In 1763, James Watt was working as instrument maker at the University of Glasgow when he was assigned the job of repairing a model Newcomen engine and noted how inefficient it was.
In 1765, Watt conceived the idea of equipping the engine with a separate condensation chamber, which he called a "condenser". Because the condenser and the working cylinder were separate, condensation occurred without significant loss of heat from the cylinder. The condenser remained cold and below atmospheric pressure at all times, while the cylinder remained hot at all times.
Steam was drawn from the boiler to the cylinder under the piston. When the piston reached the top of the cylinder, the steam inlet valve closed and the valve controlling the passage to the condenser opened. The condenser being at a lower pressure, drew the steam from the cylinder into the condenser where it cooled and condensed from water vapour to liquid water, maintaining a partial vacuum in the condenser that was communicated to the space of the cylinder by the connecting passage. External atmospheric pressure then pushed the piston down the cylinder.
The separation of the cylinder and condenser eliminated the loss of heat that occurred when steam was condensed in the working cylinder of a Newcomen engine. This gave the Watt engine greater efficiency than the Newcomen engine, reducing the amount of coal consumed while doing the same amount of work as a Newcomen engine.
In Watts design, the cold water was injected only into the condensation chamber. This type of condenser is known as a jet condenser'. The condenser is located in a cold water bath below the cylinder. The volume of water entering the condenser as spray absorbed the latent heat of the steam, and was determined as seven times the volume of  the condensed steam. The condensate and the injected water was then removed by the air pump, and the surrounding cold water served to absorb the remaining thermal energy to retain a condenser temperature of 30 °C to 45 °C and the equivalent pressure of 0.04 to 0.1 bar 
At each stroke the warm condensate was drawn off from the condenser and sent to a hot well by a vacuum pump, which also helped to evacuate the steam from under the power cylinder. The still-warm condensate was recycled as feedwater for the boiler.
Watt's next improvement to the Newcomen design was to seal the top of the cylinder and surround the cylinder with a jacket. Steam was passed through the jacket before being admitted below the piston, keeping the piston and cylinder warm to prevent condensation within it. The second improvement was the utilisation of steam expansion against the vacuum on the other side of the piston. The steam supply was cut during the stroke, and the steam expanded against the vacuum on the other side. This increased the efficiency of the engine, but also created a variable torque on the shaft which was undesirable for many applications, in particular pumping. Watt therefore limited the expansion to a ratio of 1:2 (i.e. the steam supply was cut at half stroke). This increased the theoretical efficiency from 6.4% to 10.6%, with only a small variation in piston pressure. Watt did not use high pressure steam because of safety concerns.
These improvements led to the fully developed version of 1776 that actually went into production.