A New Look At Microsoft’s Startup Story, With Insights For Today: Microsoft @ 50, Chapter 2

Microsoft co-founders Paul Allen, left, and Bill Gates with an array of personal computers in the early 1980s. Microsoft’s decision to make software, rather than produce a PC of its own, defined its business in its early years. Gates and Allen recreated this photo years later — see below. (Microsoft Photo)

Editor’s Note: Microsoft @ 50 is a year-long GeekWire project exploring the tech giant’s past, present, and future, recognizing its 50th anniversary in 2025. Learn more and register here for our Microsoft @ 50 event, March 20, 2025, in Seattle.

Bill Gates needed a coat.

It was November 1980. Ronald Reagan had just defeated Jimmy Carter in the U.S. presidential election. Barely 25 years old, Gates had been running Microsoft for five years with his childhood friend Paul Allen. Steve Ballmer, the future Microsoft CEO, had joined a few months earlier as “Assistant to the President.”

Microsoft had grown to about 50 people since moving to Bellevue, Wash., from Albuquerque in 1979. The IBM Personal Computer was a year away from hitting the market, and Microsoft was scrambling to come up with a 16-bit operating system — what would become MS-DOS — for a computer that would emerge as a defining machine of the PC revolution.

Gates was deep in the code, and the business, and not the smaller details of life or the weather. The brisk fall day caught him by surprise when he showed up for a University of Washington game at Husky Stadium in a t-shirt. 

David Marquardt offered Gates his sportcoat, and the rest is history. 

A tech investor with a background in mechanical engineering — and a regular at Silicon Valley’s legendary Homebrew Computer Club — Marquardt had already met with Ballmer to start exploring the possibility of investing in the company. As a follow-up, Ballmer set up a meeting with the Microsoft co-founder in the Gates family’s box.

“We really didn’t watch much of the game,” Marquardt recalled in a recent interview. “He spent a lot of time [writing] on the back of the program, outlining his compiler architecture and what he was doing with the company. It was a very technical first meeting — not a lot of small talk.”

Around that time, Microsoft’s annual profit was $2 million to $3 million, on about $5 million in revenue. Technology Venture Investors (TVI), where Marquardt was a junior partner, later became Microsoft’s first outside investor, putting in $1 million for a 5% stake.

“So it was a $20 million valuation, which everyone told me, that’s ridiculous, paying four times revenues for a software company,” Marquardt said. “Anyway, it worked out.”

It sure did. Five years and a few months after that football game, on March 13, 1986, Microsoft went public on the New York Stock Exchange, closing its first day of trading at a market value of more than $500 million. The company is worth more than $3.1 trillion today.

For this second chapter in our Microsoft @ 50 series, GeekWire spent the past month revisiting Microsoft’s early years, from its founding in 1975 to its IPO in 1986, exploring some of the same questions we consider in our startup coverage today. What made the company a success? What was the key to its business model? What were its biggest challenges and mistakes?

We interviewed former employees and others from that era, dug through our own reporting archives, and found long-lost nuggets in books and historical records, with a little help from AI. 

For starters, that scene at the football game offers an insight for modern-day startup investors. Note that Marquardt wasn’t pushing Gates about business growth, or the path to an IPO, like other venture capitalists were at the time. As an engineer and early believer in PCs, he was genuinely interested in the technical nuances of what Microsoft was building at the time.

“We spoke the same language,” Marquardt recalled. “We kind of hit it off.”

But what else defines Microsoft’s startup story? Here are our takeaways.

Microsoft targeted a nascent market with huge potential. 

Focus defined this startup. It wasn’t just Bill Gates’ ability to focus intensely on code, to the point that he often neglected to comb his hair or grab a coat. It was also Microsoft’s overall focus on software as a business.

As a company launching at the dawn of the PC revolution, Microsoft could have gone into the business of making computers. But software was a more natural course, considering the expertise that Gates and Allen had developed starting out as kids at Lakeside School in Seattle. 

A plaque on the Microsoft campus commemorates the launch of BASIC for the Altair, the company’s first product. Click to enlarge. (GeekWire Photo / Todd Bishop)

It was also a savvy business move, making Microsoft’s total addressable market equal to the broader world of personal computers. It began with their BASIC interpreter for the Altair 8800, the machine that Paul Allen spotted on the cover of the January 1975 issue of Popular Electronics magazine. And it took off with the proliferation of PCs, thanks to a non-exclusivity clause in the IBM contract that let Microsoft sell MS-DOS to other PC makers.

