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As mentioned last week, I have a decade of experience scaling startups in the consumer & fintech sectors. Some brands you may know are Cheesegeek (backed by Steven Bartlett ~ Diary of a CEO), Lucky Saint, Seedlip and now DIRTEA.

Over the past 10 years, I have learned how great startups scale and why others fail to do so.

The differentiator between the great and ‘the rest’ comes down to first principles thinking.

I break this down below with a real method you can implement today.

What is thinking by first principles?

First principles thinking is a problem-solving approach that’s especially powerful for startups. It involves breaking down complex problems or industries into their most basic, foundational truths and then rebuilding from scratch, unconstrained by existing conventions or norms. Instead of following what’s already being done, you look at the core elements and create innovative solutions from the ground up.

Here’s how it works in the context of a startup:

1. Identify assumptions: Start by questioning every assumption about the market, the product, and customer behavior. Ask yourself: Why do things work this way? What are the existing inefficiencies? What are the real customer pain points?

2. Break down to basics: Strip away industry norms, established business models, and traditional methods until you're left with the most fundamental truths. These are things that cannot be further simplified or questioned. This is the foundation upon which you’ll build.

3. Rebuild from the ground up: Once you’ve identified these first principles, use them as building blocks to create innovative solutions or products that challenge the status quo.

Examples:

🚗 Uber: Instead of accepting the traditional taxi industry as it was, Uber founders asked fundamental questions like, "What do people really want? Reliable transportation at the push of a button." By breaking down the taxi industry to its most basic elements (drivers, passengers, vehicles, and the ability to connect them), Uber re-imagined the model using technology and created a service that was faster, more convenient, and scalable.

🪒 Harry’s Razors: (now filing for IPO) Traditional razor companies dominated the market, often relying on expensive branding and retail distribution. Harry’s questioned why razors needed to be so expensive and how they could make the supply chain more efficient. By breaking it down to basics—high-quality blades and direct customer relationships—they rebuilt a new model focused on DTC (direct-to-consumer), cutting out the middlemen and passing savings onto their customers.

For a startup founder, first principles thinking is crucial. It allows you to identify opportunities where others see barriers, rethinking industries, and solving problems in ways established companies often overlook. Instead of being constrained by "how things have always been done," you create solutions that are both disruptive and deeply customer-centric.

Peter Thiel, partner of Founder’s Fund, co-founder of PayPal and Palantir, is a strong advocate for first principles thinking, especially in the context of startups and innovation. In his book Zero to One, Thiel emphasizes that building a successful company often requires going beyond incremental improvements (which he calls going from "1 to n") and instead creating something truly new and transformative (going from "0 to 1"). First principles thinking is the key to this kind of breakthrough innovation.

Here’s how Peter Thiel views first principles thinking:

1. Challenge Conventional Wisdom

Thiel argues that most people think in terms of "copying" or "incremental improvement"—taking something that already exists and making it slightly better. He believes this approach leads to stagnation. To really innovate, founders need to challenge the accepted ways of doing things and ask: What is true? What can we do differently? Instead of accepting business models, industries, or technologies as fixed, you break them down into their most fundamental components.

2. Find Fundamental Truths

Thiel encourages founders to break problems down into their basic truths. For example, in the early days of PayPal, he and his co-founders didn’t just think about improving credit card processing. They asked fundamental questions about what money is, how it could work on the internet, and how financial systems could be more efficient. By thinking from first principles, they created an entirely new approach to online payments.

3. Apply a Zero to One Mindset

In Zero to One, Thiel highlights how startups must create something radically new, rather than slightly better. First principles thinking allows entrepreneurs to generate fresh, unprecedented solutions that can disrupt entire industries. Rather than building another taxi service or shaving company, first principles thinkers create Uber or Harry’s by identifying the true needs and most basic aspects of the market, and then creating entirely new solutions.

Example: SpaceX (Thiel was an early investor)

Elon Musk, a fellow advocate of first principles thinking, used this approach with SpaceX. Instead of accepting that rockets must be extremely expensive because that’s how the aerospace industry worked, Musk broke down the cost of building a rocket into its raw materials. He found that the actual components were much cheaper than the price of a rocket, and through this, SpaceX designed rockets at a fraction of the cost. Thiel uses this as a powerful example of first principles thinking in action.

Strategy of the week: Using 1st principles to reach $1m in sales.

To use first principles thinking to reach your first $1M in sales for a CPG startup, you can break down the problem into fundamental components and then work backward to craft a strategy that focuses on these essentials. Let's work through the process:

Step 1: Define the Goal in First Principles Terms

• Sales Goal: $1M

• AOV (Average Order Value): $125

• CAC (Customer Acquisition Cost): $55

To calculate the number of sales needed:

• $1,000,000 ÷ $125 (AOV) = 8,000 orders required to reach $1M in revenue.

