Silicon Valleys, Mountainous Valuations

Google recently acquired Nest, a smart thermostat maker with $300 million in revenue and no reported profit for 3.2 billion Though Google can afford a high price and high valuations aren’t uncommon in Silicon Valley, purchases like these illustrate how cozy the Valley is and how that coziness contributes to such high prices. Nest was founded in 2010; according to the S&P Capital IQ the company launched three initial investment rounds during which it hoped to raise $150 million in funds. Nest, despite decent sales (reported to be just over one million since 2010) may face difficulties in market penetration—the majority of thermostats are sold through home furnace and air condition repair services, which have longstanding relationships with well-established companies such as Honeywell (a company currently pursuing litigation against Nest for intellectual property violation). Consumers are unaccustomed to self-installation of devices such as thermostats; though Nest boasts its easy-to-install/easy-to-use nature, it is difficult to imagine swaths of average American consumers trading in the ease of repair service installation for a sleeker, shinier thermostat. This large price tag will probably drive up valuations of other similar start-ups and tech giants scramble to find the next big thing within the realm of smart home devices/appliances.

Nest's "Smart" Thermostat

In Silicon Valley, it would appear that nobody wants to be the company that can’t keep up. Google is making a bet on Nest—a very large one at that—and this is nothing new in Silicon Valley, where we’ve seen Facebook shell out $1 billion for Instagram to keep Facebookers where they belong, Google purchase Waze for $1 billion to keep the navigation app away from Facebook, and Yahoo acquire Tumblr for $1.1 billion just to keep up with the social media-sharing Joneses. NYT Dealbook analyst/contributor Steven Davidoff recently elaborated on this trend, noting, "The purchases are driven by a venture community that must feed the beast. Their friends at the few dominant players in technology — Google, Microsoft and Facebook — are all trying to find the next big thing and have core products that are money machines. The money is redirected into these acquisitions that are add-on products with great hype, but are undeveloped. It all builds the Silicon Valley prestige, driving valuations higher." Everyone wins...until the concepts don’t, and the bubble pumped up by the soaring prices bursts. I encourage you to think back to when Yahoo bought broadcast.com for $5.7 billion in 1997, before the dot.com bubble burst, which led to a frenzy of overvalued acquisitions culminating in AOL’s infamous $165 billion dollar, deal with Time Warner. This deal is commonly known as the biggest mistake in corporate history.
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Brandon Nesfield