 “That not only gets it the IBM PC business, but it also is a platform that can be cloned — and it isn’t a closed ecosystem,” said Margaret O’Mara, a University of Washington historian whose book, The Code: Silicon Valley and the Remaking of America, chronicles the rise of the modern tech industry. “So it just creates this market that turns out to be globally dominant.” 

Publicly, Microsoft’s vision was, “A PC on every desk and in every home.” Inside the company, of course, people would add the phrase, “running Microsoft software.”

Over the decades, Microsoft has expanded into hardware, from the Microsoft Mouse to modern-day Microsoft Surface computers, and even its own data center processors for training and running AI models. But this early focus on software set the company apart. 

The company had the courage to defy conventional wisdom.

“Few people even thought there would be a distinct software industry,” Gates wrote in the book Inside Out, published by Microsoft on its 25th anniversary. We believed that computing power would be cheap, that there would be computers everywhere made by lots of different companies, and that software would be needed to take advantage of these trends.”

It might seem like a no-brainer today. But in the early years, it wasn’t at all clear that the bet on software would work out. Microsoft struggled at times to pay the bills — going so far as to borrow $7,000 in 1977 from a new hire, Bob Greenberg, to help make ends meet, as documented in Gates, the 1993 book by Paul Andrews and Stephen Manes.

“Just like a lot of startups, we were really early in a lot of things, but found ways to navigate through and persevere long enough, and eventually it all caught up,” said Steve Wood, a computer engineer who joined Microsoft in 1976, in a recent interview.

At times, it seemed as if the company had to bring the market into existence by sheer force of will, as demonstrated by Gates’ landmark  “Open Letter to Hobbyists” in February 1976.

Gates’ “Open Letter to Hobbyists” from 1976. (Click for full version, via Wikimedia Commons)

“As the majority of hobbyists must be aware, most of you steal your software,” Gates wrote, describing the work that went into writing, documenting, improving, and expanding the footprint of Microsoft BASIC. “Hardware must be paid for, but software is something to share. Who cares if the people who worked on it get paid? … Is this fair?” 

Questions about software as a business persisted for years, even after Microsoft found traction. 

Before investing in 1981, Marquardt faced skepticism from his partners, who had avoided backing software startups based on an economic theory of marginal pricing. Because the cost of producing another copy of a software program was effectively zero, this theory went, competition would push prices toward zero, as well, leaving little room for profits.

“And I didn’t believe that,” Marquardt said. “I thought the value was going to be in software, because that was going to be the bridge that was going to bring the masses — at least businesses at first, then eventually the masses — into the personal computer. So I got pretty excited about Microsoft, but it was a bit of an uphill battle to convince my partners to invest.”

Microsoft’s founding duo had complementary skills.

A common pattern among startup founders is sometimes described as the “dreamer/doer” or “hacker/hustler” pair. The combo of Steve Jobs (hustler) and Steve Wozniak (hacker) of Apple may be the best-known example from that era, but there are many others, as well.

Paul Allen and Bill Gates recreated their classic photo in 2013. (Living Computers Museum Photo)

Microsoft’s two founders fit this mold, with a slight caveat: Allen and Gates were both programmers with innate abilities to code and deep understanding of technology. But Gates was inclined to apply his ambitions to business, as well.  

In his second meeting with the Microsoft co-founder, Marquardt was struck by the fact that Gates seemed to know Microsoft’s competitors better than they knew themselves.

Allen was a student of the tech industry, in his own way, but he also pursued a variety of interests outside of work — immersing himself in science fiction and honing his guitar skills — ultimately achieving something closer to what we would call work-life balance today.

Wozniak and Allen had a lot in common, as they discovered during an event at Allen’s Living Computers Museum in Seattle in April 2017, less than two years before Allen’s death. 

“Woz and Paul had never met. They bonded completely, and spent the night talking to each other,” recalled Ed Lazowska, the longtime University of Washington professor, who arranged for Wozniak to attend. “The reason was, they were on the same side of that equation.”

Microsoft’s early years were marked by a hard-charging, argumentative, and at times dysfunctional culture. 

Entire books have focused on this topic, perhaps most notably Hard Drive: Bill Gates and the Making of the Microsoft Empire, by James Wallace and Jim Erickson, published in 1992, which offered many outsiders their first accounts of screaming matches inside the company.

Gates so frequently declared an idea the stupidest he’d ever heard that longtime Microsoft executive Paul Maritz would tell people not to worry, “because they weren’t going to hold the record for long.” Gates was also fond of saying that a piece of software was the worst piece of code he’d ever seen, and he could do it in 200 lines of BASIC over the weekend.

