So a few years back Nest was the up-and-coming home automation company. It had an amazing thermostat that was designed like Steve Jobs’ designed Apple products, and a fascinating smoke detector. Google (now Alphabet) got so excited that it bought the company and amazing things were expected, but nothing really resulted. Now the founder has left, it has bled an impressive number of employees and Alphabet’s effort to create an Amazon Echo competitor called Chirp has been pushed to a new redundant Nest-like division. Folks are writing Nest’s obituary so what happened?
In effect it wasn’t a competitor that killed them. It was largely Alphabet. So Alphabet pays billions for an innovative company because Alphabet can’t innovate itself and instead of the firm driving innovation into Alphabet, Alphabet kills the innovation in Nest. Let’s talk about how that happens this week.
How to kill a company with cash
Years ago, as part of my duties as an internal auditor, I ran an acquisition clean-up team. Back then and now the most common way to do acquisitions was to force conformation with all of the rules the acquiring company had, including management structure and span of control (the number of people that each manager is required to have under them).
Now startups don’t have a lot of cash so they largely pay their people with stock or stock options, which are pretty much worthless in the early days of the company. As a result, people work on shoe string salaries or even for nothing in the hope that the firm will be bought or go public and that worthless stock will make them rich.
There are a huge number of problems with this foundation. One is that when people suddenly get a huge amount of money they aren’t as motivated to keep working,and many have enough to retire. In addition, the huge payday also makes it clear to the folks that joined late that if they want a huge payday like their peers got they need to join another firm earlier so they too can get rich.
We used to see secretaries who were there at the start make a lot more than vice presidents who were more recent hires and there is nothing that demotivates an executive more than seeing someone they think of as entry-level getting paid a ton more than them.
So you get a combination of the acquiring firm destroying whatever unique structure the acquired firm had that made it attractive in the first place. Then that influx of cash given to a critical number of key employees either gets them to quit or retire and demotivates the people who didn’t get that cash.