Middle-market M&A and venture capital are operating in a market defined by selective deployment and heightened discipline. While capital reserves remain substantial, buyers and investors are deeply scrutinizing seller fundamentals to prioritize the best companies and the best fit. Also a major factor is artificial intelligence, which has emerged as both a complex source of diligence friction and a powerful valuation catalyst, one that’s reshaping how deals are priced, built and won.
According to Brian Zuercher, a partner with The Northbound Group, today’s M&A market can be defined as a
The Northbound Group
simultaneous mix of caution and rapid deal-making.
“The caution is evident in standalone deals where buyers lack a strategic goal, such as an industry rollup,” Zuercher says.
“Meanwhile, well-capitalized PE or private groups focused on sector-specific rollups are actively pursuing acquisitions. In general, well-prepared, high-performing companies are positioned to succeed, while turnaround deals continue to face significant challenges.”
If expectations align with business fundamentals, he says the primary factor that could hinder progress is the pace of deal execution.
“Sellers who are well-prepared and able to act swiftly will have a higher likelihood of closing deals successfully,” Zuercher says. “Time has always been a challenge in closing deals and the current uncertainty has only amplified this difficulty.”
Well-run companies in desirable segments are attracting multiple bidders and seeing strong valuations, says Thomas Pampush, Business Group Chair, Ice Miller. But whether it’s in the market generally or in a specific deal, uncertainty drives buyers and sellers apart. Though sellers try to create certainty by going to market with a clear picture of future growth, often supported by a sell-side QofE, Pampush says buyers’ diligence processes are pressure testing targets’ business and assumptions in ways not previously seen.
Some of that uncertainty, says Hugh Cathey, CEO of RxCelerity, could be grounded in a particular concern.
“The biggest obstacle is there is a sentiment that we could be headed for a downturn in the economy due to the geopolitical climate,” Cathey says. “That makes things more complicated for both sides of the transaction.”
Other macroeconomic uncertainties that might give dealmakers pause, according to Cathey, are interest rates and oil prices because of their unpredictability.
“For me, that means there’s more risk in any kind of deal,” Cathey says.
Zuercher says he’s keeping an eye primarily on input costs and geopolitical uncertainty, noting that there are particular sectors that have been hit with massive import costs and it’s not clear whether they will make big moves to onshore or move sourcing.
Speaking of onshoring, Kyle R. Shen, president and CEO of Nexceris, says a major current factor is increased domestic production and insourcing with the U.S. breaking traditional partnerships and ties.
“Increased threats of tariffs are causing companies to do more deals to shore up domestic U.S. production,” Shen says. “I see lots of deals for U.S. manufacturing and raw materials capabilities.”
Strategic buyer discipline and valuation realism
Drilling down, Pampush says there’s still an abundance of capital in the market, so quality targets continue to see strong valuations and high demand, especially in attractive sectors such as business services or health care.
As Shen puts it: “If you are making good money with an established base, there are lots of buyers out there — not a surprise that good companies are in good shape. PE is looking to deploy capital in good investments.”
Zuercher says those companies that have endured a challenging decade of storms and continue to progress should be seen by buyers as an exception. Now, those that demonstrate successful integration of AI into their model will have an advantage, as will sellers capable of supporting seller-financed agreements. However, those with outdated valuation expectations are still creating transaction hurdles.
“Peak 2021 pricing is largely unattainable across most industries, making it challenging to align on adjusted valuations,”
Zuercher says.
To this point, though Pampush agrees that some sellers are still unrealistic about valuations, he says with each passing
year more and more sellers come to market with reasonable expectations, and buyers continue to have leverage over transaction structure, including earnouts, to bridge any valuation gaps.
Sellers are also realizing deal resistance because of the increasingly robust buyer due diligence and the murkiness of AI’s business impact.
“Sell-side QofEs are almost de rigueur on deals with an EV of $20 million or more, and that threshold is declining,” Pampush says. “Exposure to and utilization of AI is another source of uncertainty that has buyers questioning sellers’ growth propositions.”
Buyers, in general, face stiff competition for quality targets, he says. And PE sponsors are grappling with prolonged hold periods while still chasing new deals.
Deals are out there, Nexceris’ Shen says. Buyers just need time to find the right ones.
“(There’s) lots of money chasing few deals and going into smaller deals,” he says. “Lots of competition for good deals.”
Middle market M&A outlook
Looking ahead to how the remainder of the deal year might play out, Pampush says he expects the fourth quarter to be very robust.
“There are a lot of quality targets held by ready sellers and eager buyers with access to plenty of capital,” he says.
The Northbound Group’s Zuercher, however, says it seems like another year of cautious optimism across most sectors.
“While I anticipate a rise in deal volume, it’s unlikely to be a standout year,” Zuercher says. “With the majority of VC funding concentrated in AI, gauging the broader capital flow remains challenging. The full impact of post-pandemic financing is still a couple of years away from becoming clear, but I foresee increased market capital over the next two years.”
For RxCelerity’s Cathey, he sees a shrinking window for the current M&A conditions.
“My bet is that 2026 ends up looking a lot like 2025, but I think 2027 is going to prove to be more challenging,” he says.
Mega deals and capital concentration in early stage
Casting a look across the early-stage ecosystem, J.D. Davids, managing partner of SmartMoney Ventures, says what’s catching his eye is the rise of the mega deals.
SmartMoney Venture
“Over $400 billion of venture capital was deployed in the first half of 2026, which is more than the full year of 2025 and any other full year prior,” Davids says. “Much of the capital is going into chip manufacturing and data center buildouts because the demand for AI compute/tokens is almost limitless. The race for market share dominance is on between giants new and old.”
Venture Capital dry powder remains above $600 billion and approximately 86 percent of it is going into AI-first companies, according to the most recent PitchBook-NVCA Venture Monitor report.
