Inside Tony Fadell’s Struggle to Build Nest

At a November all-hands meeting for engineers at Nest’s Palo Alto, Calif., headquarters, co-founder Matt Rogers said he was “losing sleep” over an exodus of staffers—roughly 70 in about six to 12 months, out of its workforce of roughly 1,000.

Tony Fadell, the company’s CEO, interrupted, pointing out that many of those departing employees had come from either Google, which acquired Nest in early 2014, or from Dropcam, maker of connected security cameras that Nest bought in mid-2014. Mr. Fadell went on to urge employees who have a problem with the way Nest is run to step up, rather than take on a  “victim mentality.” Victims are “not long for the world,” he added, according to a recording of the meeting made available to The Information.

Rather than feeling victimized, current and former employees at Nest say they feel as if the maker of the Internet-connected thermostat and other smart-home devices has stalled. In the two years since the company was acquired by Google for $3.2 billion, it hasn’t released any new hardware products other than updates to its existing lineup. Sales in 2014 fell short of what Google and Nest expected, say several people with knowledge of the projections.

Its purchase of Dropcam, maker of Internet-connected security cameras, got caught up in internal squabbles over executive roles and new product releases. Products on the drawing board, such as security sensors that would detect people entering and leaving a home and a hub that connects those sensors and various household devices, are yet to appear. The company has changed course several times over three years on the heart of that system, a wireless hub codenamed Flintstone.

According to two people briefed on the matter, Nest’s owner Alphabet has put pressure on Nest to release the Internet-connected security system by the fall. Ana Corrales, Nest’s chief operating officer, said Alphabet and its main subsidiary, Google, are taking a hands-off approach and do not influence the company’s product road map. (For details of upcoming products, see accompanying story).

Hot Seat

In the hot seat is Mr. Fadell, one of Silicon Valley’s most recognizable names, thanks to his role in the development of the Apple iPod. Since he sold Nest to Google, Mr. Fadell has been treated to glowing magazine profiles that suggest he is the next Steve Jobs. His reputation attracted talented employees who had lofty ideas about the company’s future.

In an interview with The Information, Mr. Fadell acknowledged some management difficulties, which he said stemmed from the speed at which the company has grown. Growth “didn’t happen as dramatically at other places,” he said, referring to other companies he’s worked for, like Apple and Phillips.

He said that Alphabet was tightening the financial screws. “The fiscal discipline era has now descended upon everything.” Alphabet’s message is now “hey, show us your business plan for the year. We’re going to hold you to those numbers.” Mr. Fadell said Alphabet is putting the same pressure on all of its subsidiaries it dubs “other bets.”

Google and Alphabet declined to comment, according to a spokesman for both.

Mr. Fadell stressed that building products for the home was different than building consumer gadgets at Apple, where the company needed to release a new version once a year to stay ahead of the competition. “It’s not a consumer driven personal device. This is something you’re going to put on your wall. It’s going to sit there for ten to 12 years,” he said. “We’re so far ahead of the competition, it doesn’t require that.”

A Nest spokeswoman said the company updated four products in 2015 and released a new app that operates its thermostat, smoke alarm and cameras. It has also been building partnerships and working with developers to integrate with other connected home products. “We’ve been quite busy building out that platform,” the spokeswoman said.

A detailed examination of the past couple of years, based on interviews with numerous current and former employees, shows that at least some of Nest’s struggles with new products stem from decisions made by Mr. Fadell. Known for engineering and designing products, people who know him say that like his former boss, Steve Jobs, he pushes hard to infuse more features and sleeker designs into Nest products. All are installed at his vacation home near Truckee, Calif. The CEO often reports minor bugs and ideas for new bells and whistles.

But that relentless desire for improvements can cause delays, scrambling product roadmaps. That was true with Dropcam.

The idea for the Dropcam acquisition came from Google’s corporate development team a few months after Google completed its purchase of Nest. At the time, Dropcam was flying high, with sales growing 300% to 500% a year, albeit off a small base. Some of Dropcam’s investors argued against selling. At the time, in the spring of 2014, Dropcam was close to shipping a new security product called Tabs that could sense whether windows or doors had been opened. It was also working on an outdoor security camera, a product its customers said they were yearning to buy.

Dropcam co-founder Greg Duffy, though, said he was swayed by Mr. Fadell, whom he looked up to as a product pioneer. When Mr. Duffy and his co-founder, Aamir Virani, met with Mr. Fadell to talk about an acquisition, Mr. Duffy recalled, Mr. Fadell said the company had a long and crowded product road map. Some of those products would be shipping imminently, he added. Mr. Fadell also hinted at the fact that it might soon come out with its own camera if it did not acquire Dropcam, making it a potential competitor. Nest ended up paying $555 million for Dropcam.

