Yesterday’s Nest acquisition was unique in the respect that one of Nest’s four board members, Bill Maris, was a partner at the corporate VC arm of the acquirer, Google Ventures.
The other investor board member, Randy Komisar, was a partner at a KPCB, the Silicon Valley venture firm helmed by John Doerr, who was on the board of the acquirer, Google. The last two board spots were filled by the Nest co-founders, Tony Fadell and Matt Rogers.
Holy conflict of interest Batman! What a completely awkward situation for both Maris and Doerr. As an investor you want to maximize returns, but as a part of Google, wouldn’t you want to keep the price down for your parent company?
Google has been the acquirer of a Google Ventures funded company four times since the VC firm launched in 2009: Makani Power, Milk and Bufferbox. Nest will be the fourth if you count Bufferbox, which was so small that Google Ventures didn’t even know it was in M&A talks because it was grandfathered in as a personal Kevin Rose investment. Nest is one of the biggest, if not the biggest, Google Ventures Google exit to date.
In every case above, Google Ventures partners have recused themselves from M&A discussions, due to obvious conflicts of interest, and that was especially acute in the Nest acquisition because of the size of the deal (A whole Snapchat!).
With Nest, Google’s Maris took himself out of the game and left Kleiner’s Komisar to negotiate for the investor’s side when talks got serious over a month ago. KPCB held the majority of the investors’ share in Nest, and saw an over 20x return in this deal.
Back at Kleiner, John Doerr also excused himself from talking to Komisar about the talks, because of his Google board conflict (note: Kleiner owns no Google shares). So Komisar was a lonely puppy for a while.
According to co-founder Fadell, Google had been interested in nabbing Nest as far back as Google Ventures’ investment in 2011, but the discussions were never serious until this winter. We at TechCrunch had heard Apple was also trying to feather its nest with Nest around a month ago, whether that intent was “serious” or not.
For what it’s worth, Fadell told Fortune’s Dan Primack yesterday that he couldn’t discuss whether or not he had entertained an Apple buy, which likely means that he had, even if informally. I mean, he’s the father of the iPod. He’s not going to chat up his former colleagues?
But when it came time to sign away the company, Google was simply a better fit from a data standpoint. “Excitement from Sergey and Larry delivered a little extra confidence,” said one person familiar with the matter, citing that the deal was of the eBay “Buy It Now” sort instead of an all-out bidding war.
As Google Ventures is now completing two to three new investments per week and will have a brand-spanking-new $300 million fund as of this month, Google acquisitions of portfolio companies are just going to keep on happening. And the partners are trying their best to retain the mindset of a Sand Hill Road firm instead of one that resembles traditional corporate VCs like Intel Capital. “We get paid when we maximize returns,” one person said.
But there’s the question of how much revenue Google sees from a large Google Ventures return. Let’s say hypothetically that this deal returned a few hundred million for Google Ventures (if Google got 12.5% that would mean a ~$400M return minus carry). One could argue that if Google gets profit from Google Ventures, then Google bought Nest for a discount because it also sees the returns on the deal, a price of ~$3 billion instead of $3.2 billion, again hypothetically.
And unlike a Sand Hill VC, Google Ventures does advertise “Google access” as a portfolio company perk. According to a well-informed source, a Google Ventures investment will not make or break a potential acquisition, but yeah it might help — like the original intro that eventually led to the Nest buy: “Google is a part of our DNA,” they said, “I think that’s attractive.”
Image via Frank Gruber.