How to Make $200 Million in 28 Months

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Photo: H. Armstrong Roberts/Corbis

Last week, a company called SmartThings sold itself to Samsung for $200 million. On the face of it, nothing about this is unusual — tech companies sell to bigger tech companies all the time, and $200 million is, believe it or not, a relatively modest sum as these things go. But the SmartThings sale caught my attention for two reasons. First, I know SmartThings — I wrote a story a year ago about testing their home automation kit in my house. Second, as I watched the company in the months after that story came out, it occurred to me that they were following the start-up playbook to a T. Every move they made seemed expertly calculated to grow, get attention, and eventually cash in.

Let SmartThings be a lesson to you, aspiring tech entrepreneurs. If you want to start a tech company, and sell it for $200 million just over two years later, here's how to do it:

1. Solve a big problem that looks like a small problem.

In 2012, a technology executive named Alex Hawkinson had a flood in his Colorado vacation home that caused $80,000 worth of damage. That isn't exactly alert-UNICEF material, but it is really annoying — think of all that ruined West Elm! So Hawkinson decided to make a system of sensors that would alert him, via a smartphone app, if water accumulated in his house from hundreds of miles away. Thus SmartThings was born. The company eventually expanded into an entire line of sensors, all linked through an app, that could help you keep tabs on your belongings and control them from afar. A home automation kit was the perfect balance of serious innovation and whimsy — not too dry and boring, not too frivolous and useless – and it turned out to be useful for much more than just avoiding floods. With a SmartThings kit, homeowners could build their own home security systems for much cheaper than an off-the-shelf system, create environmentally-friendly automated light systems, and more. It was a big deal masquerading as a gimmick.

2. Get VIPs to feel like they've discovered you.

SmartThings was a Kickstarter sensation, raising $1.2 million and meeting its goals many times over. But, since it was based in Washington, D.C. rather than San Francisco, it didn't really catch the eye of Silicon Valley's investor corps until it won the start-up competition at the Dublin Web Summit. Conferences like these are attended by venture capitalists and angel investors — in other words, the kind of people who worry about $80,000 floods in their vacation homes — and many of them doubtless returned to their offices raving about this exotic, under-the-radar company they'd discovered. A month later, the company had raised $3 million more.

3. Dwell among buzzwords.

Hawkinson's timing was impeccable, given that the so-called "Internet of Things" — the jargony tech phrase that means, basically, the idea that all the appliances in your house will one day talk to each other — was quickly becoming one of the hottest areas in consumer tech. Everyone wanted in on Internet of Things, and SmartThings got itself included in many of those early conversations. Its early employees also gave themselves buzzword-heavy bios, like: "Jeff is a 'Cloud CTO' that strongly believes in the importance of Cloud-based services as an enabler of time-to market, scalable architectures, improved and more mature service level agreements, and competitive advantage." Cloud-based services! Scalable architectures! That is the winningest Start-Up Bingo card ever. And by establishing themselves as leaders in the emerging Internet of Things sub-sector, Hawkinson and Co. ensured they'd have a seat at the table when the real action started.

3. Be a platform, not a product

Early on, SmartThings made the best decision of its life by opening up its technology, and allowing other manufacturers to build things on top of its software. Products don't sell for hundreds of millions of dollars; platforms do. Becoming a platform meant that SmartThings didn't have to spend time and money making tons of hardware — it could outsource that work to other companies and just be the thing that tied them all together. And having dozens of manufacturers locked in to designing SmartThings-compatible gadgets gave the company a moat that prevented bigger, richer companies from easily taking over their space.

4. If possible, be a nerdy, amiable white man.

This one is uncomfortable. But it's true! If you want to be the CEO of a mega-successful tech company, sadly, it still helps to look like Alex Hawkinson. I mean, just look at him. Doesn't he just look like he should be swimming in venture-capital dollars? Don't you just want to throw a term sheet in his general direction?

Photo: Michael Nagle/Bloomberg via Getty Images

(Hawkinson also has the advantage of being a genuinely nice, intelligent dude, with a long list of qualifications and a 15-year track record in the cloud-computing business. But this isn't a prerequisite to success. Assholes with no experience sell their companies all the time.)

5. Give good demo.

SmartThings' advantage over, say, a big-data analytics platform is that it's easy to show off. Put a sensor on your door, and you can get a notification on your phone when that door is opened. Plug your lamp into a SmartThings outlet, and you can turn that lamp on or off with a simple tap of an app. The way SmartThings works is Jetsonian enough to feel futuristic, but simple enough for the average person to understand.

Put another way, it's catnip for tech writers who want to wow their readers with an exciting yet relatable glimpse of the future. And dozens of tech writers wrote about Hawkinson's demo house, which he'd had rigged with 300 SmartThings sensors. (Bonus points for Hawkinson's choice to rig up his home system so that it played Marvin Gaye and dimmed his bedroom lights when his kids were in bed — an edgy, sexy-time detail that few publications could resist mentioning.)

6. Intimidate the giants, then play hard to get.

While SmartThings was charming the media, it was also being circled by big companies like Apple, Google, and Samsung, all of whom saw the potential of the Internet of Things and were worried about being beaten to the punch by a small upstart. SmartThings had wisely set up partnerships with companies like Philips, Belkin, and Sonos early on, which enabled those companies' devices to run on SmartThings' platform. And when Apple announced that it was building HomeKit, a SmartThings-like platform, it upped the ante for Apple's competitors to build or acquire something similar.

Meanwhile, Hawkinson was playing it cool. When asked by Business Insider if he wanted to sell SmartThings to a larger tech company, Hawkinson said it wasn't a going concern:

BI: Would you be open to an acquisition if it came along?

AH: It’s not at all on my mind right now. Never say never in business generally, but right now we have a lot of interest in the company, I’ll say, and we believe that just generally right now it’s best to stay independent because we find that the market place wants a truly open platform in this space.

Translation: you can buy us, Samsung, but you're going to need to shell out some serious cash.

7. Get really, really lucky.

None of the things SmartThings did are a guarantee of success. It's not like they planned to build a platform for the Internet of Things just as the Internet of Things was becoming the obsession of tech mega-companies, or get out ahead of Apple and Google just in time to bring Samsung to the negotiating table. All of tech M&A these days is basically random dart-throwing, and Hawkinson just so happened to be in the right place when the darts were thrown.

There are other ways to build and sell a company for hundreds of millions of dollars in the span of a few years, but it's hard, and Hawkinson and the rest of SmartThings' executives and advisers did all the right things, and got filthy rich as a result. Start-up wannabes: This is how it's done.