Step 2: Break Down the Problem

Let’s break down your sales process using first principles:

• Revenue = Orders × Average Order Value (AOV)

• Orders come from customers acquired through marketing and other efforts.

• Customer Acquisition Cost (CAC) tells you how much you’re spending to acquire each customer.

Step 3: Examine Core Assumptions

We have key factors:

1. AOV of $125

2. CAC of $55

The basic truth here is that every customer generates $70 in profit ($125 - $55). Now, let’s challenge these assumptions and see if there’s room for optimization.

Step 4: Optimize for Core Levers

To grow your CPG startup and reach $1M in sales, it's essential to focus on optimizing the core levers of your business. These levers—customer acquisition cost (CAC), average order value (AOV), conversion rates, and customer retention—are critical drivers of revenue. By using first principles thinking, you can challenge the conventional assumptions around each of these levers, break them down to their basic components, and build creative, efficient strategies from the ground up.

Reducing Customer Acquisition Cost (CAC)

The first key lever to consider is your customer acquisition cost. At present, you are spending $55 to acquire each customer. To grow efficiently, you need to challenge the assumption that this cost is fixed. Break down CAC into its components: marketing spend, channel efficiency, and audience targeting. The question to ask is: Are there ways to acquire customers at a lower cost?

One approach is to conduct rigorous testing across different marketing channels—social media, search ads, email marketing, and influencer collaborations—to identify where you’re getting the best return on ad spend. By focusing on high-performing channels, you can optimize your marketing budget and reduce overall CAC. For instance, social media ads, such as those on Instagram or TikTok, may offer cheaper impressions for your target audience, especially if your product appeals to a younger demographic. Meanwhile, refining your audience targeting based on behaviors, interests, and demographics can further improve efficiency. Reducing your CAC even by a few dollars can lead to significant savings over time, allowing you to acquire more customers for the same budget.

Increasing Average Order Value (AOV)

The second lever, AOV, represents the average amount each customer spends on a purchase, which is currently $125. Increasing this number can have an outsized impact on your revenue, as it allows you to earn more from each transaction without needing to acquire new customers. AOV, like CAC, is not a fixed figure. It can be influenced by the way you present your products and offers.

To increase AOV, one effective strategy is bundling complementary products. When customers see more value in purchasing multiple items together, they are often willing to spend more. For example, if you’re selling personal care products, bundling a razor with shaving cream and aftershave at a slightly discounted price could encourage customers to spend more per order. Another strategy is to introduce subscription services, offering a discount for customers who commit to recurring orders. This not only raises AOV but also helps stabilize cash flow. Finally, offering upsells and cross-sells at checkout can provide additional opportunities to increase purchase value. If you can boost your AOV to $150, you’ll need fewer orders overall to reach $1M in sales.

Improving Conversion Rate

The third lever—conversion rate—is about maximizing the number of visitors who complete a purchase once they land on your website or interact with your brand. Increasing conversion rates means getting more sales from the same amount of traffic, which reduces reliance on acquiring new visitors. First principles thinking urges you to question what might be preventing customers from converting and focus on removing any friction points in the purchasing process.

You can optimize your website’s user experience by analyzing where potential customers drop off. For example, if you find that customers are abandoning their carts at checkout, you can simplify the process by reducing the number of steps, offering guest checkout, or providing clear shipping information upfront. Additionally, A/B testing different landing page layouts, product descriptions, and calls-to-action can help you determine what design elements resonate most with your audience. Even small improvements in conversion rate, such as going from 2% to 3%, can significantly affect your bottom line and accelerate your path to $1M in sales.

Maximizing Customer Lifetime Value (LTV)

Finally, customer retention is a critical but often overlooked lever in growing a startup. It’s typically much cheaper to retain an existing customer than to acquire a new one. The lifetime value (LTV) of a customer refers to the total revenue you can expect from them over their entire relationship with your brand. Using first principles thinking, it’s important to question whether you’re maximizing the value from each customer you acquire.

Building a strategy to increase LTV involves nurturing your relationship with customers after their first purchase. This could include launching a loyalty program, offering discounts or rewards for repeat purchases, and developing personalized email campaigns to re-engage past customers. For example, sending targeted emails with product recommendations based on previous purchases can encourage repeat business and build customer loyalty. By improving retention, each customer becomes more valuable over time, and the cost of acquisition is spread over multiple purchases, reducing the impact of CAC on profitability.

In summary, optimizing these core levers—reducing CAC, increasing AOV, improving conversion rates, and maximizing LTV—will allow you to build a more scalable and efficient path to your first $1M in sales.

First principles thinking enables you to challenge assumptions about what’s fixed, break down each component to its essentials, and then rebuild with creative, optimized solutions tailored specifically to your business.

So that’s how you can use 1st principles to reach your first, or next, $1m in revenue.

Thank you for reading. I hope this becomes useful reading before the work week starts again.

Feel free to DM me here.

Have a great week,

Robert