Headwinds, Tailwinds, and Crosswinds Ahead for Rising Startup Ecosystems

It’s that time of year again: prediction season. There are some “known unknowns” founders and investors will adapt to — foremost, a change in administration. But if the last five years have taught us anything, it’s that far more “unknown unknowns” will play out in the months to come.

In 2025, startups beyond the coasts and outside of the traditional tech hubs will face new challenges and, with customary resourcefulness, also seize new opportunities. Here’s where we think a few scales are poised to tip.

Headwinds

Liquidity crunch: While venture-backed IPOs ticked up in 2024, public market entrances still fell short of expectations and historical levels. M&A activity also remained sluggish (this year was the second-slowest in the past 11 in terms of deal volume, according to Axios). With scarcer exit opportunities and LPs looking for returns, VCs may retreat further to perceived safety in traditional tech hubs.

Ripple effects from the liquidity crunch: While we documented the founding of 1.4K+ new regional VC firms from 2011–2021, many of those firms (that are often the biggest backers of their local ecosystems) face a more daunting market for raising subsequent funds without materialized returns. The optionality to lock in gains amid prolonged investment cycles through secondary sales and continuation funds are disproportionately available to larger, multi-stage, incumbent funds.

Steep prices and borrowing rates: Although inflation has eased from 2022 peaks, relatively high interest rates persist, and consumers and businesses are still feeling the financial strain. In regions where venture capital is already sparse, accessing funding remains difficult and expensive. Higher interest rates additionally create pressure for outsized venture returns, pulling investors back to geographies that have historically produced the biggest multiples.

Mega round-driven funding gaps: According to Carta data, less than 3% of deals accounted for 41% of capital raised by U.S. startups in Q1-Q2 of 2024. No surprise: these $100M+ rounds are largely concentrated in the coastal tech hubs, with many drafting off of the AI boom.

Tailwinds

Anticipated reduced M&A barriers: Many speculate that a second Trump administration is likely to lead to a rollback of the FTC’s antitrust and anti-merger approach. Exit optionality is indeed essential to the startup and venture capital lifecycle, as acquisitions make up 90% of exits.

Inflationary pressure easing: The country’s inflation rate declined for several consecutive months in 2024, prompting the Fed to cut interest rates for the first time since 2022 in September, followed by subsequent cuts in November and December. With lower interest rates comes greater access to capital and lower theoretical investment “hurdle rates,” which benefits startups and investors.

Re-shoring and reindustrialization: Supply chain shocks and geopolitical uncertainty have led to a bipartisan “Made in America” push that advantages regions in the middle of the country with proven manufacturing capabilities and expertise. Tariffs as trade policy during the Trump administration could also have a meaningful impact.

Maturing ecosystems: Rising cities — and especially their startup communities — have evolved substantially in the last decade. These markets have grown their talent pools, attracted public and private funding to bolster their innovation and tech ecosystems, built network density around specific industries, and generated startup success stories that will only beget more momentum.

Winds that are definitely blowing, we’re just not sure in which direction

Artificial intelligence: On one hand, the LLMs and foundational models that are capital-intensive to build and scale benefit Big Tech and Silicon Valley incumbents. Brookings data also shows that much of our country’s AI jobs are located in traditional tech hubs…

…On the other hand, the democratization of AI allows startups with fewer resources to operate more efficiently, making success less dependent on deep pockets, dense developer talent pools, and, ultimately, zip code. Startups in rising cities are also more attuned to regional economies and plugged into legacy industries that would benefit from the practical application of AI.

Remote work: As more companies ramp up in-office policies, the availability of remote roles that enabled talent to stay in or relocate to rising cities during the pandemic diminishes. This shift risks slowing the flow of highly-skilled workers to emerging tech hubs, potentially stalling the growth and diversification these ecosystems have seen in recent years.

…Alternatively, startups between the coasts may have greater access to tech talent looking to remain remote or find new roles in the cities where they reside as employees resist returning to coastal offices.

Focus on capital efficiency: Shifting investor preferences may lead startups to focus more on sustainability than growth in a way that leads to muted outcomes that attract fewer follow-on investments and meager exits in regions where capital is already scarce…

…On the flip side, the VC mindset shift from “growth at all costs” to sustainable profitability is an advantage for capital-efficient businesses in more economically conservative regions with significantly lower operating expenses and costs of living.

Startups in rising ecosystems face unique pressures that amplify during economic shifts, but these challenges also create opportunities for differentiation, innovation, and long-term resilience. Overall, we’re bullish on America’s shift toward and embrace of a more dispersed innovation economy.