Hardware startups need more fundraising in face of tariffs say investors

Hardware startups — and their investors — will have to look at options for more fundraising, bigger budgets and longer cash runways as they try to prepare for the impact of tariffs imposed by the US administration on a wide range of imported goods.

The tariffs, combined with retaliatory measures from some of the US’s biggest trading partners, have thrown cross-border trade into disarray, and will have impact on investment patterns. Just how quickly that hits individual startups and investors varies, however, with hardware companies first in the firing line, corporate VCs tell GCV.

“Any hardware company, given the global supply chains these days, is going to feel that effect in some shape or form, because these tariffs are now on pretty much all the countries,” says Pradeep Tagare, head of investments for National Grid Partners (NGP).

“If you’re importing aluminium, for example, you’re going to have to figure out how you’re going to address that. Hardware companies, which make up about a quarter of our portfolio, will have to think through it and wherever they can, they will move on. But they will have to go through that process.”

The smarter or luckier startups may already be procuring important equipment from outside the US, adds Raymond Zheng, who leads Honda’s strategic investments and open innovation activities. But almost everyone working on hardware is likely to eventually feel some pain due to the global nature of the supply chain.

“[Take] for example, a startup doing battery chemical materials – components of batteries that require special equipment from outside of the US – some from Japan, some from China, some from Europe,” he says.

“If they need more [materials] to scale and need more equipment, and the tariff is in place, they’re going to have to pay more. They will probably need more funding and bigger budgets. Those are the ones that will get hit a bit harder. The software startups, probably not yet.”

Energy and batteries aren’t the only areas where there’s an issue. Construction technology startups may be able to source concrete more locally, but steel and aluminium are more specialised and have been hit by 25% tariffs from the US. Need wood? Lumber is expected to have duties placed on it later this year, having been designated as similarly classed ‘strategic goods’ by the government.

Another sector expected to take a big hit is consumer goods, says Piyush Puri, founding partner of media-for-equity venture firm Mercurius Media Capital, particularly those that rely on a supply chain even partially located in Asia. Larger costs for materials means startups will have to either raise prices or make cuts in areas like marketing and communications to combat shrinking profit margins.

“Margins, particularly in the first few years, are very thin, often even negative,” says Puri. “If you push that deficit further, it means more fundraising rounds and greater reliance on venture capital.

“On top of that, with the uncertainty in the market, everyone’s wary of making new investments right now. And to make matters worse, whatever capital was available has already been sucked down by AI ventures or by any company that mentions AI in its blueprint.”

Software startups will be less affected – but uncertainty will hit everyone

Not everyone is as pessimistic. Other corporate VCs say they expect their portfolios to be relatively unaffected for now, partly because they lean heavily toward software and partly because many of their startups are at pre-commercialisation stage.

“We invest at early stage, so a large number of our portfolio companies are still in that pre-series B stage,” says Mike Smeed, managing director of carmaker JLR’s InMotion Ventures unit.

“When we look at the number of portfolio companies that are hardware suppliers to JLR, there actually aren’t that many. I think it’s one, in fact, and naturally, they’re contracted to a future vehicle and not a present one. So, in reality, we’re not really feeling any impact from that.”

Tony Sun, investment director for petrochemical producer PTT’s GC Ventures fund, says the impact is minimal for most of its earliest-stage portfolio companies, because they’re still at the research and development point. For more advanced startups, it can be a different matter.

“The ones that are being affected much more are more mature, on the growth side, where they’re already generating tens of millions in revenue,” he says. “Especially if they are already in the global supply chain. The pressure on the revenue and the margin side are much, much higher for those startups than the earlier ones.”

But the impact goes beyond basic costs. Everyone agrees that uncertainty around tariffs is a potentially significant factor. For corporate VCs that can mean a lack of clarity around what the market is for portfolio companies, particularly if their potential customers are larger corporations which are taking a hit on their own core businesses.

“A lot of the startups we invest in have some component of hardware in them, but I wouldn’t say that it’s so material that the impact of tariffs will be a game changer for them,” says Raj Singh, managing partner of JLL Spark, the investment arm of real estate services firm JLL.

“I think the impact of tariffs for our startups is more around the uncertainty that it creates and the buying patterns changing for their clients, so maybe their clients are more affected by tariffs and therefore less willing to spend on a solution that might make a difference.”

Startups should think global, and so should corporate VCs

Uncertainty around tariffs is expected to be ongoing – “right now, there’s one person that has a lot of power and takes decisions quickly, so it can change overnight,” says another investor. But that also means there is an opportunity for corporate VCs to help startups by providing advice and, if necessary, capital.

Big corporations often have dedicated policy teams to keep track of changes, and giving startups access to this guidance can be a real benefit. It is a service that Sun is providing for his portfolio companies at GC Ventures.

NGP’s Tagare says his unit is instructing portfolio companies to prepare for an environment where funding could be difficult to raise until there is some element of clarity in the market, so they may have to extend their runways and make their existing cash last longer.

“Some of those companies have to deal with the effects of tariffs between borders, so they have to rework their business plan,” he adds. “We are supporting them and doing all of that.

“But from an investment point of view, we continue to invest. I mean, history has shown that these periods are the best time to invest in startups. Because, invariably, companies get a lot more efficient. They know that funding is hard to come by, so the focus changes.”

Staying flexible

Mads Moeller, who heads power and automation group ABB’s Electrification Ventures unit, says that while it’s too early to guess how the tariffs will eventually pan out and ABB has not put together a specific policy for startup deals, he believes investors should keep their options open.

“You need to be aware of where you invest,” he says. “Especially in areas like electrification, where regulation and market access really matter.

“With tariffs and shifting policies, geography might play a bigger role, at least in the short term. But that can also create new opportunities. If it becomes harder for US startups to expand internationally, it might open the door for European or Asian startups to take a stronger position.”

But having options is key. While the energy and electrification technology startups Electrification Ventures looks at may have hardware components potentially affected by tariffs, they also tend to think globally, often running pilot projects on different continents simultaneously. In this environment, having the flexibility to focus on the most promising markets is an advantage.

“Normally, I’d say startups should narrow their focus, especially when it comes to scaling. But right now, having the option to serve different markets might actually work in your favour. It gives you room to adapt, and in our space, that kind of resilience is important,” he says.

“Startups in energy and electrification already deal with long cycles and market challenges. This is one more factor, but it doesn’t change the fundamentals.”