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It seemed like a match made in high-tech heaven. Nest Labs was hatched in 2010 in a Palo Alto, California, garage by Tony Fadell, a former Apple executive who played key roles in developing the iPod and the iPhone. Fadell’s notion of the next big thing was an intelligent, communicative thermostat that could launch the era of the so-called smart home. He quickly gathered angel funding, led by legendary Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers. In 2014 the investors sold Nest to Google for a cool $3.2 billion.

“We felt it was a fair price because Google was getting arguably the best hardware team on the planet at the time,” says Rob Coneybeer, co-founder of Shasta Ventures, which joined Kleiner Perkins in Nest’s A-round funding.

Marrying that team to Google’s networking dominance and enormous financial resources to redesign the way we all live — what could go wrong? A lot, it turns out. Fadell, an alpha executive who acknowledged to the New York Times that he “pushes people beyond what they thought they could achieve,” had an ugly public spat with one key subordinate, then semipublic friction with a new chief financial officer at Google (formally renamed Alphabet Inc.), who pressed him to shorten Nest’s so-called runway to profitability. Two years after the acquisition, he was ready to quit. He left the company in June.

Meanwhile, Nest experienced bugs in its second big product, a smoke detector that had to be recalled when regulators found it could be disabled accidentally. While the first mover stumbled, competitors including Amazon.com, Apple and Samsung Electronics Co. woke up to the potential of the smart home. The current consensus among the technorati is that Amazon has jumped ahead in this potential multibillion-dollar market by inviting the outside world to build hardware around its Alexa voice-command system.

“The market is still in a very nascent and fragmented state, but Amazon is the dominant player today,” says Werner Goertz, who covers personal technology for tech consulting firm Gartner.

Nest and its parent, Alphabet, are hardly out of the running on the smart home. But Nest’s tumultuous first six years are a cautionary tale for institutional investors seeking return from unfolding technological wonders. While Silicon Valley remains a seemingly inexhaustible well of innovation and implementation, portfolio investors struggle to catch the lightning of that innovation in a bottle of stable profitability, whether directly through innovators’ share offerings or indirectly through acquisition by existing public companies like Alphabet. There are so many ways for the brightest to stumble — through the vagaries of visionaries’ egos, the relentless efforts of rival geniuses, or simple wrong guesses in an endlessly evolving domain.

Venture capitalists can live with multiple failures thanks to the huge killings they make from their successes. Institutional investors, which access companies later in their development cycles, cannot. “The economics of my business allow me to succeed less than 20 percent of the time and still deliver extraordinary returns,” says Randy Komisar, the Kleiner Perkins partner who oversaw his firm’s stake in Nest. “Investors in public markets just can’t afford that.”

Kleiner Perkins was the first and largest private investor in Nest, but Komisar admits to being a bit underwhelmed when Tony Fadell first pitched him. “After the iPod and iPhone, I thought he could do very grand things,” he says. “When he presented a round thermostat, I was a bit disappointed.”

By 2010, Fadell, now 47, had a reputation as one of the Valley’s most potent secret weapons. Raised outside Detroit, he had headed west after graduating from the University of Michigan in 1991 with a computer engineering degree. Fadell got a job at General Magic, a wireless communications pioneer founded by renegade Apple engineers. His colleagues there included established tech legends like Andy Hertzfeld, a founding father of the Macintosh personal computer, and legends-to-be like Pierre Omidyar, who not long afterward started eBay.

“Tony was a leader fresh out of undergrad,” recalls Peter Nieh, another General Magic alumnus, who two decades later invested in Nest as a partner at Lightspeed Venture Partners. “He was an incredible engineer combined with a provocative thinker. If Tony was starting a company to do food trucks, we would have backed him.” Fadell himself declined to be interviewed for this article.

