At the start of the year, Tom Drummond, managing partner at the San Francisco-based venture capital firm Heavybit, was feeling mildly anxious about the state of the world and how political volatility in the US might affect capital markets. Now? “No one knows what the hell is going on,” he tells WIRED.

Drummond was referring to President Donald Trump’s so-called reciprocal tariffs, which sent global markets into a tailspin when they were announced on April 2. Trump later backpedaled, pausing import duties on most countries for 90 days, though a 145 percent tariff on Chinese goods has remained in place. It’s unclear what will happen when the pause ends in early July. “There’s just as much chance for these tariffs to be pulled as for Trump to dig his heels in,” says Drummond.

Several venture capitalists working at small to midsize firms told WIRED in recent weeks they are concerned that Trump’s tariffs could slow down tech investments, further decelerate an already sluggish market for initial public offerings, and possibly even put some tech startups out of business. Some investors say they’re planning to lengthen their investment cycles and will be looking to sell their stakes in private companies to other asset managers. Others say that, at least for now, they’re staying away from investing in hardware companies, which may be hit particularly hard by Trump’s tariffs.

“The tariffs are undoubtedly the main thing that was discussed in every partner meeting the past couple weeks,” says M.G. Siegler, an independent investor and former partner at GV Management Company. "The key question is how real this ends up being, how long will it last, versus just some sort of weird temporary blip.”

Bracing for Impact

The biggest factor determining how much a VC firm will be impacted by the tariffs, Drummond says, is whether its portfolio companies are subject to first-order effects of the tariffs, meaning they’re directly reliant on global trade, or whether they’ll primarily feel the second-order effects of an eventual reduction in customer spending if the economy goes into a recession.

“If you’re looking at a portfolio of industries that rely substantially on cross-border trade or transactions, like hardware, clean tech—even biotech to a degree—you’re in a world of hurt right now,” he says. One of Drummond’s portfolio companies is an internet-of-things platform, which he says is now scrutinizing its inventory management strategy, trying to determine when to order from suppliers and if it can find new ones outside of China in places like Vietnam.

Siegler says that if the tariffs remain in place, he believes VC firms are going to “distance themselves even further from basically all hardware startups.” He adds that some investment funds have stayed away from hardware for a long time for other reasons. “Hardware is much harder and riskier than software—but this just escalated that to the nth degree.”

Chip Hazard, a Boston-based general partner and cofounder of Flybridge Capital, recently sent out an email to over 400 startup company founders urging them not to panic, but warned that capital markets are in “turmoil” and institutional investors might “freeze up,” thereby reducing access to funding, according to a copy of the message viewed by WIRED. Hazard encouraged startup founders to think through the risks and opportunities the tariffs will likely create for their businesses, as well as to evaluate their financing strategies.

“To the extent you are midstream in raising capital, get that closed as soon as possible. We repeat, close anything midstream ASAP,” Hazard wrote. “And be really judicious about how your capital is being deployed.”

Managing partner Charles Hudson told WIRED that his venture firm, Precursor, has stakes in several ecommerce startups that could be “heavily impacted” by Trump’s tariffs.

But, Hudson adds, he doesn’t know the best way to strategize around the tariffs, because “the logic for their timing, scale, and scope seems to reside only in the head of our president, and tariffs aren’t being discussed as part of the normal policy-making process that would give us more clarity.”

Precursor, which invests in early-stage startups, just raised more than $65 million for its fifth fund. Hudson said in a recent interview with The Information that he plans to make investments over a three-year period rather than the standard two years. The hope is that the extra time horizon will give limited partners, who supply the funding to venture capital firms, to see returns on their investments.

Hudson also predicted that selling stock in private startups on the secondary market will make up the overwhelming majority of liquidity that investors see over the next five years, rather than returns from acquisitions or initial public offerings.

Other VCs agree that the secondary market is likely to heat up. “VCs used to be the ultimate HODLers, holding on for dear life, riding it out until a startup they invested in IPO’d,” says Drummond. “But over the past 10 years they’ve had to become much more disciplined sellers and figure out how to deliver liquidity sooner.” That’s been true for a while because of rising interest rates and VCs being more cautious, but it’s “especially true now,” he says.

Analysts from PitchBook, a database for statistics about the venture capital and private equity markets, warn the tariffs could have a cooling effect on international investments, noting that startups once celebrated for having “global first” strategies might now be seen as vulnerable.

In the first quarter of this year, prior to Trump’s official tariff announcements, a smaller share of US capital was already flowing to VC deals in Europe and China than in recent periods. Around 47 percent of European deals included US funding, down four percentage points from the final quarter of 2024.

“For decades, VC has flourished in an increasingly borderless world, but another week of tariff wars is prompting a major reassessment,” PitchBook reporter Leah Hodgson wrote earlier this month.

Bad News for IPOs

Before Trump took office, investors had been hopeful that the tech IPO market would continue rebounding this year after falling into a slump in 2022. The market was showing signs of recovery in 2024: There were 176 initial public offerings in the US last year compared to 127 in 2023 and 90 in 2022, according to data collected by the consulting firm EY.

Accounting firm KPMG noted in a report published earlier this month that “lingering market uncertainties” had led many startups to delay their imminent public debuts this quarter. The mobile banking service Chime, ticket giant StubHub, and Swedish “buy now, pay later” firm Klarna all hit pause on planned public offerings. AI infrastructure firm CoreWeave was the outlier—it began trading shares in late March.

“With expectations for the recovery of the IPO market moving farther out again, we could see a shift in VC firms needing to reallocate investment priorities, as some companies may need additional funding prior to a now more-distant IPO,” Conor Moore, global head of KPMG Private Enterprise, said in the report.

Some investors and analysts say there are reasons to be optimistic, despite unpredictable US trade policy and instability in the broader markets. Industries like AI, defense tech, and security could now be ripe for investment. “Pockets like defense tech might be ‘safe’ bets because those startups were trying to shy away from the Chinese supply chain anyway, for obvious reasons,” says Siegler. Logistics startups, especially those specializing in nearshoring, also stand to benefit from Trump’s policy changes.

Hazard, who sounded the alarm about the impacts of tariffs in his note to founders, and whose firm manages $1 billion in assets, says he remains particularly confident about long-term trends in AI. “If we’re headed into a period of economic uncertainty, and our AI companies are focused on helping their customers be more agile and generate more revenue, there’s a lot of potential value there,” he tells WIRED.

American companies continue to receive the lion’s share of global investment in AI, according to KPMG. OpenAI and Anthropic alone have announced investments totaling more than $43 billion this quarter. But those massive fundraising rounds are outliers that likely exclude most small and midsize investors. And a booming AI market—which includes startups that haven’t yet proven a path to profitability—may not be enough to offset the volatility of this new geopolitical era.

Still, Hazard tells WIRED, “I’m a little less alarmed than I was two weeks ago.”