Introduction
We just launched our Hypergrowth Startup Index, showcasing the world's fastest growing companies and how they're doing it. Gathering data from over 1,000 companies (in collaboration with Pitchbook), and interviewing thought-leaders and experts, the report is a veritable playbook on how to scale quickly.
Then the the U.S. administration announced a slate of global tariffs that are having profound impacts on both equity and bond markets. But what impact will these tariffs have on the startup landscape? That's what we hope to explore in this article.
The Tariffs
The current U.S. administration is making headlines with a long list of tariffs on dozens of countries. One day, there are new tariffs on a list of countries. Then come the retaliatory tariffs. Then, there are tariff freezes. (Track ongoing tariffs via The Conference Board or Bloomberg.)
These actions are leading to a volatile market, trillions of dollars lost in stocks, and fears of recession.
The financial impacts will hit consumers and businesses hard, and the startup industry is particularly vulnerable to the unpredictability.
With rising costs of goods, declining consumer demand, pausing of IPOs, and limiting VC investments, startups are facing many upcoming challenges.
To survive and succeed, startup leaders will need to fully understand the potential impacts of the tariffs on their businesses and how to prepare to navigate these hurdles.
Here are some ways that the tariffs could affect the startup ecosystem and how founders can limit negative impacts.
Potential impacts of tariffs on startups
Individual startups and the ecosystem at large will all be impacted by the tariffs. Even with pauses on tariffs or if the administration pulls back tariffs in the future, the market may remain volatile, and international sales could be affected.
Here are some ways that the tariffs may impact the startup industry.
Supply chains may be disrupted
Supply chains will likely face disruptions, especially with so many tech parts being imported from abroad. With rising costs for suppliers, they may need to reduce production or increase their prices.
For startups, this could make it harder to source any components you need for production, especially for companies that sell physical products.
Companies will need to diversify their supply chains as much as possible to limit being overly impacted by tariffs in any one location. This can be challenging for startups that have limited time and money to pursue multiple suppliers, but those that can adapt and find alternatives will have an easier time getting through the supply chain disruptions.
Business costs will increase
The cost of doing business, for startups all the way up to large corporations, will increase in response to tariffs, especially for companies that import or export goods. Digital-based companies, such as SaaS or AI, are likely to be impacted the least, while companies that sell technological goods, like smart devices, will face some of the highest costs, especially if the U.S. announces tariffs on semiconductors, Reuters reported.
Prices on consumer goods will rise
As a result of rising business costs, consumers will also pay higher costs. Many businesses can try to absorb some of the tariff-related costs to help steady consumer demand. Still, with rapidly increasing tariffs and retaliatory tariffs, businesses will likely need to pass some of the higher costs on to consumers.
Consumers are likely to limit spending
As consumer costs increase, customers will look to eliminate any excess or unnecessary spending. If they can swap to free services or software alternatives, they are likely to do so, especially when everything from tech to groceries is increasing in price.
As reported by CBS News, experts at Goldman Sachs have predicted a 45% chance (at the time of writing) that the U.S. could enter a recession within the next year. J.P. Morgan has set odds of a global recession at 60%, NPR reported. With the risk of recession, consumers and businesses will need to cut spending, which could limit demand for goods and services.
VCs may limit their funding
Businesses and consumers will be looking for ways to cut costs and save money, so it only makes sense that VC firms will also need to scale back their spending when the market is so unpredictable. With higher risks of startups losing money, VCs will be more cautious in their investments.
“VC and growth investors may exercise greater caution than usual and allocate more of their funds to reserves for existing portfolio companies. Early-stage companies with imminent funding needs may find the fundraising process to be more difficult and more drawn out,” warned Brandon Greer, Senior Director of Corporate Development at HubSpot.
Some IPOs are on pause
For later-stage startups preparing to go public, it may be best to wait longer before the debut. As PYMNTS reported, several IPOs for big names like StubHub and Klarna have been paused in response to the tariffs. Uncertainty around the markets is making it harder for businesses to move forward with any long-term decisions.
“Just as startups have investors, so do most funds. There is still a high level of pressure from the past few years from fund LPs to see real returns from their positions. That dynamic will continue to influence appetite for new investments, as well as exit outcomes—and the dynamic could worsen should tariffs prompt a longer-term economic pullback,” Greer explained.
