What Trump’s Trade War means for startups and Venture capital
The US administration’s shocking tariff’s strategy is shaking the global economy and is bringing great uncertainty to both public and private markets. President Trump announced that the US will pose 25% tariffs on the auto industry, in conjunction with steel and aluminium tariffs. Potential follow up tariffs appear to be in the pharmaceutical industry and on lumber products. The inconsistency with shaky back and forth decisions on tariffs announcements creates even more uncertainty in the global markets as it appears that there is no long-term plan for US trade policy, but rather bursts of announcements about new tariffs every other day. Trump’s tariffs are projected to raise inflation and hurt growth of the American economy.According to the Fed Chair Jerome Powell, GDP growth projections are down from 2.1% to only 1.7%.
The world is adjusting to the world order change and the end of the era of globalization and free trade. The world is reallocating itself into areas of interest and economic growth, empowering governments to take action nationally to be prepared for the upcoming US growth hits in the US that will impact economies globally.
A poster child of this change are Tesla shares that are dropping approximately 50% due to public reputation shift of Elon Musk and his late controversial political engagement, while the Chinese EV manufacturer BYD accelerating and creating momentum globally. We see Nasdaq and the US public market get hit, while the DAX is surging. German stocks since December 2024, have been preforming extremely well and have beaten the US magnificent tech stocks by 56%.
These large geopolitical and macroeconomic trends do not only impact stocks and GDP growth of economies, but they also impact risk capital, startups and the entire innovation ecosystem. They impact almost any industry from AI to climate tech and health-tech. Typically, startup founders do not get involved in macroeconomic trends, when building their startups, but as I have experienced in the last 4 years working with CEOs, founders and fund managers, they should be aware and plan ahead to adpat their ventures and investment portfolios due to those changes.
Most of that impact on startups correlates with the public markets and might signal pessimistic slowdown, but there is much reason to stay optimistic about the future and even be bolder than ever.
Increasing supply chain issues, raised costs and delays for startups
As we have seen during the downturn a couple of years ago, economic uncertainty impacts supply chains. The tariffs imposed by the US administration and the reciprocal tariffs by the EU, Canada and Mexico as a response on goods, no matter if it’s sensors, chips, auto-parts or lumber will change procurement processes, shipping costs, and preferences of businesses to import to and from the US. A startup company in the US that is using a sensor made in China and metal parts made in Canada, will have 25% more to pay, and that startup either will need to adjust their use of funds to deal with it internally or raise prices for their customers. Startups might need to raise more capital to meet those increased prices, or look for other suppliers within the US to relieve the 25% cost. Thos might lead to deceleration of development and production and increase inefficiencies of developing new relationships and processes.
I speak with a few startups, that are running around and trying to build strategies to adapt to the costs, but also to prevent any delays and customs issues. This might mean production to halt, delays to customer orders, and slowdown in R&D development of startups. It might impact company valuations and needs to raise capital and might elongate or shorten time between investment rounds.
Shifting Venture Capital trends and investment focus
JP Morgan is projecting a probability of over 40% for a US recession to happen in the near future, and Goldman Sachs changed and reduced their US growth projections forecast by 0.5%. Although the climate in the first two months of the US administration in the financial sector and public markets were extremely positive and optimistic, analysts are reshuffling their projections. Venture capitalists from the Bay Area such as David Sacks who was appointed by Trump as a Senior Advisor and “White House AI & Crypto Czar” pushed for a new golden age with extreme growth of AI investments. In January, there was an extreme optimism from VCs in the US and even downgrading of the ecosystems in Europe but as uncertainty grows VCs are cooling down in the venture industry, and some are adapting to the economic projections of slow growth and increase inflation.
We know from the recent market downturn that occurred after Covid that market uncertainty, leads to Limited Partners including pension funds and family offices to change their risk appetite. LPs might choose not to invest in risk capital and choose less risky investment asset classes. What this means for venture funds and fund managers that raising for their new funds will be more challenging especially if they are new fund managers. We have seen many VCs sit on dry powder and waiting for markets to come back to positive growth, not making investments for a while, and sometimes get pressured by their LPs. We are definitely not there yet, however if signs of recession will materialize and trade war will escalate and not blocked, we will see LPs change their risk profile of their investment portfolios, and mega funds and emerging fund managers raise rounds, but challenge for new fund managers.
VC Geographical focus might shift with US growth slows down but Europe and the UK accelerates
According to the OECD Economic Outlook report of March 2025, we see projected slowdown in the growth of all markets, as the US is taking the entire G20 on an economic decline due to a trade war and reciprocal measures. The only region that does not experience slowdown but acceleration of growth in 2025 and 2025 is the Euro area and the United Kingdom. It’s important to note, that in all countries apart of Mexico there is still growth but not at the expected rate.
Different geopolitical and market realities like the relationship crisis between the US and the Ukraine, and AI investment announcements like the $500 billion investments of AI infrastructure by Open AI, Softbank and Oracle, embolded the European Union and the UK government to take bolder actions that will cut the economic and defence dependencies on the US and will make their own aggressive investments in AI, defence and other technologies. This new mindset along with the projected growth, will also create momentum from global private investors to invest in Venture Capital and companies in the European region. I see US venture funds very interested in EU and UK startups and also startup founders who wish to come and build their ventures in Europe. This reality will yield new policies and government investments in technologies, AI, Infrastructure, energy and defence technologies.
