Fund Structure
Concentration Risk
The risk of having too large a portion of a fund's capital in a single investment or sector, increasing vulnerability to that investment's failure.
Concentration risk in a VC fund arises when too much capital is deployed into a single company, sector, or geography. If a fund's top holding represents 40% of fund value and that company fails or significantly underperforms, the whole fund suffers enormously. Most VC funds manage concentration through portfolio construction rules: maximum initial check size (e.g., no more than 5-10% of fund in any single company), sector diversification, and stage diversification. However, VC's power law dynamics create inherent concentration — the best investments naturally become a huge portion of the portfolio. Some funds embrace this ('conviction investing') while others manage it more actively. There's a real tension between diversification and concentration: too diversified and you can't generate top-quartile returns.