Wall Street’s volatility has venture capitalists raising the specter of yet another funding winter.
Last week, early-stage startup investor Chip Hazard sent a letter to over 400 companies in his firm Flybridge’s portfolio, warning them that the money spigot could soon run dry.
“To the extent you are mid-stream in raising capital, get that closed as soon as possible. We repeat, close anything mid-stream ASAP,” Hazard wrote in a memo seen by Business Insider.
President Donald Trump’s tariffs sparked a historic sell-off in the stock market two past two weeks. Analysts at Goldman Sachs said Thursday stocks would fall further and the economy could tip into a downturn, even after the President dialed back most of his tariffs last week.
Trailing 3-month returns for VC portfolios have already seen a 3.3% drop in current market value due to the Trump tariffs, according to data provider Pitchbook.
“The tariff plan brings little relief for the private market ecosystem, which has already been struggling under the pressures of low exit activity,” Paul Condra, Pitchbook’s global head of private markets research, wrote in an analyst note last week.
Hazard told founders in his portfolio not to panic. His letter noted that most of them will not be directly affected by the rising cost of imports. However, some or all of their customers may be. And the tariff-induced anxiety rippling through the markets might give some institutional investors pause.
“The capital markets are in turmoil, and institutional investors may freeze up, leading to a reduction in the accessibility and availability of venture dollars,” Hazard wrote.
Avoid any startups with connections to China
At last week’s partner meeting for a large Bay Area VC firm, the message was clear, according to someone in the room who asked to remain anonymous: No new high-multiple deals until the turmoil is over, and avoid any startups with connections to China.
If this trajectory at all sounds familiar, it should.
It was not long ago that the pandemic’s stimulus checks and low borrowing costs pumped cash into the venture market, setting off a free-money era and driving startup valuations higher.
This period of excess wound down quickly, though, as inflation and interest rates climbed.
Seeking a safe harbor for their billions of dollars, pensions, foundations, and endowments invested more in real estate and bonds rather than high-risk tech stocks and venture funds.
The money that once gushed into these funds waned. Investors wrote fewer and smaller checks to startups, leaving some starved for capital. The number of company shutdowns surged.
In some ways, the artificial intelligence boom changed everything. The rapid evolution of this technology reignited interest from venture capitalists, who were eager to find the next breakout.
While the market is far from the heady days of unchecked spending, investors are jittery to get into the hottest startups. Former OpenAI CTO Mira Murati is targeting an eye-popping $2 billion seed round for her new AI startup, Thinking Machines Lab, BI reported last week.
Now, after a second week of market turmoil with no end in sight, there’s worry the recovery may stall.
“We’re a lot more cautious,” said the VC whose firm is pausing big deals. “We’re not trading as though the economy is good until the economy is trading like normal.”
General partners trying to raise new funds were already facing an uphill battle before the tariffs went into effect, as first-quarter fundraising plummeted to the lowest point in six years, according to data from Venture Capital Journal.
After the tariffs, raising a new fund became even harder, according to one San Francisco VC who noticed prospective investors in these VC funds, also known as limited partners (LPs), were stalling until they had a better sense of the market’s direction.
“I talked to several LPs this week, and they didn’t explicitly mention the tariffs, but they politely said they would like to reconnect in a couple of months,” said the VC. “I can read between the lines and see people want to wait it out to see what happens before they deploy more capital.”
“The math for LPs might have changed,” said Anna Barber, a partner at M13, a venture capital fund that invests in business and e-commerce software. Barber said she hasn’t given new marching orders to founders yet, though, saying it’s too early to tell the long-term effects.
LPs generally prefer to take the long view and avoid making decisions on day-to-day market fluctuations, according to Nate Leung, a partner at Sapphire Partners and co-founder of OpenLP.
“That said, we are hearing folks anticipating prolonged illiquidity,” Leung said. “The last few years have been tough fundraising markets that continue to see challenges.”
As soon as Trump was elected, markets surged, and companies lined up to finally go public, including the buy-now, pay-later lender Klarna, the ticket reseller StubHub, and the AI infrastructure provider CoreWeave. Google’s blockbuster $32 billion offer last month to buy the cybersecurity company Wiz fueled hopes the dormant M&A market would roar back to life under a more business-friendly administration.
Now Klarna, StubHub, and others have delayed their IPOs indefinitely due to market volatility.
“All of that optimism has been sort of squashed,” said one emerging fund manager.
The investor said he would expect some organizations that invest in venture funds to slow down and put more money to work behind bigger, more established funds instead of emerging funds.
He recalled the slog of raising a fund in the post-pandemic bust.
“It feels like Groundhog Day,” he said.
