The VC landscape is getting heated and expanding over AI, but another topic seems to be populating investment memos, GTM strategies and expansion plans. Tariffs, those seemingly boring policy tools, are redrawing the investment map across continents and deciding on winners versus losers in ways that would have seemed unthinkable just a few years ago.
The New Trade Reality Hits Home
The recently implemented U.S.–EU trade deal has fundamentally started changing the economic playing field. The average tariff on U.S. imports from the EU will surge from 1.2% in 2024 to 17.5%, according to investor advisory firm Capital Economics and reported by CBS News. That will reduce the EU’s annual gross domestic product by 0.2%, the investment advisory firm forecast.
This dramatic increase, nearly fifteen-fold, is forcing venture capitalists to fundamentally rethink their investment strategies. New trade barriers are increasing costs on critical components like semiconductors, batteries, and sensors. For startups in hardware, AI, and even SaaS, tariffs are no longer background noise; they’re reshaping margins, supply chains, and go-to-market strategies, as noted by The VC Corner.
Supply Chain Disruption Creates New Opportunities
The tariff impact has created unexpected opportunities for startups providing supply chain solutions. For example, Warehouse Management Systems and AI-powered platforms are becoming essential for optimizing supply chains. Tools that track shipments, optimize inventory, or offer supplier diversification insights are seeing a spike in demand. Enterprise buyers are now budgeting for logistics solutions.
The Hardware Startup Crisis
Hardware startups are being hit the hardest. With tariffs of 10–50% on electronics from China, Taiwan, and South Korea, startups are facing soaring bills of materials (BOMs). Founders are either absorbing the cost or passing it on to customers, fundamentally altering their unit economics. According to industry analysis, “While software startups may be insulated, deeptech and hardware players will feel real pain: higher costs, tighter supply chains, and more investor hesitation” reports Thomas Adcock, Tax Partner at Gravita for Tech EU.
Europe’s Capital Crunch Deepens
The numbers paint a stark picture of Europe’s declining position in global venture capital. The Americas attracted £71.4 billion in VC investment in Q1 2025, nearly three-quarters of the global total, with the US accounting for £69 billion of this amount per KPMG report.
The structural disadvantage runs deep. American venture capital funds raised $800 billion more than their European counterparts over this period. Venture capitalists invest heavily in high-risk research and development activities that are pivotal to spreading innovative ideas and raising overall growth according to the International Monetary Fund. Even more concerning is the retreat of U.S. capital from European markets. In Q1, only 46.9% of total European deal value included US capital, almost four percentage points less than in the preceding quarter. For China, that figure reached just 5% for the quarter. A prime example of the shift in priorities is Andreessen Horowitz’s decision to close its London office according to PitchBook.
European Startup Sentiment Plummets
The impact on European startup confidence is palpable. Investors warn that “They will raise immediate costs on hardware imports, software licenses, and cloud infrastructure and potentially throttle essential funding pipelines.” “It’s an economic gut punch for European startups that could stall critical innovation and throw growth-stage companies into” uncertainty, as reported by Sifted.
The pressure is forcing some European companies to consider dramatic moves. With the European Union in President Trump’s eye line for tariffs, European startups may find the US a better place for their operations according to PitchBook analysis.
America’s Strategic Sector Pivot: AI
While Europe struggles with trade headwinds, U.S. venture firms are adapting by concentrating on strategically protected sectors. U.S. venture capital deployed $3 billion into defense in 2024, marking a record year for the sector, and early 2025 numbers suggest continued strong interest according to The VC Corner.
The AI sector has become particularly dominant in attracting capital. AI startups received 53% of all global venture capital dollars invested in the first half of 2025, according to new data from PitchBook. That percentage jumps to 64% in the U.S., as reported by Axios. This represents an unprecedented concentration of venture capital in a single sector.
The scale of AI investment growth is staggering. The AI sector had a record-breaking year in 2024, securing over $100 billion in global venture capital — nearly double the $55.6 billion raised in 2023, as reported by Gilion. Average deal sizes jumped across all funding stages in early 2025, fueled by a surge in generative AI and biotech investments. Mega-rounds in generative AI and data centers pushed the late-stage deal size to a hefty overall average of $270 million. In a recent report published by Bain, the seed stage and combined pull of AI investments is reshaping the entire venture landscape.
The Broader Market Impact: The Fundraising Slowdown
Global venture capital markets are showing mixed signals amid the tariff environment. Global startup funding reached $91 billion in Q2 2025, according to Crunchbase data — an 11% increase year over year but 20% drop quarter to quarter.
The fundraising environment for VC firms themselves has become particularly challenging. The imbalance between demand and available capital remained steep, signaling a tough climate for dealmaking. According to PitchBook data published in Fortune, just $10 billion was raised across 87 VC funds, setting the stage for what could become the weakest fundraising year in over a decade.
The exit environment has also suffered. Early Q1 2025 brought a brief IPO revival hope, with several firms planning debuts. But renewed tariff concerns rattled markets, cut valuations and shook investor confidence. Klarna and StubHub delayed pre-IPO roadshows, citing market conditions according to Crunchbase.
However, the tariff impact is creating uncertainty that could derail the venture capital recovery. Although demand for AI remains strong, new tariffs could disrupt chip supply chains, which may eventually “dent VC appetite” for AI investments, as reported by Fortune. VCs investing in tech startups with manufacturing customers are parsing the preliminary impacts of tariffs on the sector, as covered in Pitchbook with manufacturing deals already declining before tariffs took full effect.
The Innovation Paradox
The most troubling aspect of this shift may be its long-term impact on global innovation ecosystems. Venture capital has traditionally operated on the principle that the best ideas can emerge anywhere and scale globally. Tariffs introduce friction into this model, creating artificial barriers that may prevent promising technologies from reaching their full market potential.
AI will likely remain the biggest ticket for VC investors, although defensetech, healthcare and biotech, and cybersecurity will likely also continue to attract attention, as noted in the recent KPMG release. This concentration in specific sectors, while commercially rational, raises questions about innovation diversity and global technological development.
The tariff regime is also forcing unexpected geopolitical realignments. China is pivoting to higher-value investments in Hungary, Slovakia and other nations within its growing orbit as Bloomberg reports, creating new investment corridors that bypass traditional transatlantic routes.
A Fractured Future?
The current trajectory suggests we may be witnessing the emergence of increasingly regionalized venture capital markets. Guest author Rohit Yadav on Crunchbase takes us on an exploration of the value chain: VC fundraising, startup fundraising and exits, to see how tariffs are driving both direct and indirect impacts.
The question isn’t whether the venture capital industry will adapt to this new reality—it already is. The more pressing question is whether this adaptation will preserve venture capital’s role as a catalyst for global innovation or transform it into something more insular and nationally focused.
Early evidence suggests a mixed outcome. While American venture firms are successfully pivoting toward protected sectors like AI and defense technology, European investors face a more complex challenge: either accepting reduced returns from tariff-impacted investments or shifting focus toward domestic markets that may lack the scale necessary to generate venture-level returns.
Conclusion: Innovation in the Age of Walls
The ultimate irony may be that trade policies designed to protect domestic industries could end up stifling the very innovation that drives long-term competitiveness. In an interconnected global economy, walls built to keep competitors out may also trap domestic innovation inside—a lesson the VC industry is learning in real-time as it navigates this new landscape.
The transformation is already underway, with American firms doubling down on AI and defense while European startups face an uncertain future of higher costs, reduced access to capital, and potential relocation pressures. Whether this represents a temporary adjustment or a permanent fracturing of the global innovation ecosystem remains to be seen, but the early indicators suggest the latter may be more likely.