Europe, AI, and the game on the field | Part II

This is the second post in my series about the comparative advantages of European AI-native startups. In my first post, I outlined why European founders face obstacles when competing in large foundational models and "horizontal AI" applications.

Now I’ll dive into three specific factors that European founders can use to their benefit: regulation, demographic shifts, and existing flagship industries. Capitalizing on these strengths, European startups have an unparalleled opening to build sustainable, vertical-specific AI businesses that fundamentally reimagine entire industries.

"Competition is for losers." — Peter Thiel

As noted in my first blog post, McKinsey projects that Generative AI could boost Europe’s economy by over $500 billion within five years. While a significant share of this growth will inevitably go to “big tech,” European startups can thrive by deliberately avoiding direct competition. Instead, founders can win big by targeting urgency in specialized markets, creating defensible positions where Silicon Valley incumbents struggle to adapt to specific requirements.

In 2011 Marc Andreessen famously said that "software is eating the world." Since then, software has devoured much of the U.S. economy, while finding European business to be a much more challenging dish. The digital adoption gap is massive: 60% of U.S. small businesses use at least one vertical SaaS platform, compared to just 8% of French and 5% of German companies. While the degree varies by sector, this pattern of lower digital adoption is consistent across the European economy.

This digital lag, combined with the productivity potential unlocked by generative AI, creates a timely opportunity. European startups now have the chance to push digital adoption and create entirely new business categories tailored to Europe’s specific economic needs.

These future champions may bear little resemblance to vertical SaaS companies as we know them today. They'll develop novel mechanisms to accelerate digitization and capture value in their respective industries — a topic I'll explore more deeply in future posts.

In my view, European founders can tap into three key factors as comparative advantages:

1. European regulation
2. Demographic shifts
3. Serving Europe's flagship industries

Let's examine each one in detail.

1. European regulation: Restrictive straightjacket, protective umbrella, or both?

My previous post highlighted how European regulations often present obstacles for founders. However, these same regulations can become strategic assets through thoughtful positioning.

Specifically, addressing regulated or regulation-adjacent industries offers two benefits:

1. A protective moat. Europe’s extensive regulations, from AI compliance and data protection (GDPR) to industry-specific standards, create natural barriers against global competitors. Big tech incumbents like Microsoft or OpenAI prioritize broad horizontal solutions over building specialized products for Europe’s complex regulatory landscape. At the same time, potential customers in these sectors typically lack the technical expertise and resources to build compliant, high-performance software solutions in-house.
2. Greater potential for transformation. Regulated industries often stagnate due to limited external competition. Service quality suffers and digital adoption lags far behind the state-of-the-art. This creates an opening for founders, as the gap between current solutions and technological potential is wider. Startups can deliver significant improvements, building resilient businesses protected by the very regulations that created the opportunity in the first place.

For founders: Look for regulation-adjacent opportunities with a high degree of “paperwork” and low service quality i.e. automation in healthcare, compliance, permitting, financial services, taxes, education etc.

2. Demographic shifts: Fewer Europeans working less means more demand for AI

Demographic challenges in Europe are creating unprecedented urgency among companies seeking solutions to labor shortages and productivity gaps. Over 80% of German employers struggle to find skilled candidates, while half of German SME leaders view labor shortages as an existential threat, particularly in engineering, craft trades, healthcare, and IT.?

This is not a uniquely European challenge, but one that is more pronounced than in the U.S. The longer-term view is that European birth rates are below the replacement rate of 2.1 (1.5 EU vs. 1.7 U.S.) and the old-age dependency ratio is expected to surge from 33% to 57% by 2050 (26% to 41% in the U.S.). In other words: this is only the beginning.

Meanwhile, Europe’s productivity growth has stalled. Germany, historically Europe’s productivity leader, has even experienced a 1.5% decline in productivity per employee since 2018, primarily due to fewer hours worked and only marginal efficiency improvements. Today, Germans work roughly 15% fewer hours per capita than Americans — not working smarter, just shorter.

