New Tariffs Already Chill Spending For VCs, Startups, M&A, Software

The imposition of new, punitive, tariffs on the rest of the world by the US is having a double-whammy impact on venture capital investing and related spending for AI, M&A, enterprise software and even data center construction.

The immediate financial affect is a slowing down of investment, especially commitments by limited partners, as they await clarity about the durability of these threats and their longer term implications. That yearning for greater certainty may take quite a while to emerge. This means that VCs contemplating funding and startups hoping for operating funds may be on hold for months. This could also impact mergers and acquisitions as the economic rationale for them needs to be recalculated. The secondary impact is that costs for a wide variety of goods and services are rising - especially construction materials for data centers - impacting the growth and supplemental costs for AI investors. Overall, it appears that this will likely result in a pause in new spending. JL

Natasha Mascarenhas and colleagues report in The Information:

A stock market rout triggered by tariffs on Chinese and European goods is threatening to end the AI–powered gold rush that buoyed Silicon Valley for more than two years. Tariffs on imports, from smartphones and servers to building materials and motors, are impacting companies involved in AI data centers and robotics. The downturn will accelerate the fall of AI startups that were already struggling. The more than 20% drop in the Nasdaq risks cutting off new capital (as) it will get harder to raise money from the limited partners that back VC firms. The AI field has also been thrown into disarray, as the cost of new data centers under construction for OpenAI, xAI, Anthropic and others is surging. "Assume your [most recent VC] fundraising was your last one for a while.”

A stock market rout triggered by President Donald Trump’s tariffs on Chinese and European goods is threatening to end the artificial intelligence–powered gold rush that has buoyed Silicon Valley for more than two years.

Eric Bahn, a co-founder of early-stage venture firm Hustle Fund, is advising startups the firm has backed to be more cautious with spending and to purchase any hardware, like laptops or phones, before prices increase.

“The safest modus operandi is to assume your last [venture capital] fundraise is indeed your last one for a while,” he wrote Monday in a memo to portfolio companies, a group that includes website design provider Webflow and consumer finance app NerdWallet.

The Takeaway

The Trump administration’s tariff hikes are already starting to chill spending on enterprise software, startup M&A and VC funding, say investors and startup consultants.

“Leverage AI where you can to ease pressure on [cash] burn and to create efficiency gains,” he said.

Tariffs on Asian imports, ranging from smartphones and servers to building materials and specialized motors, are already impacting companies involved in AI data centers and robotics. The downturn will accelerate the fall of AI startups that were already struggling, venture capitalists say.

The equities sell-off and possible economic slowdown are also prompting software buyers to pause new deals, hurting both young and mature enterprise firms, some IT consultants say.

Adam Mansfield, a consultant at Boston-based UpperEdge who helps large firms negotiate software contracts, said the market uncertainties have already caused some customers that spend millions a year on software to put off deals with Microsoft, Salesforce, SAP, Oracle and ServiceNow.

“Budgets were already under pressure going into 2025, and the market crash has prompted customers to further tighten them,” he said. (SAP, Microsoft and ServiceNow declined to comment, while Salesforce and Oracle didn’t return requests for comment.)

Selva Pandian, who leads the cloud practice for consulting firm DemandBlue, said software customers that were anticipating the new tariffs, which the Trump administration had been publicly promising for weeks, have been hitting the brakes on new contracts.

Companies just want to “keep the lights on,” Pandian said.

Investors and startup founders are trying to navigate the first major stock plunge in three years. Venture capitalists, eager to capitalize on breakthroughs in AI pioneered by OpenAI, poured over $60 billion into AI startups over the last two years, according to PitchBook. And public investors piled into stocks like Nvidia and OpenAI backer Microsoft, which benefited from new demand for the technology.

The more than 20% drop in the Nasdaq Composite from recent highs risks cutting off new capital if fund managers think it will get harder to raise money from their own investors—the pensions and other limited partners that back VC firms.

Over the last week, at least two limited partners have said they have paused making new investments or raising new capital to back venture firms until the economy stabilizes, according to one investor who spoke directly to their representatives.

However, many institutional investors have already made their annual allocations for venture investments, delaying the fallout for venture capitalists trying to raise money.

Investors are also starting to see signs that acquisitions—expected by venture capitalists to pick up this year—will pause. For instance, one investor lamented over how potential acquirers walked away from two portfolio companies over the past week.

“M&A is on hold till there’s more market clarity,” this person said.

The AI field has also been thrown into disarray, as the cost of new data centers under construction for OpenAI, xAI, Anthropic and others is on the verge of surging. Oracle executives, for instance, have expressed concern about the cost hikes for a large facility it is building for OpenAI in Texas.

Silver Linings

Some startups, on the other hand, could win some new business due to the tariffs.

Manufacturers looking to bring operations to the U.S. from overseas could turn to robotic automation to cut costs, said Ryan Phillips, a principal at private equity firm WP Global, which is leading a $400 million financing round for humanoid robotics maker Agility.

Some firms’ robots are remotely piloted by workers in other countries, allowing them to continue using cheap overseas labor to work in U.S. facilities. That’s the approach startup Reflex Robotics has taken. It’s hiring workers in the U.S., Latin America and South America to pilot its humanoid robots on wheels, which can pick items from shelves and stack boxes.

Another sector that could see gains is companies developing software for international shipping and ports, said Hans Swildens, CEO and founder of investment firm Industry Ventures. These companies provide software to help importers manage tax collection and legal compliance, and the new tariffs could open a new revenue source for them, said Swildens.