The trade war between the United States and China is escalating quickly. Much has been written about the impact of tariffs on large businesses. Ultimately, though, most large companies have the resources to absorb new taxes, or simply pass the increase on to consumers.
But what if you're a brand-new start-up suddenly faced with new, unexpected taxes?
That's exactly the question many technology start-up companies in the U.S. are confronting in the wake of the recently announced tariffs.
Our company, Brilliant, created a new kind of smart home control that gives homeowners touch and voice control over all of their smart devices from anywhere in their home. For three years, our team of 30 has invented new technologies, raised capital, created the product and built an ecosystem of partners. We launch today, finally putting our product in the hands of homeowners.
Just two months from our launch, Brilliant was suddenly faced with adversity from an unexpected source: its own government. Our nascent products were subject to the 10 percent tariffs that were announced on $200 billion in "Chinese" products.
To be clear, Brilliant is a US company; all our employees are based in the United States, and the Brilliant product is designed entirely in the United States. Our manufacturer is even a US-based company, albeit one with factories throughout the world. But like most consumer electronics products, Brilliant is being manufactured in China, because that is where the electronics supply chain is based, and it offers a unique combination of high quality and consumer-acceptable cost. Simply because of the geography of our manufacturing, we're suddenly subject to tariffs imposed by the US government.
With no time to move our supply chain, we were forced to raise our prices. No sooner had we done so than the tariff rate was abruptly increased to 25 percent. We felt that we could not raise our prices further without pricing ourselves out of our market. We are a premium product, but we are premium in an attainable manner – more like Apple than like Cartier. We didn't want to become a luxury product, so we had little choice but to absorb the price increase.
Technology start-ups generally lose money as they establish their business, because everything is more expensive for a start-up than it is for a large company operating at scale. The initial objective is not to make money, but rather to prove that a product can ultimately be profitably scaled. Many now-great companies have followed this path. But when companies are in their infancy, absorbing punitive taxes means that precious capital reserves will be depleted more quickly. For start-ups like Brilliant that are doing well, this means that more investment will be needed, resulting in less ownership for employees. Start-ups that are on shakier ground may run out of capital before they have a chance to prove themselves. In the vast graveyard of failed start-ups lie many that would ultimately have thrived, given the chance.
Nearly all economists agree that the effect of the trade war with China on the US economy will be profoundly negative, but the challenges to start-ups are especially troubling. Start-ups are important drivers of future economic growth, because some will grow exponentially – not too many years ago, such tech giants as Google, Facebook and Amazon were all start-ups. But because start-ups look insignificant today, there's relatively little attention paid to the impact that tariffs have on them.