On March 13, 1986, Microsoft shook up the financial world, and to some degree, we are still feeling the reverberations from that 40 years later. That was the day of Microsoft’s very successful IPO. The hunt for the next Microsoft began immediately, leading directly to the dotcom bubble of the turn of the century.
How big was Microsoft’s IPO?
Microsoft’s IPO initially valued company at $21.00 per share. It raised $61 million for the company, and put its market capitalization at $777 million. The price peaked at $35.50 per share before settling to $27.75 at the end of the day. Microsoft expected it to take weeks to reach $27.75. Bill Gates owned 45% of the company’s stock, which meant on March 14, 1986, he was worth almost $350 million. He had not yet turned 31. The next year, he became the youngest person to become a billionaire, before he had turned 32.
Why Microsoft waited so long
Founded in 1975, Microsoft was an 11-year-old company at the time it went public. They waited so long because Bill Gates wanted to maintain control over the company as long as he could. By 1986, Microsoft had to go public. This wasn’t because they needed money. Their profit margins were enviable, at 34% of their pre tax revenue. Microsoft didn’t need the $61 million the IPO raised.
The reason Microsoft had to go public in 1986 was because Bill Gates had been using stock to attract talent. Microsoft projected that by sometime in 1987, they would have 500 shareholders, which would require Microsoft to register with the Securities and Exchange Commission, effectively turning them into a publicly traded company, but without the benefits of going public in the conventional way.
Backed into this corner, Gates agreed in late 1985 to pursue an IPO.
Why was Microsoft so profitable?
Motley Fool greatly oversimplifies Microsoft’s early years, as do others. They’re better at SEO than analysis. Microsoft’s best known products in 1986 were PC DOS and MS-DOS, the text-based operating systems for IBM and IBM-compatible PCs. In 1986, Microsoft Windows existed, barely, but wasn’t yet successful.
Microsoft’s secret was that virtually every computer on the market was running some Microsoft product. Its operating system powered the booming PC market. But Excel was the most popular spreadsheet on the Macintosh. Its predecessor, Multiplan, was a reasonably popular spreadsheet on other platforms. Microsoft Word was an up and coming word processor. Microsoft Basic was one of the most popular programming languages, and ran on virtually every platform.
Sometimes Microsoft licensed software on a royalty basis and sometimes for a flat rate up front. Getting the flat rate up front shielded Microsoft from losing profits to piracy early on. But once Microsoft could afford to risk some loss to piracy, it was more profitable to take a royalty per unit sold. There were 60 million IBM and IBM-compatible PCs sold in the 1980s, and Microsoft collected a royalty on virtually every single one. Then in 1991, it discovered it could sell new versions of MS-DOS as upgrades and make money on each unit sold a second time.
When Windows 3.0 hit the market in May 1990, the game was essentially over. Microsoft could sell you an operating system, a graphical environment, and versions of Word and Excel that ran in that environment, all running on commodity hardware that was getting cheaper by the quarter, if not the month. Although it would be a few years before other companies would give up, a monopoly in operating systems and office suites was inevitable before 1990 was over.
The more successful Microsoft became, the more afraid of failure and anticompetitive it became. This led to legal issues in the late 1990s. Microsoft reformed to a degree and is more tolerant of certain competing products continuing to exist than it was in the 90s.
Today, Apple, Amazon, and Alphabet (formerly Google) are larger than Microsoft, but the four companies are the only technology firms in the 2024 Fortune 20 list. The fifth largest technology firm is Meta, the social media company everyone loves to hate, at #30.
The legacy of Microsoft’s IPO
To this day, young ambitious people enroll in school to get technical degrees in hopes of becoming the next Bill Gates, and venture capitalists like Kevin O’Leary and Marc Andreessen (himself a cofounder of a failed dotcom) prey on them. These ambitious programmer/entrepreneurs rarely get rich, but the venture capitalists have figured out how to make money even as the businesses they fund fail.
Today’s entrepreneurs would do well to note that Microsoft made minimal use of venture capital. Microsoft’s only VC only owned 6.2 percent of the company. Gates didn’t trust them.
If you’re thinking of trying your hand at being the next Bill Gates, keep that in mind.
Another direct consequence of the Microsoft IPO was the dotcom bubble of the late 1990s and the subsequent recession. Fear of missing out on the next Microsoft drove up the value of anything tech- or Internet-related. Investors believed the next Microsoft would come out of that generation of companies. In the end they were kind of right. Two companies from that wave ended up matching and eventually eclipsing Microsoft. But it wasn’t exactly clear until a few years after the dotcom bust that Amazon and Google would be the ones to do it. Short-lived randos like VA Linux, Geocities, Cyberrebate, and Internet America were able to come along for the ride while the market shook out.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.