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Google’s $3.2 Billion Acquisition of Nest is a Big Win for Silicon Valley Venture Capitalists, Signals Search Giant’s Increasing Presence

On January 13, 2014, Google announced it was purchasing Nest Labs, known for making “smart” home thermostats, for $3.2 billion. ((Rolfe Winkler & Daisuke Wakabayashi, Google to Buy Nest Labs for $3.2 Billion, The Wall Street Journal (Jan. 13, 2014, 6:46 PM), http://online.wsj.com/news/articles/SB10001424052702303595404579318952802236612.)) The acquisition was Google’s biggest since a 2012 purchase of another hardware maker, Motorola. ((Rolfe Winkler & Daisuke Wakabayashi, Google to Buy Nest Labs for $3.2 Billion, The Wall Street Journal (Jan. 13, 2014, 6:46 PM), http://online.wsj.com/news/articles/SB10001424052702303595404579318952802236612.)) The US Federal Trade Commission approved the deal in early February. ((Kwame Opam, Google’s acquisition of Nest wins FTC approval, The Verge (Feb. 6, 2014, 5:05PM), http://www.theverge.com/2014/2/6/5387326/googles-acquisition-of-nest-wins-ftc-approval.))

Google’s purchase of Nest produced exceptional returns for several Silicon Valley venture capital firms that had invested in Nest. ((Yulia Chernova, Google to Buy Nest Labs for $3.2 Billion: ‘Fantastic’ Return for Investors, WSJ Venture Capital Dispatch (Jan. 13, 2014, 5:18 PM), http://blogs.wsj.com/venturecapital/2014/01/13/google-to-buy-nest-labs-for-3-2-billion-fantastic-return-for-investors/.)) Venture investors have already invested about $145 million into Nest since its founding in 2010. ((Cromwell Schubarth, Google’s $3.2B Nest buy is blockbuster for venture capital firms, others, The Business Journals (Jan. 14, 2014, 11:52 AM), http://www.bizjournals.com/seattle/blog/techflash/2014/01/googles-32b-nest-buy-is-blockbuster.html.)) Google’s $3.2 billion acquisition price is about twenty-two times the total amount invested. ((Cromwell Schubarth, Google’s $3.2B Nest buy is blockbuster for venture capital firms, others, The Business Journals (Jan. 14, 2014, 11:52 AM), http://www.bizjournals.com/seattle/blog/techflash/2014/01/googles-32b-nest-buy-is-blockbuster.html.))

One big winner, venture capital firm Kleiner Perkins Caufield & Byers, saw a return of about $400 million from their $20 million investment in Nest. ((Adam Satariano, Google Buying Nest is Cozy Deal for Ventyre Firms, Bloomberg (Jan. 14, 2014,4:04 PM), http://www.bloomberg.com/news/2014-01-14/google-buying-nest-is-cozy-deal-for-venture-firms.html.))  Google’s own venture capital arm, Google Ventures, was also an early investor in Nest and retains the earnings it made with the parent company’s purchase. ((Adam Satariano, Google Buying Nest is Cozy Deal for Ventyre Firms, Bloomberg (Jan. 14, 2014,4:04 PM), http://www.bloomberg.com/news/2014-01-14/google-buying-nest-is-cozy-deal-for-venture-firms.html.))

The acquisition may signal a bullish market for technology hardware, and make it easier for hardware entrepreneurs to raise capital moving forward. ((Josh Constine, Who Gets Rich From Google Buying Nest?, TechCrunch (Jan. 13, 2014), http://techcrunch.com/2014/01/13/nest-investors-strike-it-rich/.)) Seeing the high acquisition price Google paid for Nest, venture investors may be more likely to seek investments in other hardware startups in hopes of seeing similar returns. This potentially makes investment pitches an easier sell for startups as well. Viewed along with the growing popularity of “smart wearable’s,” hardware makers, beyond just the traditional smart phone companies, appear to be on an upward trend.

Google, certainly, has been bullish of late; they are even setting up a new office space just for engineers coming to them through their recent acquisitions. ((Kukil Bora, Google to Set Up New Office in San Francisco To House Engineers Who Came With Recent Acquisitions, International Business Times (Feb. 18, 2014, 12:48AM), http://www.ibtimes.com/google-set-new-office-san-francisco-house-engineers-who-came-recent-acquisitions-1556241.)) Google Ventures has been one of the driving forces behind Google’s recent growth. Other than its early involvement with Nest, Google Ventures has invested in about 200 startups, including a recent investment in the car service, Uber. ((Carlos Watson, Nest: In the Belly of the Google Whale, OZY (Jan. 17, 2014,), http://www.ozy.com/c-notes/nest-in-the-belly-of-the-google-whale/4910.article; Leena Rao, After $258M Google Ventures And TPG Investment, Uber Hires Finance, Business, And Growth Execs, TechCrunch (Sept. 3, 2013), http://techcrunch.com/2013/09/03/after-258m-google-ventures-and-tpg-investment-uber-hires-finance-business-and-growth-execs/.)) While Google is synonymous with Internet search, Google Ventures has become one of the most active venture capital firms in the country. ((Joe Levin, Google Makes Another Top Three List…For Venture Capital, Android Headlines (Feb. 14, 2013), http://www.androidheadlines.com/2013/02/google-makes-another-top-three-list-for-venture-capital.html.))  In fact, even though the fund was only started in 2009 it has been involved with 127 deals in the last three years alone. ((Jeremiah Nelson, Google Ventures, Capital, and Moonshots Secure Google Top Deal Maker Spot, Android Headlines (Feb. 12, 2014), http://www.androidheadlines.com/2014/02/google-ventures-capital-moonshots-secure-google-top-deal-maker-spot.html.))

Google is much more than a search company now, and plans on becoming ever more integrated in our lives. The technology giant has physically moved into the home with its acquisition of Nest and has designs on expansion into healthcare, finance, and online learning. ((Jeremiah Nelson, Google Ventures, Capital, and Moonshots Secure Google Top Deal Maker Spot, Android Headlines (Feb. 12, 2014), http://www.androidheadlines.com/2014/02/google-ventures-capital-moonshots-secure-google-top-deal-maker-spot.html.))

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