Finance Your Business Like Bill Gates and Michael Dell

A long-held notion in entrepreneurial circles is that the way to start and grow a thriving business is to come up with a great “idea”, write a great business plan, raise capital from angels or VCs, flawlessly execute the plan, and (Voila!) get rich! But that’s not how Bill Gates and Michael Dell got started.

Microsoft’s Customer-Funded Origins
At the dawn of the personal computing revolution, Gates and his buddy Paul Allen had the insight that the new-fangled PCs being developed by dozens of companies, including Ricoh and IBM, would be all but useless unless they had operating systems – software – so their users could tell the PCs’ hardware what to do. The long-time friends knew they were among the few who had the skills to write the software that the hardware makers needed.

One PC-maker after another, Gates and Allen signed contracts to develop (or sometimes buy and adapt!) the operating systems software, on pay-in-advance terms. Because the hardware makers paid them in advance for a significant chunk of the work, Gates and Allen had the necessary cash they needed – their customers’ cash! – to hire additional programmers to carry out their growing workload.

Eventually, they figured out that, while doing pay-in-advance services work, one contract after another, was attractive, selling application software – Microsoft Word, Excel, and so on – in shrink-wrapped boxes was even more attractive. So they transitioned their software services business into a product business.

John Mullins, Associate Professor of Management Practice, London Business School

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