8 Steps Startups Can Take to Navigate the Uncertainty of Tariffs
Profitable Growth - Vol 01
There couldn't be a better time to name this substack: Profitable Growth. 😎
I had initially prepared content focusing on decision-making. However, given last week's announcement and the subsequent markets' reactions, I decided to pivot and share some pointers on navigating the situation.
I'm also beyond grateful to everyone who believed in me and subscribed to this substack last week! We recorded almost 50 new subscriptions. To keep the momentum going, I'm granting the first 100 subscribers the special status of Founding Members, which will provide them unlimited access to all future content and tools.
In this week's edition:
Main Article
Quick Hits
Number to Know
I can appreciate how scary and daunting things can look at the moment, but for folks with a bit of gray hair like me, it's déjà vu. For context, I graduated from college right as the dot com bubble burst, as an international student with only a one-year practical training visa 😱, navigated the subprime recession, and lived through COVID like most of you... this situation, too, shall pass.
The best thing you can do is to quickly identify what you can control and focus on that, without losing sight of the broader picture so you won't get blind-sighted.
In this edition, I'm sharing eight steps your organization can take to help navigate the economic uncertainty. It's meant to be a starting point and is not comprehensive by any means. I'm also sharing a few examples of how AI can now play a transformative role in navigating tariff complexities and becoming a strategic advantage.
1️⃣ Refer to Sequoia's "R.I.P. Good Times" slides and cover your bases
When the 2007 subprime crisis happened, Sequoia famously shared this deck with its portfolio companies, which included instructions on navigating the long path to recovery. Since then, they've become startups' SOPs (standard operating procedures) for preserving cash and survival, including:
Hiring freezes and zero-based re-budgeting
Reviewing and cutting all unnecessary spending, including rent, vendor and software licenses, and travel
Reviewing all salaries and moving towards more heavily commissioned sales structures
Taking a more aggressive stance on A/R, A/P, renegotiating contracts, and bolstering your balance sheet
Becoming cashflow positive ASAP and spending every dollar as if it were your last
Develop at least three scenarios (optimistic, moderate, pessimistic) for the next 24 months. Forecast P&L and cash flow under each to understand potential outcomes. For each scenario, define trigger points and corresponding actions. Document these in a contingency playbook. Revisit and revise scenarios as conditions change. Treat this as a living exercise – if new tariffs or economic data emerge, feed them into your models promptly.
2️⃣ Understand the Ripples of Tariffs' Direct and Indirect Impact on Costs and Demand
Meta and Nvidia, a good illustration here, discovered that 68% of their semiconductor suppliers relied on TSMC's Taiwan facilities, creating critical vulnerabilities given U.S.-China trade tensions.
So far, the tariffs have only been targeted at physical goods, not digital services (e.g., SaaS) or BPO (Business Process Outsourcing), so you may think you are insulated.
Think again!
The tariffs will impact hosting and AI servicing costs in these hardware-intensive industries. Who will absorb the incremental costs?
While not directly affected by tariffs, SaaS companies may also face reduced spending from clients whose costs have risen due to supply chain disruptions and higher import prices.
Similarly, the economic uncertainty will cause clients to delay purchasing decisions, resulting in longer sales cycles and your ability to meet your forecast.
On the other hand, the situation could also create opportunities to profit from a destabilized competitor's unfortunate situation.
Last, positioning your products as cost-saving essentials and being creative with contract terms could accelerate your pipeline.
3️⃣ Explore Strategic Partnerships and Collaborations
Your organization should actively pursue strategic partnerships and collaborations to navigate the tariff war effectively. These partnerships can offer alternative supply chains, access to new markets less impacted by tariffs, and shared resources and expertise.
Collaborating with companies in countries with lower tariff exposure, entering joint ventures, or forming co-development agreements can mitigate cost increases and foster innovation. Partnering with established corporations may also open acquisition opportunities or integration into established supply chains.
Engaging with local trade organizations provides startups valuable insights and advocacy on tariff-related issues. Successful collaboration strategies include "ally shoring," partnering with companies in allied nations and nearshoring to relocate production closer to key markets. Strategic partnerships enhance startups' agility and resilience, enabling access to crucial resources and capabilities unavailable internally.
4️⃣ Leverage AI for Tariff Engineering
What's tariff engineering? It's a legal strategy used in international trade to reduce the amount of duty (tariff) paid when importing goods into a country by modifying a product's design, materials, or components so that it falls into a more favorable (lower-tariff) classification under the Harmonized Tariff Schedule (HTS). It's about intelligent product design and supply chain planning, understanding tariff classifications, and proactively adjusting products to minimize import costs while staying within the law.
