First principles thinking: How to apply it for your startup

Most startups fail not because the idea is bad, but because the assumptions are never questioned.

One of the most widely discussed mental models in modern entrepreneurship is first principles thinking, popularised by Elon Musk. It is a way of reasoning that ignores how things have “always been done” and instead rebuilds solutions from the ground up.

This article explains what first principles thinking really means, why it works, and how founders can apply it practically to their own startups.

What is first principles thinking?

First principles thinking involves breaking a problem down to its most basic, undeniable truths and then reasoning upwards from there. Instead of copying existing solutions or improving them slightly, this approach asks a more fundamental question: what are the core elements that make this problem exist in the first place?

The idea traces back to Aristotle’s philosophy, where first principles are truths that cannot be reduced any further. Elon often contrasts this with reasoning by analogy, where people copy what already exists rather than questioning whether it should exist in that form at all.

Why reasoning by analogy limits innovation

Most industries run on analogy. Companies look at competitors, match pricing, and follow established playbooks. This feels safe, but it also locks innovation within narrow boundaries. Musk once explained this with a simple comparison. Improving horse-drawn carriages will never lead to cars.

To invent something truly new, you have to ignore the carriage entirely and rethink transportation from first principles. For startups, analogy thinking often shows up as:

• Copying competitors’ pricing models
• Accepting industry margins as fixed
• Assuming certain costs are unavoidable

First principles thinking challenges all of these assumptions.

How Elon Musk applied first principles thinking

Rethinking rockets at SpaceX

When Elon Musk looked at rocket launches, the industry standard price was around $65 million per launch. Instead of accepting this, he broke rockets down into their raw materials.Aluminium alloys, titanium, copper, and carbon fibre are all commodities with known market prices.

When calculated from scratch, the materials cost was only a small fraction of the final price. By sourcing materials directly and manufacturing in-house, SpaceX reduced launch costs nearly tenfold. Reusability followed naturally once the fundamentals were questioned.

Rebuilding batteries at Tesla

A similar approach was applied to batteries. Industry pricing suggested batteries cost around $600 per kilowatt hour. Musk deconstructed battery packs into raw materials like nickel, aluminium, and carbon.

On commodity markets, these materials cost closer to $80 per kilowatt hour. The gap revealed inefficiencies, not physical limitations. This insight unlocked cheaper battery production and long-term scale.

How startups can apply first principles thinking

First principles thinking is not limited to deep tech or hardware. It can be applied to almost any startup problem.

Step 1: Identify hidden assumptions

Start by writing down what you assume to be true. For example:

• “This product must be expensive”
• “Customers will not switch providers”
• “This is how the industry works”

Assumptions are often invisible until they are named.

Step 2: Break the problem down to basics

Ask what the product or service is fundamentally made of. If you are building a logistics startup, break costs into fuel, labour, time, and demand variability. If you are building software, break it into compute, engineering time, and user behaviour. The goal is to reach elements that cannot be simplified further.

Step 3: Rebuild from scratch

Once the basics are clear, rebuild the solution without reference to existing players. This is where innovation happens. You may realise certain steps can be removed, automated, or radically simplified. Manufacturing in-house, changing pricing logic, or redesigning incentives often emerges at this stage.

Step 4: Test and iterate on a small scale

First principles thinking is mentally demanding, but execution should be incremental. Test your rebuilt assumptions with small experiments. Pilot projects, limited rollouts, or internal prototypes help validate whether your new model works in reality.

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Real startup examples beyond Musk

First principles thinking shows up in many successful startups. Zerodha questioned the assumption that trading platforms must earn through commissions. By focusing on the core function of low-cost execution, it reshaped Indian stock broking economics.

DoorDash challenged delivery assumptions by breaking costs down to real-time demand, driver availability, and incentives. This allowed it to optimise unit economics where others struggled.

In the Indian startup ecosystem, similar thinking can be applied to areas like electric vehicles by breaking costs into batteries, motors, and raw commodities rather than copying existing pricing models.

When first principles thinking matters most

First principles thinking is most useful when:

• Costs seem unreasonably high
• Margins appear fixed across an industry
• Innovation has stalled despite competition

It requires more mental effort than copying competitors, but it often leads to breakthroughs that analogy-based thinking cannot reach.

The takeaway

Ideas are not limited by imagination. They are limited by assumptions. First principles thinking forces founders to slow down, question deeply, and rebuild boldly. While it is harder than following proven playbooks, it creates opportunities others cannot see. For startups willing to do the mental work, fundamentals can become their biggest advantage.