Concentration risk arises when outcomes hinge heavily on one company, customer, market, or asset rather than a balanced portfolio.

How it works

At the startup level, concentration risk appears when a single customer contributes a large share of ARR, one supplier is critical, or one geography dominates revenue. At the fund level, a few positions may represent most unrealized value—common in power-law venture portfolios but still monitored by LPs. LPs face concentration if they overweight one GP, vintage, or sector. Mitigation includes customer diversification targets, contractual minimums, portfolio construction rules, and secondary sales to reduce single-name exposure. Concentration is not always bad—conviction bets drive venture returns—but risk must be conscious. Regulatory and LP policy limits may cap exposure thresholds.

Why it matters

• Founders: Enterprise deals feel great until renewal risk concentrates; investors discount high customer concentration in diligence.
• Investors: Fund marks and DPI can swing on one exit; LPs ask about top-five position weightings and follow-on pacing.
• LPs: Endowment-style diversification assumes many managers; over-indexing one hot sector increases drawdown correlation.

Common mistake

Confusing high conviction with ignoring concentration. Doubling down can be rational, but blind concentration without scenario planning breaks when the thesis slips.

Related ideas

Concentration limit, customer concentration, portfolio construction, conviction investing, and diversification address related themes.