Diversification isn't just about limiting downside, and concentration isn't just about maximising upside. It turns out, they're two fairly distinct and important strategies, and startups rely on both. Previous writing has framed the two as opposing ideas, where one is likely to be strictly better than the other. In fact, they're totally synergetic. Many startups would never get a chance at proving themselves if it wasn't for the risk appetite of large portfolios that can better tolerate failure. Others wouldn't survive in the long run without more concentrated firms in their corner to provide support with subsequent financing and governance. You can even calculate a rough equilibrium with some basic assumptions; how many of each type of firm would be most optimal for the market. Unfortunately, it's LP expectations (as usual) which create friction in this topic. Having been repeatedly sold the story of "the few companies that matter", there isn't sufficient appreciate for the product of diversified funds. Thus, LP preferences have systematically limited the risk appetite of venture capital over time. Read more: blog.joinodin.com/p/building…

Calling scaled venture capital "beta" is not an attempt to mock the strategy; a sufficiently large portfolio of startups does begin to look like levered Nasdaq-100. It's also not an exaggeration to say that large firms are structurally disadvantaged at recognising outliers. Large firms are systematically data-driven because of institutional memory, process knowledge, and training patterns — and data is inherently backwards-looking. So, they become better at recognising patterns at the expense of getting worse at recognising novelty. Smaller firms also have a greater risk appetite, because risk translates into alpha which is the basis for outperformance. Larger firms that serve beta are structurally attracted by marginal gains, and safer incremental opportunities. The future of scaled VC is to lean into algorithmic allocation and be the fastest-moving partner for growth. It's an elastic and theoretically low-fee product with reasonable returns for large LPs. The strength of small firms and solo GPs is specifically their ability to recognise potential that the market has overlooked. It's the ideal product for HNWs, FOs, FoFs, states and foundations with strategic goals. The divide between these two categories of venture investing will be dramatically widened by the impact of AI, as indicated by prior waves of technology. Related reads: "Venture Capital as Portfolios of Compound Options", by Sebastian Hillenbrand and Erik Stafford (2025) papers.ssrn.com/sol3/papers.… "Micro venture capital", by Mario Daniele Amore, Annamaria Conti and Valerio Pelucco (2023) papers.ssrn.com/sol3/papers.… "Bureaucracy as a Lens for Analyzing and Designing Algorithmic Systems" by Juho Pääkkönen, Matti Nelimarkka, Jesse Haapoja and Airi Lampinen (2020) dl.acm.org/doi/10.1145/33138… "Data-Driven Investors", by Maxime Bonelli (2025) lbsresearch.london.edu/id/ep… "AI and the Nature of the Firm", by Alec Litowitz, Nicholas G. Polson, and Vadim Sokolov (2026) papers.ssrn.com/sol3/papers.…

If someone describes market for VC firms as having a "barbell" distribution, they are laundering the maturity and stability of other asset classes. VC does not have a barbell distribuition. There aren't independent categories of "boutique specialist" and "large generalist", in competition with each other. Large firms trade capital for strategic deal flow and information. Small firm survival is based on serving large firm interests, or navigating around them. It's top-heavy, enmeshed, and uncompetitive. The alternative is to more formally divide the market into two separate categories, like small-mid cap PE vs large-cap PE. Small exits to large; no entanglement. This produces a healthier market with better outcomes for all involved — except large firm management fees.

"What do VCs get wrong about risk management? What does risk management even mean? I thought the whole point was to be risk-on and swing for the fences?" - @johncoogan Here's what most VCs miss about risk management: Risk is the product of venture capital, and investors are able to take more risk on individual investments if they are spreading that risk across a properly diversified portfolio. VC is fundamentally a portfolio strategy, not a picking strategy. "Because fund diversification also affects fund risk, risk-averse fund managers are tempted to invest in companies with higher idiosyncratic (i.e., company-specific) risk when pursuing a strong diversification strategy." Unsurprisingly, VCs that choose riskier investments as part of a diversified strategy (rather than concentrating on traction or consensus) are more likely to outperform: "Doing so eventually leads to higher realized fund performance on average, since investments in riskier ventures only make sense if they come with better prospects of high returns." Thus, better risk management means taking more risk, not less — and managing it properly to deliver outperformance. In addition to stronger returns, this also drives more capital towards genuinely innovative propositions: "Our results indicate that especially entrepreneurial ventures in the riskiest industries or at the early stage of development may be the most affected and would gain from a greater diversification of VC funds." As a contrast, consider ZIRP-era VC, marked by concentrated fund strategy and spreadsheet investing in low-risk SaaS companies — delivering weak performance and technological stagnation. On the whole, diversification should be the default strategy. Concentration may be earned, over time, as a manager demonstrates an ability to consistently outperform and pick winners: "We further find that experience can overcome the need for greater diversification, as more experienced VC firms can generate higher returns with lower diversification. The latter allows them to acquire more specialized knowledge in a given industry or stage of development, which will also benefit entrepreneurs." (source: "Diversification, risk, and returns in venture capital")