Even before the deal was completed, the two sides discussed that Nest might kill the soon-to-ship Dropcam product Tabs, saying Nest’s own Pinna sensors were further along and had more features than Tabs, said people familiar with the situation.

A year and a half later, Pinna still has not been announced. Nest declined to comment on products that have not yet been announced.

Pinna has undergone design changes and also been bogged down in development delays of Nest’s security system hub codenamed Flintstone. The hub connects to the Pinna sensors, but it is also designed to allow Nest devices in the home to talk to non-Nest devices. But Mr. Fadell has changed his mind several times about whether to introduce a hub at all and how that hub should be designed, current and former employees say. In three years, with 130 engineers working on it, Flintstone has been killed or changed so many times that one former employee jokingly called it “Tombstone.”

Outdoor Camera

With the deal closed, Mr. Duffy wanted to go straight to work on new camera products. For instance, Dropcam had been planning to build an outdoor camera. But Mr. Fadell said he instead wanted to make changes to Dropcam’s popular indoor camera. These included adding a new stand, the ability to control the camera through Nest’s mobile app and integrating a so-called Thread radio, a wireless communication standard Nest had developed.

Mr. Duffy pushed back hard. He believed it would take nine months to accomplish those things—time that was better spent developing new products. Mr. Fadell thought it would only take three months, said a person involved in the talks.

Mr. Duffy lost the debate. The outdoor camera was put on the backburner. But it was a full year before the changes were added to the indoor camera, which was released in June of last year renamed the Nest Cam. Initial consumer reviews on Amazon were weak. A Nest spokeswoman said that was a result of Dropcam customers not liking how the camera was integrated into the Nest app. Over time, reviews improved and the product is now labelled a top seller on Amazon.

Other things about how Dropcam was run also frustrated Mr. Duffy. He remembers one meeting where a group of managers, including executives, spent hours in a room reordering the priorities, in minute detail, for individual engineers. Mr. Duffy found it an absurd use of time—like someone bringing a car into an auto body shop and telling the mechanic which parts of the engine to fix first. “The process was just utterly broken,” Mr. Duffy said.

In one meeting, Mr. Duffy witnessed Mr. Fadell berate a former Google engineer who was working on computer vision for the Nest Cam. The engineer began to explain the challenges in deciphering the different types of movement that might be captured by cameras.

In front of about 20 other people, Mr. Fadell blew up at the employee for getting off topic, Mr. Duffy recalled. Mr. Fadell told the employee to pull the algorithm from Photoshop, according to Mr. Duffy. He went on to question what the engineer had accomplished and to declare results had to be forthcoming or there would be trouble, Mr. Duffy recalled.

In Mr. Duffy’s view, Mr. Fadell’s Photoshop suggestion demonstrated that Mr. Fadell didn’t understand the technology he was trying to build and that the engineers working underneath Mr. Fadell didn’t feel empowered to forcefully push back when Mr. Fadell was wrong.

Through a spokeswoman, Mr. Fadell said he told the engineer to look at Photoshop, which offered a tool similar to what Nest was trying to accomplish, in order to learn how to implement the technology.

More than half of the 100 Dropcam employees hired by Nest have now left. In an interview with The Information, Mr. Fadell blamed the Dropcam team for the problems with the acquisition. “A lot of the employees were not as good as we hoped,” he said. It was “a very small team and unfortunately it wasn’t a very experienced team.”

A spokeswoman for Nest later said Mr. Fadell does not feel that way about Dropcam employees who are still at Nest.

Mr. Fadell said he hit the pause button on other projects after Dropcam was acquired and moved so many resources to the rebranding of the Dropcam that “we changed our product road map dramatically,” he said. “Things that were in flight, we decided we’ll leave those for another day,” Mr. Fadell said.

Seller’s Remorse

For his part, Mr. Duffy decided he had made a grave mistake by selling his company to Nest. “I felt like I had failed all the people who worked for me and all the customers,” he said.

Mr. Duffy, a geeky software engineer from Texas who had to grow into the role of Dropcam’s leader, is the polar opposite to Mr. Fadell, a polished corporate executive. People who worked at Dropcam say it was a place where everyone at the company, no matter how low they were ranked, felt comfortable sharing their views on products and their concerns about the company. Still, Mr. Duffy learned to be tough on people whom he felt didn’t perform at a high enough level.

About eight months into his tenure at Nest, at the beginning of 2015, Mr. Duffy sent an email to Mr. Rogers, his immediate boss, telling him that he was quitting. Mr. Fadell’s assistant began dialing his phone, frantically.