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This mindset translated into Microsoft’s larger approach, which ultimately contributed to the business activities that led to the landmark U.S. antitrust case against the company. 

The story of Microsoft’s early days is one of “getting on the launch pad as the rocket ship’s about to go off, but also being pretty aggressive in elbowing competitors aside — quite aggressive,” said O’Mara, the author and historian.

In addition, O’Mara noted, Microsoft’s early culture and approach reinforced and contributed to gender biases and homogeneity in the tech industry, which has had lasting impacts.

Relentlessness and vision are important, but the “high-octane, super combative culture” is not the right blueprint for startups today, O’Mara said. Yelling matches and arguments are “not necessary to build and ship great products or be an iconic tech company.” 

Of course, Microsoft has evolved and matured over the years in this regard. 

It’s also critical, O’Mara said, to recognize the importance of the larger team and the role of the broader community and tech ecosystem in Microsoft’s success. 

Gates did have a knack, at times, for tempering his temper with a sense of humor. Speaking with him for a 2008 newspaper interview, on one of his last days in the office before leaving his day-to-day role at Microsoft, I observed that he seemed to have mellowed over the years.

“Bullshit,” he responded, laughing.

Gates had a tendency to downplay Microsoft’s potential.

For all his ambition about software, and his belief in the future of the personal computer market, Gates preferred to keep the bar low when envisioning Microsoft’s potential, at least in his communications with others. This characteristic stands out in today’s startup world, when entrepreneurs might feel more inclined to talk in big terms about their prospects.

“It’s a funny thing — I think our dreams were a lot more modest,” Allen told me in a 2005 interview, reflecting on Microsoft’s growth on the company’s 30th anniversary. “We used to talk about how we might have dozens of employees back when we first wrote BASIC and brainstormed about having our own company, back in Boston.” 

Marquardt recalled Gates once developing a formula to prove that a software company couldn’t have more than $10 million in revenues. 

Gates continued this approach when it came time for Microsoft’s IPO.

Microsoft’s IPO prospectus from 1986. (Click for full version, via Internet Archive.)

“Bill was the only CEO I can ever remember who argued with the bankers to get the price down. He thought the valuation was ridiculously high,” Marquardt said. “He lived in this world of fear, like the world is coming to an end. You know, ‘Linux is going to kill us, Lotus is going to kill us.’ And they all had an opportunity to, but we managed to prevail.”

His competitive nature helps to explain this mindset.

“He always wanted to exceed expectations,” Marquardt said. 

In its product development, however, Microsoft was frequently willing to go out on a limb —  exemplifying the ethos of “fake it till you make it” in its promises to deliver BASIC to Altair maker MITS and MS-DOS to IBM, for example, before it had really started either piece of software.

Microsoft had a strong sense of place.

This may seem like an anachronism in today’s world of remote and hybrid work, but location was critical for Microsoft from the beginning — first its decision to locate in Albuquerque near MITS, and later its move to the Seattle region, where Allen and Gates grew up.

“Moving up here was a choice not only to come home, but also to get something of a competitive advantage in the job market for programmers,” O’Mara said. “If they had been down in California, they would have been competing with a lot of other startup companies.” 

There were startups in Seattle at the time, but not as many as in Silicon Valley. The move also allowed the company to tap into the pool of engineering talent emerging from the UW, from what is now known as the Paul G. Allen School of Computer Science & Engineering.

Microsoft first moved to Bellevue, Wash., before landing in its permanent location in nearby Redmond, where a massive campus redevelopment is still in progress.

The company capitalized on disruptions in technology.

Marquardt, Microsoft’s first outside investor, went on to co-found August Capital in 1995, and served on Microsoft’s board of directors for 33 years, from 1981 until 2014. 

Throughout its history, he said, Microsoft has seen its greatest success when it has taken advantage of “discontinuities in technology,” starting with the rise of the personal computer.

“If you look at it from an economic point of view, the only way that you can increase wealth and prosperity and reduce poverty, etc., is through increases in productivity,” he said. “Microsoft, through all these different generations, has figured out how to make people way more productive. … I think that’s the revolution that Microsoft drove from very early days.”

And it wasn’t done yet. In early 1986, as Microsoft prepared for its initial public offering, the company’s IPO prospectus hinted at another disruption on the way — a “graphical operating environment which runs on the Microsoft MS-DOS operating system.”

Coming next month: The story of Microsoft Windows, and where it’s headed next.