“The money is out there for companies that demonstrate real customer traction and revenue growth,” Davids says. “The problem is that it’s harder than it looks and entrepreneurs are wise to spend more time with customers than they do pitching investors.”
Cindi Englefield, co-founder of Accelerating Angels, says it may be easier than ever to start a company, test an idea and reach customers, but it is not necessarily easier to fund or scale that company.
“We are seeing impressive investment numbers, but those numbers can be misleading,” Englefield says. “Capital is concentrating in fewer companies, larger rounds and especially AI. For the typical early-stage entrepreneur, and particularly for women and founders in the Midwest, fundraising remains difficult. Going public is becoming viable again, but it remains an option for a very small percentage of companies. For most entrepreneurs, a successful outcome will be a strategic acquisition, private equity transaction, sustainable profitable business or another form of partial liquidity, and not necessarily an IPO.”
These trends are playing out in a somewhat rocky economic environment, the effects from which are rippling through the early-stage ecosystem.
“Tariffs and trade policy don’t touch our portfolio directly so much as they hit our founders’ customers: industrial and manufacturing buyers are getting cautious with capex, and that stretches sales cycles for anyone selling into those markets,” says Mary Kenney, Columbus market lead at Heartland Ventures.
Another funding trend Davids says he’s seeing is an evolution of venture capital and private equity transactions.
“Many of the venture capital mega funds like Sequoia Capital, Kleiner Perkins, General Catalyst, Andreessen Horowitz, New Enterprise Associates and others have transitioned into evergreen funds and are transacting deals that look more like private equity than venture capital,” Davids says. “For example, General Catalyst acquired 100 percent of Summa Health — the primary health care system for Akron, Ohio — via its HATCo subsidiary, and have multiple portfolio companies deploying new ways of navigating health care.”
Founders and investors navigate new hurdles
Because building is cheaper than it used to be, Kenney says a lean team can stretch a dollar further leveraging AI tools.
“We’re seeing an increasing number of founders with top technical talent focusing on building for the industrial sector, which has historically been a laggard in the technology space,” she says. “Simultaneously, the labor crunch has become so pressing that operators are more willing to test out new technologies to augment their existing teams — Deloitte projects 2 million unfilled manufacturing jobs over the next 10 years.”
Davids sees a similar impact from AI on the early stage, saying a small team — or even a talented intern using AI coding tools — can build products, websites and marketing assets in weeks that would have required large budgets just a couple of years ago.
“Entrepreneurs can also reach customers and generate revenue faster than ever before,” Davids says. “The barriers to launching have never been lower.”
Within that trend, Englefield says she also sees a healthy shift back toward business fundamentals.
“At Accelerating Angels, our investors want to see customer validation, disciplined spending, credible financial projections, a solid business model, and a realistic path to revenue and an exit,” Englefield says. “I think founders are building more intentionally and thinking earlier about governance, capital strategy, potential acquirers and the kind of company they truly want to build.”
However, because it is now easier and cheaper to start companies, find product market fit and scale, Kenney says the hurdle for landing Seed and Series A term sheets is significantly higher.
“More pilot conversations and real ARR is necessary relative to a couple of years ago,” she says. “The pace of innovation can also be a challenge — competitors can catch up, pivot or replicate features much faster than only a few years ago, so finding a true moat is difficult.”
The same AI tools that make building easier, Davids says, also create enormous competitive noise.
“It’s easier to launch, but much harder to stand out among the crowd,” he says. “The number of new businesses incorporated is currently on the increase.”
Englefield finds that founders are being asked to prove more before investors commit.
“It is taking longer to raise capital, which is taking significant time away from building the company,” Englefield says.
On the investor side, Kenney says a challenge is that valuations are all over the place in a way that takes discipline to sift through.
“We’re seeing seed rounds priced at levels that would’ve been unthinkable a few years ago, and a lot of it is being driven by large funds moving earlier and earlier with big checks, chasing a finite pool of vertical AI and physical AI/robotics deals without doing real diligence,” she says. “The math underneath it is what should worry people: median seed pre-money is now near $20 million while the median seed check is still around $3 million, so everyone is buying less of a more expensive company than they were three years ago, and the Series A bar has moved from roughly $1 million of ARR to closer to $3.5 million. Certain deals are reminiscent of 2021’s ZIRP era, which eventually corrected into down rounds and shutdowns once the money dried up.”
Davids says investors are benefiting from an improving exit environment.
“The IPO window has begun reopening, M&A activity is increasing, and secondary markets have become a meaningful third path to liquidity alongside acquisitions and public offerings,” he says. “In 2025, secondary market transactions reached a record $94.9 billion, while IPOs reached $104.7 billion and M&A exits delivered $170.3 billion. Those trends should gradually improve distributions back to limited partners after several slower years and should produce more investment activity across all stages of development.”
Early-stage ecosystem forecast
As for the future, Davids says he expects continued strength in IPOs, M&A activity and private equity transactions, along with rapid growth in AI-driven businesses. Secondary markets will continue expanding as investors seek additional liquidity options.
He also expects to see increasing consolidation within venture capital, with some smaller funds selling portfolio positions or partnering with larger firms that have greater scale to support companies through exit.
Englefield predicts that the winners will not simply be the companies that raise the most money. They will be the companies that use capital wisely, solve big problems and build businesses capable of creating sustainable value.
Investors, for their part, will need greater discipline, she says.
“As exits improve, confidence should return and more capital should move back into the early-stage ecosystem,” Englefield says. “Most likely, large investment funds and the highly visible companies will see the benefits first. Angel investors and emerging funds have an important role to play in making sure capital reaches strong companies and under-funded founders who sit outside those traditional networks.” ●