These demographic pressures create two particular benefits for European founders:

1. Higher urgency among buyers. European businesses facing labor shortages are increasingly willing to adopt AI solutions that might have faced resistance just a few years ago. While American companies adopt AI to gain competitive advantages, many European businesses now see digitization as a matter of survival.
2. Different optimization targets. European AI solutions must be designed specifically for contexts where human labor is scarce and expensive, not merely to reduce costs in labor-abundant markets. This creates a chance for European founders who innately understand these constraints and can build solutions that maximize output from minimal human input.

In short, Europe’s demographic pressures create an urgency to find productivity gains. In many cases, AI-powered solutions are the best option for quick relief and high ROI.

As these pressures intensify, the market’s receptiveness will only grow stronger.

For founders: Look for opportunities catalyzed by demographic shifts i.e. labor shortages, retirement waves, silver economy, immigration, re-skilling etc.

3. Serving Europe's flagship industries: Standing on the shoulders of giants

Europe retains global leadership in several high-value industries, such as advanced manufacturing, chemicals, pharmaceuticals, and luxury goods. This industrial heritage gives European AI startups a competitive advantage that’s difficult to replicate through capital or raw computing power alone.

Let’s take manufacturing in the DACH region as an example — I’m a Berliner and the son of an industrial mechanic, after all.

European founders targeting advanced manufacturing have three distinct advantages:

1. Technological readiness: The concept of “Industry 4.0,” coined in Germany in 2011, reflects deep roots in manufacturing digitization and has become the global standard. Two-thirds of German manufacturers already deploy Industrial IoT solutions, with the category growing over 10% annually. Such extensive infrastructure provides proprietary data essential for specialized AI applications.
2. Proximity to early customers: Manufacturing contributes approximately 20% to GDP in the DACH region, compared to just 11% in the U.S. Dense clusters of industrial excellence, such as Baden-Württemberg, offer immediate and unparalleled access to global leaders. A founder in Stuttgart can engage multiple manufacturing champions within a single day — an asset difficult to replicate elsewhere.
3. Founder-market fit: European founders often have firsthand industry experience through education, early career, or family ties. They inherently understand cultural nuances, operational realities, and the subtle challenges of these markets, bridging a crucial empathy gap that external competitors find difficult to overcome.

Similar dynamics are at play in Europe’s other flagship sectors. In chemicals and pharmaceuticals, startups can harness deep domain expertise concentrated in European research institutions and industrial hubs. These verticals, with their specific regulatory frameworks and complex operations, are areas where European startups naturally hold a strong competitive advantage.

For founders: Aim at top-of-mind challenges with instant time-to-value as your wedge into the market. This is not the time for lengthy initial sales processes based on platform logic education or incremental bottom-line impact.?

One more thing: AI models will improve, go with the flow

While these three factors (regulation, demographics, and flagship industries) provide European founders with specific windows of opportunity, they represent just the starting point.

As a general rule, I advise founders to position themselves where future improvements in foundational models act as a tailwind rather than a headwind. Better and cheaper AI models should continuously enhance your product’s performance, rather than threaten your core value proposition. If your competitive edge primarily relies on managing current model limitations (i.e. hallucinations) you might gain an early lead, but this edge won’t last. Your sustainable advantage should instead come from something deeper like: specialized data, industry expertise, and a strategic position in the value chain.

Conclusion: The European AI divergence, time to build

Europe's path to cultivating AI-native champions won't be through replicating Silicon Valley's approach. We need to face inward and cater to our own needs using regulation, demographic urgency, and leadership in key industries as catalysts and defensive moats. As I speak with founders across the continent, I'm increasingly convinced that the most promising European AI startups aren't trying to build the "European OpenAI" or the "German Perplexity," but rather creating entirely new categories that solve distinctly European challenges.

This divergence is healthy and necessary. The European software ecosystem will increasingly develop along its own trajectory, creating sizable markets insulated from global competition by the very factors often cited as European weaknesses.?

In my next posts, I'll dive deeper into different delivery mechanisms for pushing AI-powered productivity gains into the European economy. I will start by highlighting the shift in SaaS from “Software as a Service” to “Service as a Software” — see you soon!