Recent reports highlight that tariff uncertainty is significantly affecting the entire venture capital value chain, drawing parallels to the pivotal shifts in global trade systems since the General Agreement on Tariffs and Trade (GATT) was established in 1947.

A new wave of tariffs and trade restrictions is prompting businesses to reassess alliances and fundamentally altering global commerce. This evolving geopolitical landscape presents both challenges and opportunities for startups as they navigate these changes.

Venture capital funding has already seen a shift as limited partners (LPs) exhibit caution due to external factors including tariffs. This uncertainty can affect LP capital flow into venture capital in several significant ways:

• Capital Pullback: Increased volatility related to tariffs could lead LPs to withdraw from venture capital investments. If they are overexposed due to declining public markets, they may seek to rebalance their portfolios.
• Shift to Alternative Investments: As stock market fluctuations become more pronounced, LPs may pivot to other asset classes—like private credit or hedge funds—offering perceived stability and better alignment with current market dynamics.
• Preference for Established Firms: LPs might prioritize investments in reputable VC firms with proven track records, making it more challenging for emerging funds to secure capital.

Although startup fundraising showed initial signs of recovery in the first quarter, tariff uncertainties have introduced several challenges:

• Risk-Averse Environment: The potential for tariff impacts can amplify a risk-averse mentality among venture capitalists, making them more selective with funding. This caution could hinder growth and capital influx.
• Sector-Specific Challenges: Startups with international operations face heightened challenges, especially in sectors like hardware and consumer goods, where tariffs can escalate costs and complicate market entry strategies.
• Geographical Disparities: While some areas, like China, have already been experiencing fundraising declines, the implications of U.S.-EU relations might prolong fundraising cycles and flatten valuations further.

Exits represent a crucial aspect of the venture capital ecosystem; however, the implications of tariffs may be felt most acutely in this area:

• IPO Activity Decline: Although IPOs constitute a smaller fraction of overall exits, they play a vital role in driving value. Recent tariff concerns have hampered IPO processes, dampening investor enthusiasm and leading to delays in anticipated launches.
• M&A Activity: Mergers and acquisitions remain a focal point; however, the landscape is complicated. Major technology firms have largely steered clear of acquiring startup ventures since 2021, despite sporadic high-profile deals.
• Growth of Secondaries: The secondary market for venture capital is gaining traction as an essential option for liquidity, particularly in challenging market conditions where traditional exit routes are constrained.

Tariff implications are no longer just a peripheral concern; they now influence decision-making across various facets of venture capital—ranging from investment priorities to talent acquisition strategies. The challenges ahead, particularly in the second quarter, could dictate the future trajectory of the venture ecosystem. Should tariff tensions diminish, the sector may see a temporary relief; otherwise, adaptation will be crucial for sustaining growth in the long term.