The HTS is a 4,400-page document governing 20,000+ product classifications to determine expected tariffs. It's also historically been a manual process, creating opportunities for AI-based automation.
For example, Mosaic Data Science achieved 94% accuracy in automated HTS classifications using TensorFlow models, slashing electronics importers' manual review time by 70%. This process proved critical when the US suspended $800 de minimis exemptions for Chinese goods this year.
5️⃣ Establish a Tariffs Escrow Account
Take advantage of high interest rates and hold 3-6 months of projected duty payments in an escrow account. Using machine learning models to predict optimal cash reserves for duty payments, your organization could earn 3-5% APR on idle funds.
6️⃣ Start and/or Automate Hedging
We've already seen significant FOREX (foreign exchange) movement, which could impact your revenue and costs. It's easier to run your business when you've minimized the impact of fluctuating foreign currencies (one less moving part to worry about). Hedging is a service your bank may offer that allows you to guarantee a fixed currency exchange rate on a certain percentage of your revenue/costs through forwards.
There are AI-based alternatives to banks' traditional offerings. For example, Wise saved 89% of its customers from 2024 currency swings by executing 270,000+ micro-hedges daily, each calibrated to specific risks.
7️⃣ Adjust your Pricing Strategy
It's critical to adjust your pricing and revenue model deliberately. Analyze how tariffs impact your product margins and decide if, when, and how to pass those costs to customers.
Be transparent. People read the news like you do, and customers may be more willing to support you than you think, as long as you are honest.
While you don't need to broadcast all internal struggles, it's wise to communicate changes affecting customers. If tariffs force you to raise prices or cause shipping delays, craft a thoughtful message to customers explaining the situation. Emphasize that you value them and are doing everything possible to mitigate the impact (perhaps you've improved features or extended their subscription in exchange).
Honesty here can prevent frustration – customers hate surprise price hikes without explanation. For B2B clients, consider personal calls for significant changes. It's also an opportunity to reinforce the value you deliver so the customer sees the context of why you remain a worthwhile partner.
8️⃣ Communicate Transparently with Stakeholders
Transparent communication can be a superpower in times of crisis.
With your team (employees): Be candid about the challenges the company is facing and the steps you're taking. People appreciate honesty; it builds trust and galvanizes them to help. If you need to implement pay cuts, reduced hours, or a pivot in strategy, explain the reasoning and how it ties to ensuring the company's future. Reinforce the mission – why it's worth fighting for – and acknowledge the sacrifice you're asking of them.
With investors and board members: Don't go silent or sugarcoat issues. Share regular updates on how tariffs or economic shifts affect your metrics, and outline your response plan. If you need more capital or covenant waivers, flag them early. VCs want to help but need visibility. Bring data and scenarios to show you're in control. Honest communication can turn tough talks into collaborative problem-solving and may lead to unexpected support, like customer or lender introductions.
With key partners and suppliers: Similarly, communicate with major partners. If a channel partner relies on your product, assure them of your continuity and negotiate flexible arrangements that help both sides. For suppliers, if you need to delay orders or seek better pricing due to tariffs, discussing it openly can lead to compromises (they may prefer to keep you as a customer on adjusted terms than lose you entirely).
That's a starting point
There are obviously many more opportunities to prepare your organization best to navigate these uncertain economic times, but I had to cap my content to keep this newsletter manageable. Feel free to add your comments and suggestions on what else should be considered so the community can benefit!
If you need help, DM me, and I'll be happy to provide some guidance on how to structure the above.
Quick Hits: What's On My Radar
Article: CFO turnover reaches six-year high. As the "classically-trained" CFOs are retiring, a new generation of CFOs/COOs is emerging.
Virtual Event: My former MBA professor of economics is holding a free virtual session to explore key economic trends shaping the U.S. and global landscape.
Llama 4 Release: The disruption and moat discussion continue. With a 10 million token context window, can this LLM challenge specialized enterprise search and knowledge management platforms like Glean?
New App: Runway is a modern FP&A (financial planning and analysis) platform with an intuitive interface. It enables teams to collaboratively forecast revenue, expenses, and cash flow, replacing traditional spreadsheets with a more dynamic and user-friendly experience.
Number to Know
62%
That's the concentration of CoreWeave's revenue from a single customer (Microsoft). Typically, anything above 10% triggers questions from banks and potential investors. Note that they have multi-year contracts and a plan to de-risk over time and have demonstrated astonishing growth during the years leading to the IPO.
Hope you found this content helpful! Please drop a comment or DM me to share any feedback you have to improve my content. What would you like to see? I will read and respond to all messages.
Until next Tuesday, 👋
JP