Heterogeneity in type 2 diabetes can be represented by a tree-like graph structure by use of reversed graph-embedded dimensionality reduction. We aimed to examine whether this approach can be used to stratify key pathophysiological components and diabetes-related complications during longitudinal follow-up of individuals with recent-onset type 2 diabetes. For this cohort analysis, 927 participants aged 18-69 years from the German Diabetes Study (GDS) with recent-onset type 2 diabetes were mapped onto a previously developed two-dimensional tree based on nine simple clinical and laboratory variables, residualised for age and sex. Insulin sensitivity was assessed by a hyperinsulinaemic-euglycaemic clamp, insulin secretion was assessed by intravenous glucose tolerance test, hepatic lipid content was assessed by 1 H magnetic resonance spectroscopy, serum interleukin (IL)-6 and IL-18 were assessed by ELISA, and peripheral and autonomic neuropathy were assessed by functional and clinical measures. Participants were followed up for up to 16 years. We also investigated heart failure and all-cause mortality in 794 individuals with type 2 diabetes undergoing invasive coronary diagnostics from the Ludwigshafen Risk and Cardiovascular Health (LURIC) cohort. There were gradients of clamp-measured insulin sensitivity (both dimensions: p<0·0001) and insulin secretion (pdim1<0·0001, pdim2=0·00097) across the tree. Individuals in the region with the lowest insulin sensitivity had the highest hepatic lipid content (n=205, pdim1<0·0001, pdim2=0·037), pro-inflammatory biomarkers (IL-6: n=348, pdim1<0·0001, pdim2=0·013; IL-18: n=350, pdim1<0·0001, pdim2=0·38), and elevated cardiovascular risk (nevents=143, pdim1=0·14, pdim2<0·00081), whereas individuals positioned in the branch with the lowest insulin secretion were more prone to require insulin therapy (nevents=85, pdim1=0·032, pdim2=0·12) and had the highest risk of diabetic sensorimotor polyneuropathy (nevents=184, pdim1=0·012, pdim2=0·044) and cardiac autonomic neuropathy (nevents=118, pdim1=0·0094, pdim2=0·06). In the LURIC cohort, all-cause mortality was highest in the tree branch showing insulin resistance (nevents=488, pdim1=0·12, pdim2=0·0032). Significant gradients differentiated individuals having heart failure with preserved ejection fraction from those who had heart failure with reduced ejection fraction. These data define the pathophysiological underpinnings of the tree structure, which has the potential to stratify diabetes-related complications on the basis of routinely available variables and thereby expand the toolbox of precision diabetes diagnosis. German Diabetes Center, German Federal Ministry of Health, Ministry of Culture and Science of the state of North Rhine-Westphalia, German Federal Ministry of Education and Research, German Diabetes Association, German Center for Diabetes Research, European Community, German Research Foundation, and Schmutzler Stiftung.