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There has been a great deal of discussion surrounding the
current artificial intelligence (AI) boom, as well as the potential
for a bust reminiscent of the end of the dot com era. AI continues
to predominate venture capital (VC) investment, with KMPG recently
reporting that “VC investors continued to double down on AI in
Q3’25, with companies developing AI models and platforms
attracting many of the largest funding rounds of the quarter.”
And this is showing no signs of slowing down.

While experts can debate whether we are in an AI bubble that
could burst, unlike the boom cycles we have experienced in the
past, this time, investors are becoming more selective. AI startup
formation will no doubt continue its surge as we move into 2026,
but funding will become even more concentrated among those
companies that can demonstrate a real product-market fit and a
credible plan for legal rights and regulatory compliance.

Below are three trends that we can expect to define the AI
sector next year.

A Continued Shift in Investor Focus

The capital that is flowing into AI companies at historic levels
is not doing so evenly, and this will continue into next year. The
bulk of funding is being funneled to fewer, more mature companies.
Savvy investors are no longer looking to simply finance
experimentation, and most late-stage funding is going to a smaller
number of well-capitalized market leaders, leaving many earlier
stage companies operating under structural pressure.

As we recently discussed at the 2025 TED AI conference, this has
led to “a tale of two worlds,” with many earlier stage AI
startups facing the challenge today of scaling revenue or retaining
engineers amid intense talent poaching. So, the earlier stage
startups in the AI space can no longer rely simply on their
technical potential. They must prove they can trigger and sustain
hyper-growth in revenue while retaining key engineering talent in a
market where the larger companies can lure away top talent with
compensation packages startups cannot match.

Investors are also prioritizing those companies they feel can
best withstand the legal and regulatory scrutiny that is ahead.
This means founders must build an infrastructure from the start
that can support not only technical growth, but also legal and
regulatory durability long term. That means having the
legal rights to the data that your models are training on, and
their outputs. It also means complying with a complex web
of interlocking regulatory structures that can be national,
supra-national, regional, or even local. While regulations
have jurisdictional borders, AI tools can be accessed anywhere in
the world.

A Shakeout Among Horizontal AI Startups

Next year, expect there to be a shakeout among horizontal AI
startups that lack vertical specialization or agentic capabilities.
Investors want to see companies solving domain-specific problems
with proprietary data and actionable outputs. We are moving past
the era of generic AI platforms to one of targeted, high-value
solutions in regulated or operationally complex sectors. Capital
will flow to those AI companies that own a problem, not just a
model. The era of undifferentiated AI platforms is coming to an
end.

A Surge in M&A

At the same time as all of this is taking place, the capital
markets are evolving in parallel. We have started to see the IPO
window cautiously reopen, but public market entry is not likely to
be the first source of liquidity for these VC-backed companies.
Instead, 2026 will likely bring a rise in strategic mergers and
acquisitions (M&A) and secondary transactions ahead of public
listings. These “pre-exit” transactions will not only
return capital to investors who have made it through a long
liquidity cycle, but also help companies to strengthen their
balance sheets ahead of a potential IPO.

At a time when capital is plentiful but selective, the next
phase of AI expansion is not just about building breakthrough AI
tools. Instead, 2026 is going to be about building AI businesses
that can withstand legal, technical, and market scrutiny at
scale.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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