There’s a mantra you learn about as a business journalist—follow the money.
It’s a mantra that feels especially important right now, with tariffs expected to go into effect tomorrow. The Nasdaq Composite has been teetering toward bear market territory for the first time since 2022 as companies gear up for sudden spikes in the costs of imported goods. There’s been a lot of chatter about which companies will suffer the most as a result. But if you sit in the world of the private markets, as many Term Sheet readers do, you’re probably looking at what’s happening through a very specific set of lenses—and they’re probably not rose-colored.
Let’s start with the pipeline that money flows through in the private markets. Startups or small private businesses are funded by venture capital or private equity firms that are, in turn, funded by limited partners. We don’t always talk about these LPs enough (maybe because they tend to be pretty quiet and not say a whole lot in public). But it’s their money—the endowments, pension funds, sovereign wealth funds, nonprofits, and family offices—that sits behind the lion’s share of the private tech markets. It’s these limited partners who can switch the money valve on and off at will. And it’s their behaviors, and the way they react to major shifts in the economy and in the stock market, that can (and does) realign the whole private market system.
There’s been a lot of research and data since the 1970s that shows just how cyclical the private markets are—and how difficult it gets to raise money from LPs during a recession (see here). In recent history, funding to VC firms fell to about $50 billion globally in 2001 from $88.4 billion in 2000, and it dropped to $22.7 billion in 2009 from $53.2 billion in 2008, according to PitchBook.
This cycle we find ourselves in now has been remarkable in its own right. First you had a venture boom caused by more than a decade of low interest rates. Then a 2022 bear market as the post-pandemic recovery upended many business plans, followed by unprecedented amounts of money being plowed into AI companies. But the AI boom was missing a standard element of the private market ecosystem: IPOs and M&A. As a result, limited partners haven’t been getting many distributions for three years.
No surprise then that VC fundraising has been freefalling ever since 2022—and nearly all the capital that is available has flowed to a small group of funds. Last year, 75% of all the capital raised by VCs went to only 30 venture capital firms, according to PitchBook (see data here). Just nine firms raised half of all that capital. Nearly eight in 10 limited partners say they declined to re-up investments into at least one of the VCs in their portfolio this past year, according to Coller Capital’s annual survey.
The expectations going into this year were that the VC sector was due to get its groove back. Many Silicon Valley elites have been hopeful that Trump’s anti-regulation approach will revive M&A activity. And the IPO pipeline was starting to fill up again. CoreWeave’s public market debut wasn’t the blockbuster some might have wished for—the AI datacenter company ended up slashing the amount of money it raised and its stock has been whipsawed since it started trading on the Nasdaq—but there was hope that other IPO candidates, with cleaner balance sheets, might fare better.
As the Trump tariffs take effect, however, the equation is changing. Investors and startup founders must now consider the very real possibility of a sustained bear market or a recession. Companies like Klarna and StubHub have already decided to put their IPO plans on hold. So not only will LPs still not be getting those much-needed distributions, but asset classes like bonds or infrastructure could start to get more attractive again, too, and may lure these LP investors away to something with more liquidity or lower risk.
Maybe we’ll look back at this moment as a blip. Or maybe it’s the beginning of what could be a major reckoning for the whole ecosystem. Time—or tariffs—will tell.
See you tomorrow,
Jessica Mathews
X: @jessicakmathews
Email: [email protected]
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This story was originally featured on Fortune.com