From conversations with several investors there is a strong sentiment, that VCs and Private Equity funds over-invested in US companies, and there should be some kind of correction to invest in companies in Germany, France, UK and Israel. The latest WIZ acquisition by Google for $32 Billion shows that the US tech market still looks at global opportunities and that will only increase. Venture funds heavily invest in European markets and even double down on presence in the European ecosystem. General Catalyst which merged with La Famiglia recently are extremely active in the continent as well as Sequoia Capital and others, increasing their footprint in Europe. This in my view will build the resilience of the global startup ecosystem, alas the policies in manufacturing and transitional industries to localize everything.
Strategic investors and CVC activity challenged
Corporate Venture Capital as we know it today will also be impact. Most likely, large corporations will experience disruption due to increase costs of exporting and importing goods and services. Corporations are operating globally, and tariffs will impact their ability to keep costs steady. The biggest pressure would be to keep efficiency and quarterly financial performance that was promised to shareholders.
From personal experience, the first costs to be cut are on the innovation and venturing arms. CVCs live an a cycle of 5 years where many of the CVCs either get shut down or get a hold on their budget from their parent company. I expect that if we see a global trade war escalates, we might be experiencing some CVCs to either be removed from corporate strategy or reduce investments. Most likely this will impact M&A but also minority investments in startups. The impact will be on industrial corporations mainly, and not on the Magnificent Seven that will probably keep their independent arms like Microsoft’s M-12 and Google Ventures operating and investing in portfolios that could feed their core business of cloud services and AI.
Challenging times brings great Innovation
History has shown that in times of economic crisis, wars and geopolitical chaos, innovation thrives. Some of the greatest technologies and tech companies were founded during war times, and financial crisis. IBM was founded in 1911 during a recession, Microsoft was founded in 1975 during the Oil Embargo recession and Slack and Airbnb were founded in 2008 during the financial crisis. Interestingly enough, those are US companies, which brings much optimism that in addition to the shift to some other ecosystems, the US will keep generating amazing startups and tech companies.
With the rise of AI, Large Language Models, robotics and other amazing and impressive technologies that we see today, I am predicting that during 2025 and 2026 some of the most impressive and successful startups will be born. We will meet some of the most resilience future CEOs and leaders build and scale startups, and their ability to build in this financial climate will be a validation of their potential for growth and to become the magnificent future tech giant.
We will definitely see some hit and slowdown on the growth side for the short-term, especially in the US. However, early-growth startups and technologies will be thriving and exciting.
How to prepare your venture for a Trade War?
95% of the startup founders that I have met have not taken any action or spent time thinking about preparing for such an event which is right around the corner starting on April 2, 2025. Many VCs are talking about it, but there is small push on startup boards and for investors to encourage portfolio companies to prepare for such event even though we have been through similar events like the downturn recently.
Founders are focused on building product, raising capital and speaking customers as they should, however, I believe that CEOs and VCs should put some thinking and prepare for the upcoming economic turmoil. I do not believe that you should now stop working or completely change strategy. Venture capital and building startups is a long term game and you should think about how your startup will adapt to the changes of any financial and social event coming.
To help founders with thinking and preparing, here is a 4 principles framework that will help you prepare yourself as founders and to prepare your teams: Strategize, Diversify, Adapt and Be frugal.
Strategize - Don’t wait for tariffs to hit and then for you to only respond to crisis with your suppliers, investors, customers and team. Be proactive. Sit with your co-founders, with your board and advisors to build strategy that will build your resilience. Ask tough questions like what if tradewar will impact the risk apetite of our current US investor to follow up in our next round? what if our plan to expand to the US next year will meet challenges becuase of inflation and decrease in US economic growth? You have to be open and honest, and put things in writing to prepare mentally and operationally.
Diversify - I have personally seen how startup companies are creating dependencies by focusing on a single supplier, and even single banking service. Diversification is critical as a founder to build resilience and be flexible when things get tough. As yourself, can we build relationship with multiple suppliers, and see how we can work with suppliers that will reassure that these events won’t create any delays in production? are your partners and investors operating globally, and would it make sense to operate with local partners to reduce export and import issues?
Adapt - Adapting to change is a mindset and should be a part of your culture. In such a volatile economy and world, you need to prepare yourself to almost anything. You need to make sure that you are up to date with the current situation, regulations and impact of different policies, and that you are building internal processes that you can amend and that your employees and leadership could adapt along with you - you cannot have leaders on your teams with fixed mindsets but ones that will help you navigate your rocketship as reality changes around you.
Be Frugal - Be prepared to be frugal, to control your hiring, your spent, to shift travel plans and to optimize your spent on market and new development. If you are in the scale up phase, think about what would I have done in the early days of my startup - how can I do more with less. In addition, hire people that are not fixed on operating only with big budgets. A typical mistakes CEOs in the growth stage do, is hiring corporate executives that will only work with high budgets for marketing, partnerships and more. Your executives should be ready to get creative even if they have the budget at hand.
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