing name. He's got his vocabularies as good as his name. He listened to it and you come up with just awesome ways to express feelings that you didn't realize you had. Well, my car belt is a article by Mark Erics in the California Sunday magazine, which I didn't even know was a thing till I found this link. But this is an incredible art piece of reporting. It's very, very long, but it's called a kingdom from dust. And it's about, it's about

1:34:29the farming industry in Central California. And in particular, one farmer farming company, the wonderful company, which makes, I think about 65% of the world's almonds and pistachios and pomegranates that like palm juice remember that stuff, like they make that a bunch of other brands and Halo, there's a little mini Clementine oranges things. Oh, yeah. You buy them with a little cardboard box. Yep. Yep. They make those. And it's just this super, super in-depth piece about like the history. This, this couple, it's a husband and wife who owns it. They live in Beverly Hills. They had nothing to do with farming before they started buying up all this stuff. The environmental impact of everything, particularly through the drought in California. And like

1:35:21It's insane the amount of water that goes into, well, first off, Central California is a desert. So all the water is either piped in from snowmelt or other parts of the state, or essentially mined from the aquifer below the earth.

1:35:36and the amount of water that goes into one year's worth of almonds in the Central Valley could be enough water for San Francisco for a decade. And yet, so it's this really good piece of this husband and wife and company have done a lot of good things for the community there and a lot of philanthropy. So it's very ambiguous. I feel like the author set out to write a very negative piece.

1:36:05And there are very negative aspects of it, but like it's a very nuanced balance take. So really, really good long read if you're looking for something about California and history and water. Wow. Cool. I also check it out. Yeah. Well, I think that's all we got. Yeah, I think I think this might be our longest episode, but you know, a storied history.

1:36:28at Apple, Google, Nest, and basically talking about sort of what is the next frontier, like what is the next multi-hundred billion dollar business? It deserves the time. Indeed. Alright listeners, now is a great time to talk about one of our favorite companies, Statsig.

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