The Bill Gates Capital Play

In 1975, Bill Gates and Paul Allen read about the Altair computer in Popular Electronics. The Altair was a sub-$400 computer, available for hobbyists around the world. Bill Gates quickly realized the Altair would create a bunch of new enthusiasts looking for software.

The Best Capitalists Don’t Gamble

Rather than getting a loan, buying an Altair, and programming and building a product, Gates contacted the owner of the business making the Altair. He said he was building a high-level interpreter (BASIC) for the new processor at the heart of the Altair. Would he be interested in meeting?

Only after Bill Gates had secured a meeting with the owner of Altair did he begin building a program. And he didn’t buy a computer to build on. Instead, he used computer time at Harvard to build his commercial software. Because the processors at Harvard were of a different architecture, he had to write his code within an emulator. In one week, he built a broken project, without complete functionality.

At the meeting, Allen demonstrated the software. He got a contract from the owner of Altair to build BASIC for $3,000. Microsoft also received a royalty payment for every copy of BASIC sold.

They Utilize Someone Else’s Capital

Later on, Microsoft won a court battle against the owner of Altair. They won the rights to sell BASIC on their own, to the Altair’s direct competitors.

Altair paid Microsoft to build software, and Microsoft ended up selling to their competitors.

Double Down With Bigger Agreements

Five years later, IBM came to Microsoft and asked about building software for their new IBM PC. Gates discussed possible features, and agreed that BASIC should be an integral part of the new PC.

When the conversation steered towards an operating system, Gates recommended  CP/M, then the most popular operating system on the market.

However, the creator of CP/M refused to sign a non-disclosure agreement. So IBM came back to Gates and asked Microsoft to build an operating system for their PC platform.

Use it To Buy Existing Solutions

Bill Gates went out and bought a copycat CP/M operating system built in six weeks by a single person. Microsoft worked out some of the kinks, and presented it to IBM. They loved it. But what happened next is what makes Gates a genius businessman.

And Retain All Rights

So Gates ended up with the rights to sell the software IBM paid to have created. This meant all the cheaper PC clones would need to buy a copy of his software. DOS went on to more than double sales for Microsoft that year alone. Sales in 1980 went from $7 million to $16 million by 1981.

This growth happened again without risking significant capital. There was no big gamble, because the development costs were already paid for by their first customer.

Personal Morality vs Business Morality

Why don’t businesses have social responsibilities? If they’re an invention by man, shouldn’t they serve best his interests and his goals? Shouldn’t we be able to create corporations which channel capital and manpower into something more than just relentless pursuit of profit?

This was something I struggled with my first few businesses. It seemed to me that, if I could think of a smart enough way, I could both build a business which both maximized profits and maximized goodwill returned to society.

I quickly learned that markets don’t respond primarily to morality, or goodwill. In fact, often times it’s quite the opposite.

Corporations cannot behave according to common human morality, because they are accountable to different systems. They must create profits simply to continue existing against entropy. Understand, they must maximize profit in the way we must breathe.

Granted, some corporations market themselves as being good for the environment, as being good for their employees, and as being good for their suppliers. This is really an excuse to charge a premium and maximize profits.

But let’s pretend we’re really serious, we want to change the world with compassionate corporations.

Here’s my question:

What makes you think you know what’s better than an entire world full of people choosing where to spend their dollars?

We have representative governments to impose moral order on the market.

As a business person, you need to have a second set of morals. Your business morality should look to profit maximization above all else.

Because the market doesn’t tell you the ways people imagine a fair world should work.

The market tells you the way the world actually works.

The beauty of the market is its amoral nature. We aren’t accountable to other people’s ideas of what we should be spending our money on.

Understand, when McDonald’s competes for your dollar, it is competing against hookers, drugs, and booze. Any morality it emanates has been engineered to extract more profit.