The Bell Mason Diagnostic and First Principles Thinking in Venture Capital

Why Venture Capital Needs a First Principles Overhaul

Venture capital is broken. Not in the “bubble’s about to pop” and certainly not in the sense that so many are pissed off because they aren’t getting funded, but in the “founders keep getting bad funding advice from firms still operating on outdated, ineffective methodologies” sense.  In the words of Khosla Ventures‘ Vinod Khosla, “You haven’t earned the right to advise an entrepreneur. Just because you got an MBA and joined a venture firm, doesn’t mean you’re qualified to advise an entrepreneur” sense.  And in the someone-who-has-a-ton-of-wealth-or-went-to-the-right-school-is-suddenly-on-the-scene-as-a-VC, clearly, they know what they’re doing and have earned their role, sense. 

Most VCs follow the same worn-out playbook drawn from what friends say, sitting in Demo Days, listening to the podcast about Lean Startup, and whether or not they had their coffee before their meeting with you, all justified by the made-up financials a founder put together seeming reasonable — you might call this the gut feelings and referrals with friends wrapped in a PowerPoint deck methodology. Few question whether their process is actually the best way to identify, fund, and grow companies because the math is sound: raise enough capital and the 2% management allocation pays their salary… as long as 1 investment in 10 delivers a 15X return, everyone is happy.  

There is zero incentive on anyone’s part to improve upon the fact that 90% of startups fail (though we know why and can avoid those causes), evident in the fact that so many startup development organizations are desperately trying to put those practices in place, delivering better than average results, but none get direct support (funding) from investors because most are happy to keep doing what they’re doing themselves since it works just fine, for them. 

Enter First Principles thinking, the mental model that strips a problem down to its most basic truths and builds back up from there; I just explored that, here, as it pertains to why project management methodologies applied to startups are actually causing start failures. Applied to venture funding, First Principle Thinking demands an overhaul of how investors conduct due diligence, assess risk, and optimize for startup success. And no, “spray and pray” isn’t a strategy (It’s an admission of incompetence).

The Bell Mason Diagnostic (at the link there, as considered by Mandalore Partners and Mandalore IndustryTech Growth) offers an objective, systematic framework that actually aligns with First Principles thinking, providing VCs with a structured way to evaluate startups at different stages of growth. Instead of subjective guesswork, BMD forces investors to break down a startup’s capabilities—team, technology, market, product, funding—into measurable, stage-specific assessments, arriving at the fundamental truths that are paramount in First Principles.

And yet, despite having tools like BMD at their disposal, most venture firms resist true optimization. As Joe Milam, CEO of AngelSpan, bluntly puts it:

‘The venture industry seems to have avoided any steps to establish itself as a proper profession. There is no training required to become a VC, no ‘best practices’ to study, no oversight of the bad actors. There are no barriers of entry to become a GP of a fund. Even hairdressers have to go to school to become licensed beauticians.’ ‘This absence of standards – First Principles of Venture Investing – is the root cause of the many symptoms that represent what’s wrong with venture investing today.” – Joe Milam; AngelSpan

This is the core issue: VCs love to talk about “innovation,” but most are running an antiquated investment model built on inertia, not logic. If First Principles thinking revolutionized engineering, why hasn’t it done the same for venture capital?  Oh and, by the way, James Clear, author of Atomic Habits, shares how Elon Musk’s approach to innovation and thinking exemplifies First Principles in engineering, and might serve as evidence of what we’re talking about being effective.

What the Bell Mason Diagnostic Fixes in VC Diligence

If we treat venture capital like an engineering problem rather than a “high-risk gambling” exercise, we can start applying structured analysis to the process. The Bell Mason Diagnostic (BMD) was developed as a way to decompose startup success and uncover compelling opportunities investors into objective, stage-appropriate factors. It breaks down the key dimensions of a startup’s development—from technology and market fit to management and funding—mapping out where a company stands and what gaps need to be filled before scaling.

This is exactly what First Principles thinking dictates: deconstruct, validate, rebuild.

Instead of relying on investor “intuition” or broad-strokes industry trends, BMD forces VCs to systematically evaluate startups based on the actual building blocks of a successful company. In this way, it shares DNA with First Principles thinking by removing assumptions and rebuilding investment decisions from the ground up.

