First-principles thinking in daily life and venture capital

Critical thinking is a muscle that can be honed

What is First-principles thinking?

In my own paraphrase, that will mean breaking apart problems down to its building blocks, clearly understanding the rules of the system (or the universe) where the problem resides, then continuously asking “why” the building blocks are put together that way before re-arranging the building blocks (in your mind) to discern an optimal solution or pathway.

Ok my bad, that came out as a mouthful of gurgle. I am also a self proclaimed marketer so let’s try using visuals to make it clearer.

As a kid, one of my favourite toys was Lego and my most memorable moments were always the times when I went against the “blueprint” to build something “weird”. For example, in the Marvel set shown above, the SHIELD helicarrier can be taken apart for parts to make a hovercraft or even a factory with large industrial fans (because why not?).

For a more academic explanation of First-principles thinking, you can go here.

Applying it to daily life

Root cause analysis

Whenever I see a problem or issue in daily life, it can be something as mundane as “my food order arriving late”, I run a simulation in my head to ask multiple “whys” until I can’t go any further or hit pre-determined boundaries of the simulation.

The scenario below might sound very familiar to many of you (at least pre-COVID):

• Just finished a meeting and decided to grab a late lunch. Got seated at the corner of the restaurant for lunch at 2pm which is a shoulder peak period for most restaurants

• Placed an order with the waiter and started reading news on my phone while waiting

• 25 minutes later and after exhausting the stream of news from my daily reading list, I feel a rumble within my tummy and decided to check in with the waiter on the ETA of my order

• Noticed there was only 1 waiter covering around 12 tables and he took a while before getting to me. He looked apologetic and ran to the kitchen to check my order

• Before my impatience gets the better of me, I decide to distract myself with some “root cause analysis”

• Looking around, I noticed a clutch of Grabfood delivery riders clustered around the cashier and also how the cashier is manually routing orders on slips of paper. And by manual, I literally mean tearing the orders off the printer terminal at the cashier and running over to the small window of the kitchen

• These front of house order slips then get stuck by the cooks onto the top of the window where cooked orders get slipped to the single waiter that is running back and forth

At first glance, the under-manned restaurant would appear to be the cause of the delay in preparing my order. However, if you keep asking “why”, this helps you get to the root of the issue like peeling the layers of an onion.

Here is how my thought process looked like:

Observation: Kitchen missed my order

• I see only 1 waiter and another who is doubling as a cashier and also a kitchen runner -> Why?

• There is another virtual queue of delivery orders waiting to be processed by the cashier -> Why?

• As with most F&B businesses nowadays, the allure of additional revenue from higher utilisation of the kitchen during off peak hours is hard to resist -> Why?

• The owner is focused on optimising the utilization of his kitchen and kitchen crew -> Why?

• The kitchen crew is the top contributor to operational costs, after rental costs -> Why?

• Good cooks and kitchen helpers are not readily available as most locals eschew the F&B industry and a boutique restaurant operator lacks bargaining power with the mall operators to control his rent -> Why?

End root cause analysis: Boundary set to micro environment of the restaurant or we could go on forever

Now this reminds me of a scene straight from Overcooked! Haha.

n order effects

• First order effect: Delivery orders compete with walk in orders for the kitchen’s bandwidth

• Second order effect: Peering into the kitchen, I see 8 cooks which is higher than the average kitchen crew size, especially for a shoulder peak period. Owner has only scheduled for 1 part timer to wait the tables during this period.

• Third order effect: The blended gross margins of the business decreases as the mix of revenue tilts towards delivery orders where the platform operators impose significant penalties on not meeting SLAs.

• Fourth order effect: Owner has less cashflow to re-invest into front of house and back of house integrations to optimise dine-in operations

So what?

Having gone through the mental exercise above, so what? What good can you derive from it?

For me, a better appreciation for the operational and financial challenges faced by the restaurant owner.

Putting on my VC hat, I also make a mental note to look out for companies seeking to provide a front of house to back of house integration which also aggregates delivery orders from multiple platforms and sends the kitchen optimised batches of orders to cook (similar to what ecommerce enablers do for merchants today). Average waiting time of dine in guests can also be monitored and the restaurant owner can assess whether serving delivery orders is worthwhile from both financial (margins vs volume) and operational perspectives.

As you apply the above exercise to a broad swath of real life scenarios, you build up your own proprietary knowledge base and also strengthen your cognitive muscle.

If you do this consistently, it will compound and pay off in ways you will not foresee when you begin to connect the dots across different domains.