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What Nest's Funding Means for Hardware Startups

The smart home appliance maker is now valued at more than $2 billion, another indicator that hardware is hot.
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Nest Labs, the Palo Alto, California-based smart home device startup, is about to raise $150 million in funding at a valuation of $2 billion, according to the tech news site ReCode.

Who knew fancy thermostats could be such big business?

Founded in 2010, Nest previously raised $80 million in a Series C round. But this most recent investment, reportedly led by Yuri Milner's DST Ventures, is the biggest vote of confidence yet in Nest's brilliantly simple thermostat and smoke detector, and the company's potential to upend the rather staid and antiquated home electronics industry. The funding round and Snapchat-esque valuation also serve as yet another indicator that Silicon Valley is rekindling its love affair with hardware.

The secret to the success of Nest's rather unsexy hardware products is, of course, the software that runs them. Nest's thermostat is Wi-Fi connected, meaning its smoke and carbon monoxide alarm send notifications to homeowners' phones.

By combining smart software with sleek hardware design, Nest has become one of Silicon Valley's darlings in the unlikeliest of industries. However, the tide of hardware's popularity has been rising for some time. In late October 2012, Y Combinator co-founder Paul Graham wrote a blog post delineating the many reasons why hardware is becoming hot again. It performs well on crowdfunding sites, he wrote, and is aided by the spread of tablets, which can control that hardware. He ended the post encouraging entrepreneurs building tangible products to apply to Y Combinator, because, he wrote, "We're especially interested in hardware startups."

Last year's South by Southwest conference, often a good predictor of the next big thing in tech, was also chock full of panels about hardware's second coming. Last year also saw at least one major exit of a consumer hardware company, as MakerBot sold to Stratasys for $604 million. Meanwhile, perhaps the most buzzed about (and derided) tech innovation of the last year was a little hardware product known as Google Glass. It goes without mentioning that some of the hottest startups in Silicon Valley right now, which in addition to Nest Labs include companies like Leap Motion, Jawbone, and FitBit, are, in fact, dealing in hardware. 

Of course, the rising investor interest in hardware startups doesn't mean they're particularly easy to launch in comparison to software startups. In a blog post last April, Andreessen Horowitz's Chris Dixon had some wise words of advice for entrepreneurs on how to avoid common pitfalls hardware startups face: "As soon as you prove the market, you’ll face competition from lower cost manufacturers," Dixon writes. That's why successful startups like Nest make their software as critical as the hardware itself. Writes Dixon, "Think of hardware as bringing the revenue and software/services as bringing the margin."

IMAGE: Nest
Last updated: Jan 2, 2014




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