Investors and entrepreneurs say obstacles to tech growth are deeply entrenched: a timid and risk-averse business culture, strict labor laws, suffocating regulations, a smaller pool of venture capital and lackluster economic and demographic growth.
Thomas Odenwald, a German tech entrepreneur, left Silicon Valley in January of last year to join Aleph Alpha, a Heidelberg, Germany-based startup that aimed to go head-to-head with artificial intelligence leader OpenAI.
Odenwald had spent nearly three decades working in California but hoped he could help build a European tech giant to compete with the Americans. He was shocked by what he saw. Colleagues lacked engineering skills. None of his team had stock options, reducing their incentive to succeed. Everything moved slowly.
After two months, Odenwald quit and returned to California. “If I look at how quickly things change in Silicon Valley…it’s happening so fast that I don’t think Europe can keep up with that speed, » he said. Aleph Alpha has since said it would move away from building a large-scale AI model and focus instead on contract work for government and businesses. The company said more than 90% of employees participate in its stock option program.
Having largely missed out on the first digital revolution, Europe seems poised to miss out on the next wave, too. The U.S. and China, flush with venture capital and government funding, are spending heavily on AI and other technologies that hold the promise of boosting productivity and living standards. In Europe, venture capital tech investment is a fifth of U.S. levels.
Marc Andreessen, the U.S. tech investor, posted a meme on his X account that showed an image of big AI players like OpenAI and Chinese rival DeepSeek fighting for dominance. At a nearby table, a figure labeled with the European Union flag sat apart, staring at an image of a plastic cap tethered to a drinks bottle—a new legal requirement in Europe aimed at encouraging recycling. The message: Europe is focusing on the wrong battles.
“This is an existential challenge, » wrote Mario Draghi, the former European Central Bank president who was tasked by the European Union’s top official to help diagnose why Europe’s economy is stagnating. In a report published last September, Draghi pinpointed the lack of a thriving tech sector as a key factor. “The EU is weak in the emerging technologies that will drive future growth, » he wrote.
Only four of the world’s top 50 tech companies are European, despite Europe having a larger population and similar education levels to the U.S. and accounting for 21% of global economic output. None of the top 10 companies investing in quantum computing are in Europe.
The problems go deeper than just tech and reflect a broader truth about Europe: It isn’t creating its share of new, disruptive companies that shake up markets and spur innovation.
Mario Draghi after presenting his report on European competitiveness to the European Parliament in Strasbourg, France, last year.
Over the past 50 years, the U.S. has created, from scratch, 241 companies with a market capitalization of more than $10 billion, while Europe has created just 14, according to calculations from Andrew McAfee, a principal research scientist at the MIT Sloan School of Management and co-founder of AI startup Workhelix.
New companies and industries—think autos replacing horse and buggies—allows a country to produce more goods with the same amount of workers, a key driver of prosperity. Europe is dominated by old-school industries like autos and banks that extracted productivity gains long ago. The typical company in the top 10 publicly traded U.S. firms was founded in 1985, while in Europe, it was in 1911, according to the International Monetary Fund.
By the late 1990s, when the digital revolution got under way, the average EU worker produced 95% of what their American counterparts made per hour. Now, the Europeans produce less than 80%.
The EU economy is now one-third smaller than the U.S.’s and is stuck in low gear, growing at a third of the U.S. pace over the past two years.
Digital winter
Europe has world-class research universities and a deep pool of engineering and scientific talent, much of which populates top U.S. firms. Spotify and fintech firms Revolut and Klarna are success stories. Venture capital arrived relatively late, but big U.S. venture-capital firms have set up shop in Europe in the past decade, including Sequoia Capital, Lightspeed, Iconiq and NEA.
“Europe is a much smaller market, but that doesn’t mean it doesn’t have great opportunities, » said Luciana Lixandru, a partner at Sequoia Capital based in London.
Europe had a promising start. At the start of the digital revolution in the 1990s, the region boasted several leading semiconductor companies (Netherlands-based ASML, Britain’s ARM), software giants (Germany’s SAP) and the dominant player in mobile phones (Finland’s Nokia). The World Wide Web was invented by a Brit, Tim Berners-Lee, working at a European research facility.
The computer center at the European Organization for Nuclear Research (CERN) in 2019—three decades after Tim Berners-Lee invented the World Wide Web at the facility.
A big reason why Europe is now behind can be summed up as a lack of speed. Entrepreneurs complain that everything takes longer in Europe: raising money, complying with local regulations, and hiring and firing workers.
“In Germany a lot of people are just too cautious, » said Karlheinz Brandenburg, the German engineer who helped invent the MP3 digital audio compression format. German consumer-electronics companies didn’t think the invention was important and didn’t invest enough in it, he said, and then Apple seized on the invention in the early 2000s to sell nearly half a billion iPod players. Brandenburg is now seeking €5 million ($5.6 million) in financing for a next-generation headphones startup.
“What is different in America is the speed of almost everything, » said Fabrizio Capobianco, an early tech entrepreneur from Italy who lived for decades in Silicon Valley. “Americans make decisions very fast. Europeans need to talk to everybody—it takes months. »
Capobianco, who returned to Italy three years ago, is now building a startup factory in the Italian Alps to scout out European tech companies. The prize for the winners: a one-way ticket to Silicon Valley.
