How did these Stanford students turn $5 into $650 in just two hours? They used the power of first principles, and so do you

In 2009, Stanford Business School professor Tina Seeling divided the students into fourteen teams and gave each team an envelope containing $5 in “seed funding.”

Each team could take as long as they wanted to plan over the next five days. They were encouraged to “be entrepreneurial by identifying opportunities, questioning assumptions, using the limited resources they had and being creative.” But when they opened their envelopes, they only had two hours left to collect as much money as possible.

The following Monday, each team was given three minutes to present their project to the entire class.

What would you do? If you’re like most of the people Professor Seeling asked informally, you could buy a lottery ticket. Or use the $5 to place a bet. Or use the $5 to buy supplies for a car wash or lemonade stand.

“(Fine options) for those interested in earning a few extra dollars in pocket money in two hours,” Seeling writes. “But most of my students eventually found a way to go way beyond the standard answers. They took seriously the challenge of questioning traditional assumptions, uncovering a wealth of opportunities to maximize value creation.”

Still, the results varied, as results always do:

  • A team bought cheap items in a discount store and tried to resell them for a profit. (You can guess how well that worked.)
  • Another team set up a booth for the student association and pumped up bicycle tires for $1. To their surprise, the convenience resulted in many buyers. In fact, customers were so happy to use the service that the team switched from fixed prices to asking for ‘donations’, and the revenue generated skyrocketed. “The iterative process,” Seeling writes, “of making small changes in response to customer feedback allowed them to optimize their strategy on the fly.”
  • Another team made reservations at popular restaurants and then resold their seats in line to people eager to skip the wait. They also iterated quickly. Male team members ran around town to make reservations, while women made the “sales” when the team noticed that people found it more pleasant to be approached by women than by men. They also realized it was more profitable to focus on restaurants that supplied buzzing pagers: By physically swapping a longer-wait pager for one with a shorter wait, people felt they were receiving something tangible — and the students got a other reservation they could sell.)

The last two projects generated several hundred dollars in revenue. That’s an impressive two-hour ROI on $5 in seed money.

Yet another team took a very different approach.

Instead of thinking about turning $5 into more money (buying and reselling products), or using the two hours they were given as effectively as possible (inflating tires or selling reservations), they walked it all the way back…and decided that the most valuable asset they owned was the three-minute presentation time for the entire class.

And so they sold their presentation time for $650 to a local company in hopes of recruiting students into the classroom, yielding an ROI of more than 12,000 percent.

“They recognized,” Seeling writes, “that they had a fabulously valuable asset that others didn’t even notice waiting to be mined.”

First principles

Aristotle arguably first popularized the concept of a first principle: a basic proposition or assumption that cannot be derived from any other proposition or assumption.

In simple terms, first principles means establishing a basic fact or conclusion that you know to be true, deconstructing it to its core elements, and working from there.

In the case of the $5 project, that meant ignoring assumptions and determining the most valuable asset. At first glance, the $5 seemed to be their only asset. Some teams fell into that mental trap. The student collective was also not two hours, even if that was a better use of their resources.

Three minutes for the perfect audience? That was the most valuable thing they possessed. (What would you pay to get in front of a room full of people who want, can and want to buy your product or service?)

That’s why Jeff Bezos built Amazon by focusing on things that, like first principles, won’t change. As Bezos says:

In our retail business, we know that customers want low prices, and I know they will be in 10 years’ time. They want fast delivery; they want an extensive selection.

It’s impossible to imagine a future where 10 years from now a customer will come and say, “Jeff, I love Amazon; I wish prices were a little higher.” “I love Amazon; I just wish you’d deliver a little slower.” Impossible.

If you have something that you know to be true in the long run, you can afford to put a lot of effort into it.

That’s why Elon Musk decided to buy the raw materials — which cost two percent of the price of a typical rocket — and build rockets instead of buying them for SpaceX missions. And lower the price of launching a rocket by a factor of 10.

How to Embrace Your Own First Principles

As Sahil Bloom writes, “Nonlinear results are only made possible by creative, nonlinear thinking.”

But thinking outside the box doesn’t have to be a process of adding up. A better approach is to reduce something to its basic truths and reason from there.

Take process improvement. I am a veteran of formal programs such as Six Sigma and TQM and 5S (among countless others). The best way I found to increase productivity, reduce waste, etc. was to ask ideas from the people who actually do the work.

Go to the source? That is a first principle.

Or hire new employees. You can take people through the most comprehensive orientation and training program you can create, but leaders who meet new hires on their first day – rather than leave it to others – to talk about roles and responsibilities, to plan, and to make sure every employee feels welcome and valued, new hires are up and running a month faster than those who don’t.

Spending time with a new employee on their first day? That is a first principle.

Or take building a business. Once you’ve identified a problem and can fix it, the answer to most of your problems is “sales.” Rarely can a new company save its way to profitability; without a top line, there is no (positive) bottom line.

Sale? That is a first principle.

As you dig deeper to find the first principles that apply to your professional or personal life, keep in mind that first principles, while simple, almost never involve conventional wisdom. Finding a fundamental truth almost always leads to taking a course that most people don’t take.

Even if – like selling “commercial time” at a student presentation – it seems obvious in hindsight.

The opinions expressed here by Inc.com columnists are their own, not Inc.com’s.

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