Fadell left General Magic after its 1995 IPO but continued to focus on the budding field of networked devices. He created a business unit to focus on palmtop computers for Dutch electronics giant Philips, then in 1999 formed a company called Fuse. There he tinkered with a portable digital music player to capitalize on the burgeoning MP3 file-sharing movement. (Free-music pioneer Napster launched that same year.) Fuse failed to raise sufficient venture capital funding but found a home within Apple, where Steve Jobs made Fadell chief of the iPod group in 2001.

Over the next seven years, Fadell proved his mettle at Apple as both an innovator and an administrator, overseeing massive hardware development efforts for the iPod and early generations of the iPhone.

“I saw Tony drive teams on time and on budget over very tight schedules for dozens of product versions,” Komisar says. “The work he did at Apple was critical in transforming it from a computer maker to a consumer products company.”

At Nest, Fadell soon convinced Komisar and his other investors that his little round thermostat held the seeds of another lucrative revolution. It was a “Trojan horse,” in Komisar’s phrase, for a rethinking of the world’s living spaces, spurred by cutting-edge artificial intelligence and networking science. Smart home is the domestic front of the much-touted Internet of Things (IoT). Sensors that allow inanimate objects to see what is around them, machine learning algorithms that teach them how to sort out what they see, and communications links to other, similarly clever objects — all are supposed to be hurtling us toward a world of self-repairing cars and factory-floor robots that order their own inventory, to name two examples.

Some early smart-home products may seem whimsical, like the Samsung Family Hub fridge — unveiled this year and priced at $5,000 — that can report remotely when its owner is running low on milk. But an intelligent thermostat like Nest’s can have a significant, immediate impact on energy use and costs. The device’s sensors can, among other abilities, correct for the effect of winter sunlight warming a thermostat while the rest of the house stays cold. Constant communication with a utility’s computers allows the homeowner to draw energy in cheaper, off-peak periods and save it for the peaks.

Fadell leveraged his Apple experience to make his device simple and attractive, well aware that 90 percent of homeowners do not bother to program their thermostats because the process is too complicated. “Tony and his team had a complete, maniacal focus on this single product,” investor Coneybeer says. “They bought hundreds of thermostats and put them up on a fake wall in the office. They spent hundreds of hours visiting people in their houses to see where the thermostats hung.”

Still, the real promise of Nest was the opportunity to set the protocols and standards that future smart-home inventions would conform to, as the iPhone did for the universe of mobile apps. Some of those applications are envisioned but not yet developed, Gartner’s Goertz says. These include smart-sprinkler systems that integrate soil moisture readings and weather forecasts to irrigate the garden more efficiently, and monitors for the elderly that can call for help if the wearers’ blood pressure spikes or they take a fall. Other innovations presumably remain unforeseen — as Fadell himself could not have foreseen Uber Technologies when he was helping to create the iPhone in the mid-2000s.

Nest started with a clear head start as the hub of this far-­reaching ecosystem. “It’s 20th-century thinking that you’re investing in companies and their products,” says Michael Schrage, an author on innovation and a research fellow at the MIT Center for Digital Business. “What you’re investing in now is great platforms.”

Fadell and his junior partner, Matt Rogers, who had worked on his team at Apple, did not let their venture capital investors down. Though sales figures remain confidential, the Nest thermostat moved out of the garage and into mass production by October 2011, and by now it is an established fixture on hardware store shelves. A second product, the Nest Protect smoke and carbon monoxide alarm, rolled out in October 2013. (One nifty feature: It shuts down its home’s boiler and furnace in the event of a perceived fire.) “They were performing like a Swiss clock,” Komisar recalls. “This was one of the fastest-growing product companies we ever had at Kleiner Perkins.”

Nest was not shopping for a buyer, Komisar and other investors say. But Fadell had an informal bridge to Google founders Larry Page and Sergey Brin via Bill Maris, then chief of the company’s Google Ventures investment arm, which had taken an early stake in Nest. The high-powered trio began to schmooze periodically as Nest tested its market muscles. Buyout talks heated up toward the end of 2013.

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