Mr. Duffy reported to Mr. Fadell’s office on the top floor of an office park in Palo Alto. Mr. Fadell was on the phone, pacing on the balcony, when Mr. Duffy arrived. When Mr. Fadell was done with his conversation, he addressed Mr. Duffy.

Mr. Duffy said he was embarrassed by the upcoming Nest Cam and by the other products that had yet to launch. “On top of that, I think you’re running this company like a tyrant bureaucrat and it's holding back all progress,” Mr. Duffy recalls telling him.

Mr. Duffy suggested he take full leadership of the camera division and operate with relative autonomy, answering to Mr. Fadell instead of Mr. Rogers but not ceding veto power to him over decision making.

Mr. Fadell told Mr. Duffy he could play a more involved role in decision-making, but there was no way he would put him in charge of the camera division, Mr. Duffy recalls. In fact, Mr. Duffy would not even be allowed to report directly to him.

“A lot of the employees were not as good as we hoped,” he said. It was “a very small team and unfortunately it wasn’t a very experienced team.”

Nest confirmed the exchange. “You can’t report to me because you haven’t earned it,” Mr. Fadell told Mr. Duffy, a spokeswoman for Mr. Fadell said.  

The conversation effectively ended Mr. Duffy’s tenure at Nest.

Executives at Nest say Mr. Duffy was to blame for some of the issues at Dropcam. Chief Marketing Officer Doug Sweeny, for instance, felt it was Mr. Duffy’s responsibility to get Dropcam employees comfortable working at Nest. “As the founder and CEO of a company who’s going to exit a company and do very well, it is incumbent on you to take care of your people,” he said. Mr. Sweeny calls Mr Duffy’s complaints a bit of “sour grapes.”

About the same time as he quit Nest, Mr. Duffy says he sent an email to Google co-founder and Alphabet CEO Larry Page, who is a close friend of Mr. Fadell’s. “I think product development there has stalled and it’s because of Tony,” Mr. Duffy says he wrote. “So let me know if you want me to help.” Mr. Duffy suggested one possible solution to a representative of Mr. Page: He, himself, would replace Mr. Fadell as CEO. Mr. Duffy never got a reply from Mr. Page, but the representative eventually told Mr. Duffy that Mr. Page had considered the offer but declined.

Mr. Duffy spent another seven months working for Google, where he hoped to work on a new project. He left last fall.

Necessary Pressure

Some staffers say that Mr. Fadell’s relentless pressure is sometimes necessary. When Nest was trying to determine how devices in the home would communicate with each other without using too much power, Mr. Fadell insisted the company come up with a new wireless communications protocol rather than settle for an existing one that wouldn’t work as well.

“I remember him looking at this big spreadsheet that had all of the pros and cons of these protocols. He was like, ‘They’re not good enough. They’re not good enough!” said Maxime Veron, Mr. Fadell’s head of hardware product marketing.  “We were like, what? We’re trying to push our second product out the door and you want us to invent a new protocol and make it open? This is insane.”

Working day and night for six months, the teams built Thread. It was painful at the time, but Mr. Veron believes it was the right decision for the consumer. “We couldn’t have done it with hugs and kisses. You needed a good kick in the butt.”

Nest executives say they are improving the management at the company. Whereas its culture has been one of micromanagement and strict governance from the top, the new company motto is “Step Up,” a phrase plastered throughout the headquarters as encouragement for lower-down employees to take initiative and not wait for approval from on high.

“We’ve grown from a place where Tony could make every decision” says Mr. Veron. In its early years, Nest employees “could literally all huddle in the same room and discuss things.” he said, and casually get Mr. Fadell’s input on things.

But over time, Mr. Veron and other executives noticed that the practice of getting Mr. Fadell’s approval on every little thing lingered even as the company grew. “It became very clear a few months ago that we have to, on purpose, defuse that,” Mr. Veron said. So late last year, the company “had a whole Kumbaya,” where the key message was “step up,” he said.  “We have to really make people realize that we trust you to deliver on your piece,” he said.

But change happens slowly. In at least some cases, some employees felt the smallest decisions still had to be run by Mr. Fadell. In those situations, when employees suggested changes to a product, the response from colleagues was that Mr. Fadell had already signed off and they didn’t want to have to go through the approval process again.

Exodus

Dissatisfaction among employees crystallized with a rash of departures starting in the spring of last year and leading up to the November all-hands meeting. More are expected to leave, now that many of the stock options owned by early employees has vested, two years after the Google acquisition.

