Home Venture Capital ‘Febrile’ excitement helping early stage AI keep pace with the U.S.

‘Febrile’ excitement helping early stage AI keep pace with the U.S.

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It’s no secret that investor dollars have more readily flowed to the U.S. following any technological revolution. Early signs show the AI revolution isn’t reversing those trends.

In public markets, U.S. AI companies like Nvidia and Microsoft have helped drive the U.S. S&P 500 to record valuations. 

Data compiled by the European Parliamentary Research Service (EPRS) showed that between 2018 and the third quarter of 2023, the €120 billion invested in U.S. AI companies was almost quadruple that invested in EU competitors.

Since then, demand for companies like OpenAI and Anthropic has only increased, funneling more cash into the dominant U.S. market.

While Europe has some AI champions of its own, including France-based Mistral and U.K.-founded Arm (which abandoned its homeland to list in the U.S.), the early dollars have again established the U.S. as the leading market for AI.

Early-stage funding taking on the U.S.

However, partners at some Europe’s biggest venture capital funds are optimistic that Europe is closing the gap with its heavy-hitting friends across the Atlantic, particularly when it comes to early-stage investment. 

“Over the last decade of investing in technology startups, I think Europe is catching up,” James Wise, partner at VC firm Balderton Capital, told Fortune’s Brainstorm AI conference.

“So it’s still significantly behind in certain areas. But if you look at sort of dollars deployed at almost every stage here, it’s closing the gap with American-based companies.”

Indeed, Wise says there is something in the air when it comes to growing hype around European AI, despite the gloomy economic context. 

“I was in Paris last week at an AI event and it was febrile, there was so much energy,” Wise said.

The source of that energy was major U.S. investors looking to the continent for early-stage opportunities.

“I actually think some of that narrative will shift over the course of the year back to London,” the Balderton partner added, pointing to Google DeepMind’s continued presence in the U.K. capital and last week’s announcement of a new London hub for Microsoft AI, as part of a $2.5 billion expansion in the U.K.

According to London-based VC firm Atomico’s State of European Tech report for 2023, the continent is now creating more startups than in the U.S., and some of those companies are attracting serious interest. 

This was borne out with France’s answer to OpenAI, Mistral, which knocked investors off guard with a $113 million seed round, the largest in European history, just a matter of weeks after the company’s launch.

“So far, however, European AI companies have not yet raised the type of billion-dollar or multi-billion-dollar rounds that have become crucial sources of firepower for the most important and fastest-growing US AI companies, such as OpenAI or Anthropic,” the report read, pointing to the fact that U.S. groups had received more than three times as many $100 million+ funding rounds compared to the EU.

Exit signs

“I think one of the things that we see very clearly in Europe is that there is a significant capital gap at the later stage,” Laura Connell, a partner at Atomico told Fortune’s Brainstorm AI

“We really need the availability of deeper pockets, risk capital, and appetite as later stage key drivers in the development of the VC ecosystem.” 

One major area where the EU has proved a laggard is in the value of startup exits, in other words, when a company IPOs or gets acquired by another group—typically where the biggest financial rewards can be found. 

A frosty economic environment has meant dealmaking and the IPO market was heavily subdued last year.

That’s bad news for Europe after the continent previously fell behind the U.S. in terms of late-stage funding.

While there have been more exits by European startups, the biggest exits have invariably come across the water.

With OpenAI and Anthropic continuing to grab investors’ hearts and minds, some of the biggest prizes look likely to remain in the U.S.

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