“I don’t think you can replicate Silicon Valley » in Europe, said Capobianco. He wants other European entrepreneurs to follow his example: implant themselves in America’s tech hub and manage teams of engineers located in Europe, where wages and living costs are lower. That inevitably means that the highest-value jobs will be in the U.S., Capobianco said.
Most European startups find it so difficult to expand at the same pace as their U.S. counterparts that they typically move to the U.S., are bought by U.S. companies, or partner with them. One of the U.K.’s largest startups, delivery company Deliveroo, recently agreed to sell its business to U.S.-based DoorDash for $3.9 billion.
‘Europe is a much smaller market, but that doesn’t mean it doesn’t have great opportunities,’ said Luciana Lixandru, a partner at Sequoia Capital in London.
Even Europe’s hottest AI firms are linking up with American firms rather than competing against them. London-based DeepMind was bought by Google parent Alphabet in 2014. Paris-based Mistral AI, which has raised over $1 billion in the race to build large AI models, has signed distribution deals with Microsoft, Google and Amazon.
In Europe, most business financing still comes from banks, which generally require physical collateral—a building, perhaps—in the event of losses. Other forms of financing include risk-averse public-pension funds. Early venture capital investors also demanded terms that left founders hamstrung, say entrepreneurs.
“There are a lot of scattered, small amounts of capital, and then you have these very large, slow-moving, bureaucratic, quasi-government agencies. And you don’t have very much in the middle—the more dynamic endowment capital that is in the U.S., » said Hussein Kanji, an American tech investor who founded Hoxton Ventures, a London-based venture-capital firm.
Complex regulations
Scaling up quickly in Europe is hard. The U.S. is a large integrated market, while Europe has dozens of countries with their own language, laws and taxes. Labor laws slow down worker mobility by making it harder to hire and fire workers. (There is often a three-month notice period in Europe for leaving a firm, and in some cases a six-month noncompete clause, jokingly known in Britain as “gardening leave. »)
Until the past year or two, stock options in most European nations were little used because they were taxed as income before they vested.
Taxes are higher, and regulations designed to corral big business become a costly and time-consuming headache for startups.
It is easier for large AI companies in the U.S. or China to move to Europe than “growing out of Europe and to have to invest from the start to satisfy a much more complex regulatory framework, » said Sebastian Steinhäuser, chief strategy and operating officer at German software giant SAP.
Europe’s love of regulation is one reason why Han Xiao started to think about moving his Berlin-based AI startup to the U.S. He and two friends founded their company, Jina AI, five years ago after studying in Germany, aiming to apply machine learning to search information in unstructured data for companies.
“When Germans talk about AI, the first topic is ethics and regulation, » whereas investors in the U.S. and China focus on innovation, Xiao said. Engineers in Berlin are also hard to find, he said. Xiao’s attempts to fire underperforming workers have landed in court. His 17 employees tried to form a union.
‘When Germans talk about AI, the first topic is ethics and regulation,’ said Han Xiao.
Xiao initially raised about $7 million from American and Chinese venture-capital firms and SAP’s U.S. arm. His latest $30 million funding round was led by Silicon Valley investment firm Canaan Partners. The European market for AI technology is very small, Xiao said, with local clients adopting the technology slowly. After spending November and December in Palo Alto, Xiao decided to make the move to the U.S.
European businesses spend 40% of their IT budgets on complying with regulations, according to a recent survey by Amazon. Two-thirds of European businesses don’t understand their obligations under the EU’s AI Act, which came into force last summer, the survey found.
Meta delayed the launch of its latest AI model in Europe by nearly a year because of EU regulations. It began rolling out a limited version in March that doesn’t include features like image generation or editing. Apple also postponed its new AI features for iPhones in Europe until recent weeks.
Software company Bird, one of the Netherlands’ most successful startups, said recently it plans to move its main operations out of Europe to the U.S., Dubai and other locations due to restrictive AI regulation.
“Stop regulating, Europe. We might be the first, but we won’t be the last (to leave), » Robert Vis, the company’s founder, wrote on his LinkedIn page.
Culture matters
European cities crowd the top spots on quality of life rankings, far ahead of their American counterparts. That lifestyle might contribute to less appetite for risk, along with a culture of equality that frowns on naked ambition.
“I get a lot of pitch decks that say, ‘This could be a $50 to $100 million company,’ and that doesn’t really interest me, » said Chris Hill, a Santa Monica, Calif., native who lives in London and manages a fund for EdenBase. He also notes that pubs in London’s financial district are usually full at 2 p.m. on Thursdays.
The rise of venture capital in London could eventually create an entrepreneurial ecosystem where money, talent and ideas are circulating quickly, said Sebastian Mallaby, a fellow at the Council on Foreign Relations whose book “The Power Law » details how Silicon Valley built an entrepreneurial culture.
In some cases, though, old habits might die hard. The Draghi report, said McAfee at MIT, did a great job diagnosing Europe’s lagging tech sector, but then urged governments to spend more public money spurring the sector, missing the point that it was private money that was absent—most likely due to regulation and other problems.
Said McAfee: “That’s when I went from nodding my head in agreement to banging it on the table. »
Write to Tom Fairless at [email protected] and David Luhnow at [email protected]