Mr. Fadell says employees simply weren’t ready for the changes about to happen as the company rapidly expanded. “Do the people underneath me and underneath underneath underneath, do they understand that?” Mr. Fadell said. “There’s one which is the captain of the ship, but does everyone else know what their jobs are? And that’s really the difference that we have here versus other places,” he said, again referring to his days at other companies.

Chip Lutton, Nest’s general counsel, said Mr. Fadell is accessible to employees who understand the company's culture. “People who care enough to understand how Nest works and to try to be a part of it know how to get additional information in front of Tony and have it contribute to his thought, and he is open to that,” Mr. Lutton said.

A Nest spokesman said Mr. Fadell is hosting bi-weekly “lunch and learns” with small groups of people at the company, where employees can address issues. He also answers anonymous questions at company-wide all-hands meetings.

A Is for Alienated

When Google announced it would become “Alphabet,” a holding company for independent technology companies, Nest was hailed as one of the primary beneficiaries of the new structure. It could use Google’s resources to help develop new gadgets under Mr. Fadell’s independent leadership.

But as Nest has delayed the release of products, Google has moved forward on similar efforts of its own. It built the OnHub, a wireless router that performs some of the functions that Nest’s Flintstone was at one time meant to perform, including a hub and thread radio.

In a statement, Mr. Fadell said that OnHub was an example of a “collaborative effort between the two companies.” He said it didn’t initially include Nest technologies such as its Thread wireless radio “but once the team at Google understood the benefits, they included the technologies in the final product.”

Separately, Nest asked to be included in a secret Google project to create a competitor to Amazon’s Echo, a voice-controlled personal assistant device. But the Google executive in charge of the project, which has not been reported on publicly until now, said Nest would not be involved in its development, according to a person with knowledge of the discussion.

A spokeswoman for Nest said the company works with Google on various projects, but declined to comment on the Echo competitor specifically.

Stress at the Top

The relationship between Messrs. Fadell and Rogers goes back to their days at Apple, where Mr. Rogers said he earned Mr. Fadell’s respect with his willingness to bring his tireless work ethic to unglamorous roles others avoided.

In the company’s stealth days, it was Mr. Rogers who was the face of the operation, with employees referring to Mr. Fadell cryptically as “The Jeweler,” a reference to the company's habit of using precious stones as the codename of some products. 

Now, in an interview, Mr. Rogers acknowledged his health is suffering due to the stress of the job. In meetings where Mr. Rogers is present, Mr. Fadell will sometimes make clear he holds Mr. Rogers accountable for problems such as delays in product releases.

One example was over Project Goose, a new feature that tracks Nest users’ locations with their mobile phones and other indicators. The information is used to tell the thermostat to turn on and off based on whether people are home, which can increase energy savings.

The team working on Project Goose was running into problems, but the news moved slowly up the management chain. At the last minute, just before Project Goose was scheduled to launch, Mr. Rogers decided to delay the release. When the news was presented to Mr. Fadell in a meeting, he was livid, according to a person with knowledge of the meeting. He told the head of Goose team that his group was broken and needed new leadership. The Goose team had come up with a contingency plan to delay the release of the feature, but Mr. Fadell refused to accept it. The feature must be released on time, he said.

“Matt, this is on your head,” Mr. Fadell told Mr. Rogers.

In the interview, Mr. Rogers said as the vice president of engineering, “it is my responsibility to deliver on time. It’s also my counsel to delay for a variety of reasons to get more testing data. It’s the right thing to do. I stand by my decision.”

Mr. Rogers said “it’s [Mr. Fadell’s] job to push,” he said. “Being an executive is not for everybody,” he said.

Mr. Fadell says he isn’t immune to outbursts of anger, like the ones Steve Jobs was famous for. “I ask for things, and if I don’t get what I ask for and I don’t have really good reasons why I’m not getting it, what happens?” But he says he’s different from Mr. Jobs in that he also rewards excellence. When presented with a great idea, Mr. Fadell says he responds the following way: “Oh my god, that’s awesome! We should be doing that!”

Mr. Fadell attended Mr. Rogers’ wedding last year. Afterward, Mr. Fadell ordered Mr. Rogers to cancel his month-long honeymoon in June, Mr. Rogers confirmed. A spokeswoman for Nest said it was a critical time at the company: Nest was announcing a refresh of its entire product line. When Mr. Rogers refused, Mr. Fadell told him that if he went, he wouldn’t have a job when he came back. Mr. Rogers went anyway. Mr. Fadell did not follow up on his threat.

Mr. Rogers likened their relationship to a marriage. “In all long-term relationships, you have your spats. Especially in design, when things are inherently subjective, you have tension. But you work the tensions out,” he said.

—Amir Efrati contributed to this article.