What is realistic customer concentration risk and when is it a fatal flaw?
Short Answer
If your top customer is >20% of revenue, you have concentration risk. Losing them breaks your unit economics. Honest disclosure prevents surprises in due diligence.
Full Explanation
A SaaS company with £10M ARR but top customer = £3M (30% of revenue) has fatal concentration risk. If that customer leaves (and customers do), revenue drops to £7M overnight. Unit economics collapse unless margins were extreme. Investor concern: with 70% of revenue at risk from one customer, valuation is contingent on that customer. Worst case: customer is evaluating competitors or has internal budget pressure. Honest disclosure: "Our top 5 customers represent 60% of revenue. Our largest customer is 25% of revenue and has been with us for 4 years with 95% gross margin. They've expanded from £100K to £500K contract value. Concentration risk exists if they leave—we've mitigated by: (1) building 20-person team embedded with customer to increase switching costs, (2) expanding use cases within the account (moving from Finance to Ops), (3) acquiring customers in new verticals to diversify." This shows you've identified the risk and are managing it. Hiding concentration (or claiming it's "not a risk because they love us") triggers investor scepticism. Concentration is particularly dangerous for fundraising because due diligence usually includes customer reference calls—if your top 3 customers feel obligated to you (you have no plan B), diligence discovers it immediately. Better to own the risk proactively.
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