Europe has already lost the chance to join the AI revolution. Missing out on building the next generation of foundational infrastructure technology could impact competition on the global level.
Although early-stage investments are already strong, the region needs a vision to generate more success stories at later stages. Investing in the application layer is relatively easy, but supporting the foundational infrastructure behind it is the real challenge—and the main goal every European VC should strive for.
What, then, is foundational infrastructure? Essentially, it encompasses the sectors behind economic activities, involving a broad range of technologies from automation and robotics to smart grids and energy storage, to quantum computing and space tech. Foundational industries can be further divided into production systems, supply chains, and transportation networks.
While some reports indicate that Europe still leads in next-gen materials and clean technologies, other recent studies show the region is struggling with deficits in critical areas, especially in AI, quantum computing, and space technologies. This is something we should worry about: without robust foundational infrastructure tech, economic growth is hindered.
Are VCs in Europe adapting enough to the challenges of our time? For that to happen, we need more capital to join the ranks.
How to close a gap
Founders in the foundational infrastructure tech space experience more frustration than most. Why? Because they lack enough risk-taking investors and capital-intensive bets in their startups and scale-ups.
According to data from Crunchbase, foundational infrastructure technology startups have seen significant investment in Europe and the United States from December 2023 to date. In Europe, $464.6 billion has been raised for foundational infrastructure technology startups. The investment is even higher in the United States, totalling $1.06 trillion. That means Europe’s funding for foundational infrastructure technology startups is approximately 56% less than the funding in the United States—a substantial difference.
This significant funding gap is a hard reality to swallow. The region can suffer if over-reliance on foreign investment leads to less tech autonomy and less control over critical infrastructure. It is crucial to not only depend on non-European capital to fund Europe’s foundational infrastructure technologies.
According to PitchBook, as of mid-September 2023, scale-up investments stood at €108 billion in the US, but only €25 billion in the EU—a substantial difference. Regarding the stage of development: in the US, about two-thirds of all VC funding goes to scale-ups, compared with less than half in Europe. In reality, the funding gap in Europe is significantly covered by US investors, who seek to access the market, leverage tech innovations, and gain returns on investment.
To address this, Europe must first fix some issues. Where does the funding gap come from? For one, European VCs have not been able to persuade pension funds and institutional investors. According to the latest State of European Tech report in 2022, this was just 0.010%, in line with the last five years’ average. We could mope around with this number or think about its potential. We need a more risk-taking Europe willing to push the boundaries of tech.
Is there a gap because the average fund in Europe still doesn’t have an attractive track record? Is it regulatory frameworks? Red tape? Multilingualism? It’s probably a mix, along with challenges like how to make VCs more attractive than bonds during times of higher-than-usual interest rates.
Just over a year ago, the European Investment Fund (EIF) launched a €3.75 billion fund of funds, the European Tech Champions Initiative (ETCI), to back Series B rounds and above. While this is good, it is still not enough. European VCs need to prove themselves.
The Talent Riddle
Europe has the talent and the spin-offs but is still missing the means to retain them. With seven of the top ten most educated countries globally, the region leads in academic research. However, even if European countries dominate the top 20 nations for AI research, these skills cannot directly translate into production and commercialization. To keep a competitive edge, more late-stage funds are needed to support more mature pre-IPO companies.
It’s no news that most of the biggest success stories are still in the US, home to the five largest companies in the world, all originally venture-backed. While the US’s top seven tech giants are 20 times bigger than the EU’s seven largest counterparts, challengers like Mistral, Aleph Alpha (which is getting most of its funding from Europe’s VCs), DeepL, and Wayve are making waves and showing that Europe can also compete on a global scale.
Investing in foundational infrastructure means investing in people. Traditionally, humans have been viewed merely as factors of production or labour. However, investing in foundational infrastructure shifts this perspective, seeing people as the core investment goal: without people, there is no production, consumption, or markets.
Foundational infrastructure tech in Europe is growing, as shown by recent funding rounds. Some examples include Novocarbo, a Hamburg-based startup that raised €25 million to develop a pan-European infrastructure for carbon removal solutions; Twinsity, a Kassel-based deep tech startup specialising in AI-based infrastructure inspection, which secured €2.5 million from the European Innovation Council Accelerator; and cylib, an Aachen-based sustainable end-to-end battery recycling firm, which raised €55 million in a Series A round. But we need more success stories coming from Europe.
Tech’s ultimate goal should be to make a better tomorrow. Investing in foundational infrastructure technology is in this sense an investment in humanity’s future.