European VCs Must Embrace Risk or Cede the AI Era to US Dominance

European artificial intelligence (AI) startups are falling behind their American counterparts, a situation primarily attributable to their own investors. While only 5% of global venture capital is secured within the EU, the United States commands over half, and China attracts 40%. This isn't due to a lack of capital; European households annually save €1.4 trillion, nearly double the American figure. However, despite various incentives like the UK's EIS tax relief for angel investors, very little of this substantial savings pool is channeled into new ventures.

Even when funding is available, European venture capital firms exhibit a marked slowness and caution. They often dedicate weeks to due diligence and become hesitant once company valuations exceed $10-15 million. While regulation is frequently cited as an impediment, and to some extent it is, American funds investing in European startups operate under identical regulatory frameworks yet manage to deploy capital with far greater agility.

The real constraint isn't the legal framework itself, but rather investors who interpret these rules with excessive conservatism instead of acting with decisive speed.

Historically, European investors have shied away from significant risk. The market has long been dominated by banks, insurers, and pension funds, all primarily driven by the imperative of capital preservation. In Germany, the ingrained "Mittelstand" mentality—a focus on stable, long-term business—has steered family-owned industrial enterprises towards multi-generational stability. While this inherent conservatism has fostered resilience, it has also shaped the cautious character of the broader capital markets. This prudent approach largely accounts for the 6.3% decline in net investment observed in Germany between 2019 and 2024.

The venture capital industry arrived in Europe later than in the United States, and initially, the continent's funds primarily directed investments towards sectors like e-commerce, fintech, and food delivery. When it came to deeptech, the majority of European VCs simply lacked the necessary expertise—and often the courage—to invest in truly groundbreaking innovations. Consequently, in the period preceding the AI revolution, Europe's most valuable companies included names such as Revolut, Klarna, Delivery Hero, Spotify, Farfetch, Adyen, and N26. While these are undeniably robust businesses, they were relatively conventional, with clear product-market fit established early in their development, often at the seed stage.

Artificial intelligence demands substantial upfront investments, particularly in energy infrastructure, and requires investors who are comfortable with inherent uncertainty. Many European funds are ill-equipped for this reality. They might contribute a modest initial investment to an early-stage startup but frequently withdraw during subsequent funding rounds. Without the technical understanding to foresee how nascent research will translate into future markets, they perceive AI as more hazardous than it truly is, leading them to disengage.

Another significant disadvantage is the pace of operations. European venture deals frequently proceed at a bureaucratic crawl. I've witnessed a fund spend 40 days conducting due diligence on a one-year-old B2B startup processing barely 20 transactions monthly. For a founder, such delays are deeply frustrating, especially when a comparable funding round in Silicon Valley would typically conclude in less than a week.

This sluggishness also has deep cultural roots. Offices often effectively shut down in August, again during winter holidays, and over weekends—a common occurrence in countries like France or Italy. In a fiercely competitive global market, these prolonged interruptions significantly hinder progress.

Consequently, Europe is increasingly excluding itself from the crucial growth stages, effectively transforming into a "feeder market" where promising initial ideas ultimately mature into American enterprises.

The data supports this trend. In Q2 2025, European growth-stage startups attracted only $5.7 billion across 75 deals. This sum represents approximately 10% of global late-stage venture funding—the lowest share observed at any stage. While mega-rounds saw a slight increase last year, they remain considerably below the peaks reached in 2021.

Numerous examples illustrate this problem. Graphcore, once heralded as the UK's leading AI-hardware prospect, raised over $600 million but was acquired by SoftBank in 2024 for roughly the same amount, significantly less than its prior $2 billion valuation. In France, Navya, a pioneer in autonomous shuttles, entered receivership in 2023 after failing to secure subsequent funding. Similarly, in Sweden, Uniti, an ambitious electric vehicle startup focused on urban mobility, declared bankruptcy when its capital sources dried up.

To alter this trajectory, European VCs must emulate angel investors rather than functioning as cautious private equity gatekeepers. Although the escalating valuations of AI startups might diminish the perceived risk premium, actively pursuing opportunities is far more productive than simply holding onto uninvested capital.

AI founders seek conviction, flexibility, and funding disbursed in days, not months. They desire investors who grasp that a portfolio of multiple small, audacious bets will yield superior returns compared to one painstakingly slow, "perfect" deal that stretches indefinitely.

Smaller and mid-sized funds possess an inherent advantage here. Unburdened by stringent institutional mandates, they can employ creative deal structures, including SAFEs, convertibles, secondaries, and even hybrid equity-and-debt arrangements. The crucial factor is their willingness to remain agile and capitalize on promising opportunities.

Europe's AI landscape boasts talent, a robust research foundation, and even ample capital—though currently it is misallocated. What is conspicuously absent is a sense of urgency. As long as the continent's venture capital ecosystem adheres to its cautious instincts, its most promising AI startups will continue to accept foreign funding, and with it, the valuable talent and strategic leverage that accompany growth and scale.

The choice is stark: either European investors adapt to the rapid pace of startups, or the continent risks remaining merely a research laboratory for others to exploit. Europe has the potential to cultivate the next generation of global companies, but this can only happen if its capital infrastructure sheds its ingrained inclination to hesitate when it matters most.

The AI race waits for no one, and Europe cannot afford to wait either.