Tariff Chaos & China Decoupling Pose Twin Threats for Startups & VCs
Plus, a16z's $20 billion fundraising effort
Tariff turbulence continued this week and VC’s are divided. We have commentary from Mark Suster, Joe Lonsdale, Brad Gerstner, Paul Graham, and more, along with a new tech stock index from Nate Silver. We also make our case for why Trump fealty is bad for Silicon Valley. Plus, the top AI models are surpassing human benchmarks, per Stanford.
The Main Item
Trump Backers Cry ‘Art of the Deal’ While Erratic Policies Tank IPOs, M&A & Growth Forecasts
The financial markets this week showed what they think about our mad king and his love of tariffs — and chaos.
Stocks and bonds were falling hard into the weekend as the reality of 10% blanket tariffs across the world and a full-on trade war with China began to sink in. The 90-day reprieve on the massive “reciprocal tariffs” affecting almost all countries, announced Wednesday, may have stemmed the market free-fall triggered by President Trump’s “liberation day” announcement last week, but that’s proving small comfort for investors or anyone else.
There’s been talk for years about how US-China tensions were leading to a “decoupling” of the two nations' economies and the “balkanization” of the global tech industry, which for a half-century has benefited enormously from free trade and cross-border partnerships. Export and investment restrictions that began during Trump’s first term and ratcheted up under Biden had already shifted the mood and prompted some diversification of supply chains, and US VC investment in China is mostly dead (and vice versa.)
Now, though, barring some kind of grand bargain with China — which from where we sit looks highly unlikely in the near term — we’re going to see what real decoupling looks like, and it won’t be pretty for the tech industry or the startup economy. We expect Trump will find some way to avoid tripling the price of the iPhone, but the costs of countless inputs that US tech companies rely upon, from the steel needed for data centers to the rare earth minerals used in chip production, are likely to increase substantially, and some products may be hard to find.
The market meltdown that greeted the tariff-rollout has already killed startup exits, with analysts projecting that IPOs are dead for the next year or more, with most M&A also on ice for the foreseeable future. Locked-up exits are a bigger issue than usual at the moment as VCs struggle to return cash to their LPs, and with most funds showing minimal DPI even after four or five years and public stock values sinking, LPs are likely to feel even more over-exposed to venture.
Trump revels in chaos and uncertainty, which allow him to showcase his power, but there are few things that investors, executives, and entrepreneurs like less.
Trump-supporting VCs seemingly understand the tariffs are bad for business, but many won’t come out and say it directly. 8VC’s Joe Lonsdale couched his light criticism of the tariffs this week in a series of compliments for the president that smacked of “Dear Leader” fealty.
Upfront’s Mark Suster told Newcomer that while it was good that Trump finally backed down on the tariffs, as long as Trump is running the economic show things will stay unstable.
“He wants to be the maestro making markets move,” Suster wrote over text. “No good will come of single actors having outsized influence.”
The biggest Trump boosters on Wall St. and in Silicon Valley advanced some remarkable pretzel logic to justify his actions. Hedge fund manager Bill Ackman echoed the White House in praising the tariff flip-flop as the “art of the deal,” but we weren’t aware of any actual deals, as opposed to a retreat under pressure with the hope of deals later. The idea that a negotiating strategy resulting in plummeting share prices and extreme market volatility — and likely a recession — is a win in itself is quite the head-scratcher.
It’s clear already, per Nate Silver’s new tech stock index, that Silicon Valley’s bet on Trump is not paying off.
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Trump and his supporters still can’t agree if tariffs are 1) a good thing in themselves that will help balance the budget and revive American manufacturing 2) a temporary tactic to force others into trade deals more favorable to the U.S. 3) part of a deliberate effort to weaken the dollar and boost exports by moving the world away from the dollar as a reserve currency 4) a key weapon in the war on fentanyl or 5) all about confronting China.
The differences here are not exactly in the nuances. We’re open to a coherent argument about the tariff policy but we’re getting just the opposite, and meantime the markets are voting with their dollars and it isn’t pretty for Silicon Valley. Based on what Trump has said over many years, number one above is probably closest to what he thinks, which is hardly comforting.
Frankly we’re increasingly alarmed about how innovation and tech investment is likely to be hurt by a number of Trump’s policies. The attack on universities, including efforts to eviscerate federal funding for scientific research, is an assault on one of the pillars of American high-tech dominance, yet there’s been a disconcerting silence on the issue from the tech industry. We hope more university leaders at least will follow the example of Princeton and Wesleyan and push back against illegal executive orders.
Summarily arresting and deporting people with valid visas based on something they said, without any due process or even the allegation of a crime, is a horrific violation of what we once thought America was about — and couching it as an attack on antisemitism only makes it more offensive. Tech entrepreneurs around the world are surely watching, and thinking twice about coming to the U.S.
The assault on law firms, where Trump is using the power of the government in plainly unconstitutional fashion to persecute people who dare oppose him, is similarly a middle finger to the rule of law, the foundation of any democracy. We hope Perkins Coie and Wilmer Hale, who are fighting back against executive orders that would bar them from courthouses, are ultimately the role-models here, as opposed to Paul Weiss and Skadden Arps, which sought to preserve their businesses by doing Trump’s bidding.
We wrote back in May that Silicon Valley is at its best when it’s building cutting edge technology, not playing suck-up to volatile heads of state. Most of those who have done business with Trump over many decades have learned the hard way that, as with any bully, acquiescence that’s anything short of blind loyalty only makes matters worse.
What’s the value of hustling for generational wealth if you can’t say what you want when you get there?
Newcomer Podcast
Walter Bloomberg at the Wheel for the Whole Stock Market
We’re welcoming special guest Tom Dotan from Dead Cat fame to the podcast this week — just in time for a massive bout of global economic instability!
Enjoy our lively discussion on tech’s Trump-supporting self-own.
Later on, Eric talks with Flexport CEO Ryan Petersen, aka Silicon Valley’s logistics whisperer, about how President Trump’s tariff policies will affect trade around the world.
What They’re Saying
Investors Don’t Like Tariffs But Some Still Trust Trump
The drama over tariffs showcased the split between Trump’s Silicon Valley champions and his critics.
“Can AI grow the US economy faster than Trump can shrink it? I hope so, but I can’t pick a winner yet.” — Paul Graham, Y Combinator founder