Fund Structure
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Quick Answer
A fund restriction capping the maximum percentage of committed capital that can be invested in any single portfolio company, typically 10-15% of fund size.
A Concentration Limit is a provision in the Limited Partnership Agreement that caps the maximum amount of capital a fund can invest in any single portfolio company, typically expressed as a percentage of committed capital (usually 10-15%). The limit exists to ensure portfolio diversification and prevent the GP from making outsized bets that could disproportionately impact fund returns if a single investment fails. Concentration limits apply to the aggregate investment in a single company across initial and follow-on rounds. Some LPAs distinguish between initial investment limits (e.g., 5% of committed capital per initial investment) and total exposure limits (e.g., 15% including follow-on). Concentration limits can be challenging for GPs who want to go super pro rata in their best performers—a successful portfolio company may grow to represent 20-30% of fund NAV through appreciation even if the invested amount stays within limits. LPAs typically measure concentration on invested capital (cost basis) rather than current value, allowing positions to grow through appreciation without violating the limit.
In Practice
A $100 million fund has a 12% concentration limit, meaning no more than $12 million can be invested in any single company. The GP invests $3 million at seed and $5 million at Series A in their top performer ($8 million total). At the Series B, they want to invest $6 million more but the concentration limit caps them at $4 million ($12 million total). To invest the full $6 million, the GP creates a sidecar SPV for the additional $2 million.
Why It Matters
Concentration limits protect LP capital from catastrophic single-company losses but can also prevent GPs from maximizing their best investments. The tension between diversification and concentration is at the heart of venture portfolio construction. Founders should understand their VC's concentration limits as they signal the maximum financial support available from that fund.
VC Beast Take
The dirty secret of concentration limits is that the best funds often push right up against them. Top-tier GPs will creatively structure follow-on investments through SPVs or co-investment vehicles to effectively exceed their stated limits for their highest-conviction bets. LPs increasingly understand this game and are more flexible with star performers.
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A Concentration Limit is a provision in the Limited Partnership Agreement that caps the maximum amount of capital a fund can invest in any single portfolio company, typically expressed as a percentage of committed capital (usually 10-15%).
Understanding Concentration Limit is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Concentration Limit falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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