Supplier concentration measures how much of your cost of goods or critical components comes from a small number of vendors.

How it works

If one chip vendor supplies 80% of your BOM, a shortage or price hike hits margins immediately. Investors calculate concentration ratios—share of spend with top one or three suppliers—and compare to industry norms. Mitigations include dual sourcing, inventory buffers, long-term contracts, and vertical integration.

Hardware, biotech, and consumer brands face sharper questions than pure software, though cloud hosting dependence counts too.

Why it matters

• Founders: Diversify before diligence; disclose single-source risks honestly with mitigation plans.
• Investors: Concentration can kill an otherwise strong growth story in a supply shock.

Common mistake

Ignoring software dependencies. A single API provider or cloud region can be as concentrated as a physical supplier.

Related ideas

Operational risk, due diligence, gross margin, and business continuity.

When you will see it

Hardware and biotech diligence always includes supplier concentration review; software companies face similar questions on cloud and payment dependencies.

Questions to ask

• What is spend share with the top one and three suppliers?
• Are there qualified alternates qualified on the same timeline?
• What inventory or contract buffers exist for disruption?

Practical takeaway

Treat supplier concentration as something to define precisely in writing—not assume everyone in the room shares the same meaning. In term sheets, board decks, and LP updates, tie the concept to a concrete decision: a vote, a price input, a fund policy, or a metric formula. When definitions drift, teams misprice risk, miss leverage, or waste cycles on the wrong conversation.