Hotmail Sold to Microsoft for $400 Million 18 Months After Launch

In 1995 email usually came with a job or an internet subscription. If you changed employer or provider, your address went with it. Sabeer Bhatia and Jack Smith, two engineers who had studied at Stanford, wanted to write to each other privately without using their employer’s system. Their answer was email that anyone could open through a web browser, for free, from any computer.

Bhatia had come to the United States from India and studied at Caltech before Stanford. He and Smith scraped together about $4,000 to build a prototype, TechSpot reports, and went looking for investors. The venture firm Draper Fisher Jurvetson put in $300,000.

July 4, 1996

Hotmail launched on July 4, 1996. The date was chosen on purpose: Independence Day, to symbolize freedom from email tied to an internet service provider. The name included the letters of HTML, the language of web pages, and was originally written HoTMaiL.

The competition was large. TechSpot notes that America Online, the biggest email provider of the time, had 12 million subscribers.

The line at the bottom

The marketing idea came from the investor. According to Adam Penenberg’s book Viral Loop, excerpted by TechCrunch, Tim Draper wanted every message sent from Hotmail to end with a short pitch: “PS: I love you. Get your free e-mail at Hotmail.” Bhatia and Smith resisted. They did not want to add anything to their users’ private messages.

Draper kept pushing. In the end the founders agreed, without the “PS: I love you.” Every email a Hotmail user sent now carried a line inviting the recipient to sign up, with a link. Each new user advertised the service to everyone they wrote to.

The effect was almost immediate. Hotmail’s millionth user came within about six months of launch. In a 1997 essay, Draper’s partner Steve Jurvetson and Draper described the pattern and gave it the name it still has: viral marketing. In its first year and a half, they wrote, Hotmail signed up more than 12 million subscribers.

December 1997: $400 million

Microsoft wanted the users. In December 1997, about 18 months after launch, it bought Hotmail in a deal reported at $400 million, paid in Microsoft stock. Hotmail had reported more than 8.5 million subscribers that month. The Telegraph in India later noted that analysts at the time valued the all-stock deal at between $300 million and $400 million, for a company that was said never to have turned a profit.

For Draper Fisher Jurvetson, $300,000 had turned into a stake in a company sold for hundreds of millions of dollars in less than two years. Hotmail became part of MSN, and Bhatia stayed at Microsoft for just over a year.

After the sale

Microsoft grew Hotmail into one of the largest email services in the world. Then Google arrived. In April 2004 it launched Gmail with 1 GB of free storage, while free Hotmail accounts had just 2 MB. Microsoft raised its limits within months.

In 2012 Microsoft launched Outlook.com, which replaced the Hotmail service. Users could keep their @hotmail.com addresses.

What the record shows

• The product was the advertisement. Every message a user sent carried an invitation to someone new.
• Users can be the asset. Microsoft paid roughly $47 for each of the 8.5 million reported subscribers.
• Selling early was well timed. Free email soon became common, and a better-funded rival later set the pace.
• The best idea came from the investor. Draper’s tagline, which the founders resisted, turned every user into a recruiter.

Other founders in this archive turned small sums into large sales. Instagram sold to Facebook for $1 billion with a tiny team, and YouTube went to Google for $1.65 billion less than two years after it launched.