Let’s look at how the Bell Mason Diagnostic aligns with First Principles thinking in venture capital:

1. Breaking Down Complexity Into Fundamentals
   First Principles thinking forces us to strip problems down to their essential components. BMD does the same, identifying a startup’s core strengths and weaknesses in areas like team capability, product-market fit, and financial strategy. Rather than a binary “yes/no” funding decision, it provides a structured roadmap for de-risking the company.
2. Objective, Stage-Appropriate Evaluation
   The biggest mistake early-stage VCs make? Applying late-stage metrics to early-stage startups (if you’ve followed me for long, you know this about me, I’m an a****** about investors pushing idea stage startups to focus on customers, stop it!). Most investors expect product-market fit, scalable revenue, and solid customer acquisition economics before funding, when the reality is that pre-seed and seed-stage companies are still solving for those unknowns. BMD corrects this by aligning startup evaluation with its appropriate stage of maturity, ensuring that diligence isn’t just a generic checklist.
3. Iterative Improvement, Not Gut-Driven Bets
   The worst-kept secret in venture? Even experienced investors don’t know which startups will succeed. The best way to compensate for this uncertainty isn’t more intuition-based bets—it’s systematic iteration based on measured progress. BMD allows investors to track whether a startup is meaningfully progressing or stalling, rather than relying on a founder’s charisma and a slick pitch deck.

The Bell Mason Diagnostic (BMD) by the way, is a structured framework that assesses a startup’s maturity and readiness for scaling by evaluating key dimensions critical to success. It systematically scores a company across four major areas—Product, Market, Team, and Business Execution—breaking these down further into 12 subcategories such as technology readiness, customer adoption, team experience, and financial stability. Each subcategory is measured against stage-specific benchmarks, ensuring that early-stage startups are assessed differently than later-stage companies. The diagnostic process involves a guided questionnaire where startups and investors score their performance in each category, generating a visual heat map that highlights strengths, gaps, and risk factors.  The thing should be an app, by the way, and analytics and startup platforms should have this assessment built in and spit out, by default. 

Most Venture Firms Are Failing at Optimization

Despite having access to frameworks like the Bell Mason Diagnostic, most venture firms still operate like it’s 1999. Milam argues in his piece “It’s Time to Professionalize the Venture Model”, venture capital has failed to professionalize in a way that truly optimizes for startup success.

The venture model today is riddled with three fundamental failures:

1. Lack of Data-Driven Decision Making
   Most venture firms still rely on gut instincts and pattern recognition, rather than rigorous data-driven evaluation. Milam points out that this is especially problematic at the early stages, where better diligence frameworks could significantly improve funding outcomes. He argues that structured models like Bell Mason should be the default, not the exception.
2. Misaligned Incentives
   Traditional VCs don’t win by being right—they win by raising bigger funds. As Milam highlights, venture firms aren’t actually incentivized to optimize for startup success; they’re incentivized to raise more capital under management. This means that many firms intentionally overfund certain startups, creating artificial valuations that increase paper returns but don’t necessarily lead to long-term success.
3. Failure to Optimize Portfolio Construction
   First Principles thinking would suggest iterative refinement in portfolio construction—funding companies based on stage-appropriate diagnostics, tracking progress with clear milestones, and doubling down on high-performing startups. Instead, most VCs still rely on one-size-fits-all investment strategies, often failing to stage-gate funding appropriately.

Milam puts it bluntly:

“Venture investors and limited partners must transition from ‘it’s an art’ to real risk assessment and underwriting methodologies that are transparent, defensible, and measurable.”

In other words, venture capital is overdue for a professionalization revolution. The tools exist. The frameworks exist. But most firms refuse to optimize — choosing instead to operate on outdated heuristics and legacy reputation.

First Principles + Bell Mason = True Optimization

If you’re an investor and still making funding decisions based on what worked for Sequoia in 2005, you’re behind. The next generation of venture capital will be driven by First Principles thinking, structured diligence, and true optimization.

Here’s what that actually looks like:

• Applying Bell Mason Diagnostic as a Standardized Diligence Tool
  Stop making seat-of-the-pants investment decisions. Use frameworks that provide structured, stage-appropriate evaluations of startups.
• Iterative, Data-Driven Portfolio Construction
  Fund companies based on measurable progress, not just “potential.” Track startup milestones and adjust investment strategies accordingly.
• Aligning Incentives with True Startup Success and Compelling Returns for Investors
  Move away from the AUM-driven model and fund companies based on real progress, not paper valuations designed to prop up the next raise.

Venture capital can be optimized. It should be optimized.