The global race for AI dominance is shifting, with Europe and Israel rapidly closing the gap with the U.S. in the AI application layer, according to Accel's 2025 Globalscape report. While the U.S. maintains a lead in foundational AI model development, European and Israeli startups have secured a significant 66% of the private funding raised by their American counterparts this year. This surge marks a considerable change from a decade ago, when Europe's AI application market was just a fraction of the U.S. ecosystem.
The application layer, where AI is directly applied to solve real-world business challenges, has become a key area of strength for Europe. This progress is attributed to a decade-long cycle of founders and investors mastering the building of high-margin software companies. European startups are now reaching $100 million in annual recurring revenue in years rather than decades, with software companies achieving record-high revenue per employee. This productivity, combined with strong technical skills and specialised industry knowledge, has attracted venture capital across sectors such as healthcare, legal tech and manufacturing.
Venture capital firms are adapting their strategies to capitalise on this momentum. European founders uniquely blend world-class technical talent with deep market expertise, creating defensible business models that appeal to investors. While European foundational AI companies face tough competition from U.S. leaders, the AI application layer presents a significant opportunity for growth and innovation.