AI startups could flourish
The startup space has already seen great outcomes for rising AI startups, and that could continue, even with the tariffs. As customers look to limit spending and do more with fewer resources, the demand for AI may increase.
“It is possible we will see a tighter funding environment, but we could also see an acceleration in AI adoption as businesses look to continue growth with more economic constraints,” said Kipp Bodnar, CMO at HubSpot.
However, higher tech-related costs could still negatively affect costs for AI startups, and these businesses will need to find ways to lean out their budgets while continuing to meet demand.
How startups can prepare for and respond to tariff concerns
Above all, startups will need to be adaptable to withstand the market challenges, both now and in the future. Take, for instance, some of the unicorn startups that survived the 2008 financial crisis: Airbnb, Uber, WhatsApp, and Netflix.
According to one study on startups that survived the worst of the COVID-19 pandemic, the companies that were digitally innovative, open to adopting new technology, and with strong relationships with customers and stakeholders were most likely to succeed. Startups with experience in incubators were also better off managing a business during a crisis, according to the research.
With all that in mind, here are methods to build resiliency to tariffs and other challenges your startup could face in the future.
Be transparent and communicative
From vendors to clients, it’s important to be transparent about the tariff impacts, especially if you need to raise prices. Work with your marketing team for the best strategy to emphasize the value you offer, even with a higher price, to minimize the risk of scaring off clients.
With vendors, consider negotiating costs and payment terms — but remember that your vendors and suppliers are also likely to be hit with the same issues you are. Work together to benefit all parties.
Thin out the budget where possible
Startups are already operating on thin margins, but if there’s any space to reduce costs, work toward reducing spending as much as possible. Maybe you tap more AI tools for your GTM strategy or adopt a remote working policy to limit overhead office costs.
“Startups should maximize their operating runway while staying close to customers to have a real pulse on the demand for their product,” Bodnar said.
To further reduce spending, startups may need to switch suppliers and vendors to more local options where possible. This could limit the cost increases for startups that may need to import parts.
Re-evaluate launch timings
Hardware-centric startups are going to be hit harder by tariffs than AI- or software-focused startups. Companies selling digital products tend to have lower costs of goods sold (COGS) because they have limited imports for product parts.
For companies that import significant amounts of hardware, it’s time to consider whether now is the right time to launch that second product or if higher costs linked to tariffs could negatively impact the launch.
However, software companies should also be mindful of launches, especially with limited demand here and abroad. According to Tomasz Tunguz, VC at Theory Ventures, tech companies have about 15% of their revenue coming from Europe and 48% of revenue from outside of the U.S. in general, meaning tariffs could lead to declining demand for U.S. startups selling products and services internationally.
Not only that but with consumers likely to limit spending, now may not be the best time to launch a product — unless that product could be particularly beneficial to your customers during these times.
Work with professional advisors
If your startup has an advisory board, consult the board members on how to navigate the challenging markets. The advisors have likely experienced similar challenges, such as during the COVID-19 pandemic or the 2008 financial crisis, and will be able to offer advice on the next steps to take.
If your startup doesn’t have an advisory board, consider consulting with a mentor, former colleagues, or even other founders to talk through your options. Study how successful startups have previously made it through difficult market terms, and apply similar tactics to your own operations.
Look into emergency funding options
Advisors or mentors may help point you in the direction of emergency funding options to help sustain the startup during these tumultuous times. Startups can also look into business loans or credit cards as emergency solutions, especially if VCs limit their investment spending.
However, reserve increasing your business credit for emergencies only and after you first reduce spending. Loans and credit come with interest rates, and you don’t want to end up in a hole of debt that you can’t dig out of down the line.
Conclusion
The market uncertainty and volatility surrounding the ongoing tariffs have put even more pressure on the startup industry. The implications will be far-reaching, affecting everything from consumer demand, supply chains, operating costs, and even VC investments.
However, there are still opportunities for growth, especially for AI startups. While the road will be bumpy, founders can use this time to be innovative in order to overcome the market challenges.
Clear and frequent communication among teams and with customers will be vital to staying afloat. Startups will also need to find ways to minimize operating costs and may need to absorb some of the tariff-related costs in order to limit the fall in consumer demand as prices across the board increase.
Finally, keep in mind that no matter what the market looks like, the startups that are flexible and innovative are the ones that will scale. Ultimately, these startups are building resiliency to succeed, even through difficult times.