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.