The debate over concentrated versus diversified VC portfolios usually goes like this:

Concentrated = high risk, high reward. Fewer companies means bigger swings. If you nail a couple winners, your fund prints money. Of course, you could lose everything too.

Diversified = risk mitigation. More shots on goal means you can afford lots of losses, but there’s concern the returns will be diluted.

Of course, the best of all worlds would be to have a concentrated portfolio if you could guarantee that you have hits in it.

But when it comes to which strategy is better, the landscape of funding has changed dramatically over the decades in the US - which is what has the biggest impact on which strategy to go with.

The concentrated portfolio playbook worked when there was little to no VC competition

Go back to the 90s or even early 2000s, and venture capital was a cottage industry.

A handful of firms existed, and most startups couldn't find investors even when they had traction. This meant if you were investing back then, you could invest in companies that already had product-market fit at incredible valuations.

In late 1997, when Benchmark invested $6.7m in eBay for a ~22% stake, eBay did nearly $6m in revenue that year. They already had product-market fit, and Benchmark got into the company with such high ownership and a relatively low valuation because there were no other VCs interested in investing.

Try replicating those deals in Silicon Valley now.

In that environment, concentrated portfolios made total sense. If you're only investing in companies with proven traction at favorable valuations, your downside risk is low. You don't need 100 positions when you're cherry-picking obvious winners at great prices.

Fast forward to today's pre-seed landscape

These days, there are thousands of investors chasing deals.

Most pre-seed and seed funds are investing pre-revenue. Often pre-data. Sometimes pre-anything.

When you invest that early, you literally cannot de-risk through selection. You don't have enough information.

This is where the old concentrated portfolio advice falls apart.

If you're investing in 20 companies that have zero product-market fit, you're taking massive concentration risk. A couple bad batches, and your fund goes to zero.

The investor competition changed, and the strategy has to change too.

The math actually favors diversification now

Ultimately, what changed the game is that power law returns are uncapped.

Your downside on every investment is 1x. You lose your money, that's it.

But your upside? Unlimited.

These days we're seeing 10,000x winners. One of those completely overshadows every other position in your portfolio. (The other investments literally don't matter from a returns perspective.)

Research from Carta shows that seed investors typically need to invest in 25-35 companies for their funds to be viable and perform.

Their portfolios contain a larger number of smaller investments because investors at the earliest stages need to take more "shots on goal" than funds investing in later-stage companies with revenue and product-market fit.

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If you accept that logic, the answer becomes obvious: increase your portfolio size to maximize your probability of capturing one of those massive outliers.

As one fund manager wrote in Signature Block: "If someone offered you 3.5 times more shots for each shot you take, and you'd have to find only a 2x bigger outcome, you'd take the deal every single time."

Two big caveats

This strategy only works if you can solve for two things:

1. Deal flow: Do you actually have access to enough quality companies to build a 100+ company portfolio? (At some point there are diminishing returns.)
2. Operations: Can you support that many portfolio companies? (There's real overhead involved.)

But if you solve those problems, the math says shoot more bullets - not fewer.

The bottom line

Concentrated portfolios made sense when VCs could invest in proven companies at great prices.

That world doesn't exist anymore for early-stage investors.

Today, if you're investing at the earliest stages with zero data, diversification isn't defensive - it's your best shot at capturing a 10,000x winner.

The landscape changed, and your strategy should change with it.