- Google announced Wednesday that it would reabsorb Nest, the smart appliance company that was running independently under Google’s parent Alphabet.
- The move calls into question what a successful exit looks like for one of Alphabet’s so-called Other Bets companies.
- Alphabet insiders have expressed confusion over the mission for Other Bets as key executives headed for the door.
Two-and-a-half years ago, Google made a radical move that shocked the entire industry.
It split itself up.
The hodge-podge of side projects and skunkworks that didn’t fit neatly into Google search and advertising business were spun out into their own separate companies, called “Other Bets.”
Those projects, which included everything from self-driving cars to delivery drones, were reborn as independent entities with clever new names and big dreams: Verily (life sciences), Waymo (self-driving cars) and GV (a venture capital firm that invests in early-stage startups), to name a few.
The hope was that one of these Other Bets would become the next multibillion-dollar tech company and help diversify parent company Alphabet’s revenue sources beyond Google’s digital ads business.
But this grand vision was always laden with some unanswered and uncomfortable questions: What does a successful Other Bet look like? When will one of those companies graduate from a mere “bet” to a winner that can stand on its own? Are they supposed to reach a point where they’re big enough to spin out into a separate company outside Alphabet with a separate board of directors?
In short, when does an “Other Bet” stop being an Other Bet?
I’ve spoken to numerous people across various Alphabet companies over the last year, and none of them had a unified answer for what an Other Bet success story should look like.
On Wednesday, the question was thrust into the spotlight when Nest, a company that makes smart home appliances, was stripped of its Other Bet status and reabsorbed into Google. Instead of going it alone, Nest (which Google originally acquired in 2014 for $3.2 billion) was going into the mothership.
I decided to loop back with some of those Alphabet insiders in light of the Nest news and get their thoughts. Nearly three years after the big Alphabet reorg, confusion remains. There’s little consensus about whether the Nest move represents the first sign of a reversal of the Alphabet strategy. But it’s clear that many insiders view Nest as the most overt example of significant shortcomings in the Other Bets blueprint which have until now played out more subtly.
Some current and former Alphabet employees have told me the structure has been good for Google. Google, under CEO Sundar Pichai, no longer has to worry about spending time and effort managing far-out projects like internet balloons and self-driving cars. It can concentrate on improving core products like search, Gmail, and Google Maps while investing in growth areas like YouTube, AI, and hardware. Google has had an incredible run since Alphabet formed under this new structure.
And the structure seems to have allayed pressure from antsy shareholders, worried that Google was spending too much money on fanciful projects.
But the benefits to the new structure stop there, according to many insiders.
An exodus of executives that speaks volumes
In 2016, about a year after Alphabet’s formation, a string of key executives left the company. Tony Fadell, the Nest CEO, stepped down in June 2016. Bill Maris, the CEO of GV, left in August 2016. Chris Urmson, the former tech lead of Google’s self-driving car division also left in August of 2016. Craig Barratt, the CEO of Access (Google Fiber) left in October 2016. And Dave Vos, the head of X’s drone delivery division called Project Wing, also left in October 2016.
The friction seemed to be that the heads of some of Alphabet’s Other Bets, or of divisions that were on track to become Other Bets, were frustrated by the Alphabet structure, according to some close to the company. They signed up with the promise of being CEOs running their own startups, but were instead constrained from the top by Alphabet’s CFO Ruth Porat, who controlled funding, as well as by the whims of Google cofounders Larry Page and Sergey Brin.
It’s no coincidence that many of these departing executives went on to start their own companies. Urmson now has his own self-driving car startup called Aurora, and Tony Fadell is running a new VC firm called Future Shape that plans to back early-stage tech startups.
The vision of Alphabet was to create nimble startups, but many of the entrepreneurs tasked with leading these startups concluded that they had better prospects of accomplishing their goals outside Alphabet than within.
Make money or make an impact?
Complicating matters is the fact that the medley of Other Bets have different definitions of success, some of which have little to do with business fundamentals.
Take Jigsaw, an “incubator” within Alphabet that develops products to solve real-world problems like attacks on free speech by foreign governments. Laudable though they may be, the goals are broad and nebulous, based around achievements like having “impact” as opposed to creating products that make money. That alone is at odds with the notion that Other Bets are supposed to find a way to turn themselves into real businesses.
Then there’s X, the so-called “Moonshot Factory” that works on ambitious projects like wind energy and drone delivery. X’s mission is to “graduate” its ideas into real companies that benefit Alphabet. But even the projects that have already graduated from X are all over the map. Some graduates like Waymo, Verily, and Chronicle (a cybersecurity company) became new Other Bets under Alphabet. But other graduates, the geothermal energy company Dandelion and construction company Flux became a independent companies outside the Alphabet.
The big new revenue pool didn’t even come from an Other Bet
In the fourth quarter, Alphabet announced a major milestone in its quest to expand beyond advertising revenue —one of the main motives for creating the Other Bet companies. But the new source of non-advertising revenue, pegged at $1 billion a quarter, was not from an Other Bet. It came from Google Cloud, a business within Google itself.
Apparently the Other Bet strategy is not the most efficient way to create a new multi-billion dollar business.
As for Nest, Alphabet’s decision to bring the smart appliance company back to Google has been well received. One Nest employee told me this week that the move will help Nest better compete with the likes of Amazon and Ring in the connected home space. Plus, there weren’t any layoffs. All Nest employees will continue to work on the same stuff. (However, Nest’s cofounder Matt Rogers is stepping down soon, a sign he may have wanted to see Nest succeed on its own like all those other top Alphabet executives who left in 2016.)
For Nest employees, it’s a happy ending, even if it’s one that doesn’t answer the question of whether their project’s life as an Other Bet was a success or a failure. For the other Other Bets, and for Alphabet’s overall vision, the lesson of Nest is less reassuring: There is no cohesive strategy. Many of you will fail. And the definition of success is constantly shifting.
This column does not necessarily reflect the opinion of Business Insider.