TL;DR

  • European and Israeli AI application companies attracted 66% as much private funding as US peers in 2025 — up from just 10% a decade ago
  • AI-native applications are reaching $100M ARR in years rather than decades, with record-high revenue per employee
  • VCs see defensibility in product-centric AI applications despite recurring questions about competitive moats

Europe Narrows AI Funding Gap

The transatlantic divide in AI development tells two distinct stories. Whilst the United States maintains dominance in large foundation models, the application layer reveals unexpected regional parity. European and Israeli AI application companies have attracted 66% as much private funding as American peers in 2025, according to Accel’s 2025 Globalscape report.

This represents remarkable progress from a decade ago, when European funding stood at just 10% of US levels. The shift reflects maturation of regional founder and investor ecosystems that “really understand how to build great software companies,” according to Accel partner Philippe Botteri. Rather than competing in compute-intensive model development, European founders are leveraging domain expertise across sectors from legal and healthcare to manufacturing and marketing.

Record Growth Velocity

The current wave of AI-native applications demonstrates unprecedented scaling efficiency. Companies are reaching $100 million in annual recurring revenue within years — a milestone that previously required decades. This acceleration comes with exceptional capital efficiency, achieving the highest revenue per headcount ratios ever recorded for software companies.

However, established cloud software providers aren’t disappearing. Accel’s Public Cloud Index shows 25% year-over-year growth, with incumbents rapidly integrating agentic capabilities. The boundary between traditional SaaS and AI-native companies continues to blur as integration speeds accelerate.

Looking Forward

Whilst Europe maintains ambitions for homegrown foundation models like Mistral AI, VCs see limited opportunities in the large model space. The application layer remains the primary battleground, with intense competition for investment opportunities despite ongoing defensibility questions. Grove Ventures argues the market undervalues companies focused on proprietary data and data flywheels — suggesting untapped opportunities beyond the binary choice between models and applications.

Article based on reporting by TechCrunch

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