Europe’s technology sector is approaching a pivotal moment. Despite a surge in start-up activity, increased venture funding and committed public institutions, the region still struggles to produce software companies capable of achieving global scale. As outlined in a recent report by McKinsey and Boardwave, structural challenges—such as fragmented markets, cautious capital environments and limited commercial experience—continue to constrain growth. Yet a convergence of geopolitical shifts, technological advances and regulatory evolution now creates favourable conditions for transformation. With coordinated effort, Europe has the opportunity to unlock a sustainable cycle of innovation, investment and leadership on the global stage.
Rebuilding the Innovation Engine
While Europe benefits from high-quality talent, robust early-stage funding and institutional commitment, these strengths have yet to coalesce into a self-sustaining innovation engine. A successful innovation ecosystem depends on alignment between people, capital and institutions. Thriving firms generate experience, attract further talent and inspire confidence in investors. This creates a positive flywheel that accelerates growth. However, when any one component underperforms, it weakens the cycle.
In Europe, too few companies reach the €1 billion revenue mark. Those that do often take years longer than their US counterparts. As a result, there are fewer role models, anchor companies or spin-outs to reinforce the system. Investors may become more conservative, and talented individuals may relocate to more dynamic ecosystems. This in turn reduces institutional incentives to adjust regulatory frameworks, public funding or procurement processes in support of scaling companies.
Capital constraints further slow the engine. While early-stage funding has improved, late-stage venture capital remains limited. European start-ups frequently struggle to raise growth capital or pursue large-scale mergers and acquisitions. The result is often premature exits or missed opportunities to compete at scale.
Strategic Alignment for Scale
Some European countries offer promising models for ecosystem alignment. Estonia, for example, has cultivated a dense network of start-ups through measures such as streamlined business registration and strong investor networks. Sweden has supported new ventures through public–private initiatives that provide funding, mentoring and infrastructure. These national efforts demonstrate how a long-term strategy can foster scale-up success.
Likewise, several European companies have demonstrated effective approaches to scaling. Revolut, Spotify and Celonis prioritised global expansion from the outset, rather than focusing solely on local markets. Their strategies included entering multiple countries in parallel, forming strategic partnerships and aligning incentives with long-term growth. Others, such as Einride and Sorare, leveraged partnerships and unique go-to-market strategies to build momentum quickly and attract substantial investment.
These examples highlight the value of designing scalable products and business models from the beginning. European companies that tailor their offerings for international markets, structure operations to support growth and invest in talent with cross-border experience are better positioned to scale. Moreover, targeted mergers and acquisitions can accelerate market access, reinforce go-to-market capacity and strengthen technological capabilities.
Must Read: Advancing Health through Digital Transformation in Europe
Institutions also play a central role. University spin-out frameworks, for instance, often present a barrier. High equity stakes taken by academic institutions reduce the potential upside for founders and early employees, discouraging entrepreneurial activity. Reducing these stakes, as seen in recent UK reforms, could help unlock more commercial potential from research-intensive environments.
Cultural and Capital Shifts to Enable Growth
Europe’s innovation challenges are not solely structural; cultural norms also shape the pace and scale of growth. Risk aversion among investors, founders and institutions remains a limiting factor. Many founders exit early not by choice, but due to a lack of follow-on capital and support for long-term growth strategies. Meanwhile, many investors continue to favour short-term stability over long-term value creation.
This conservative approach is reflected in capital composition. In 2023, late-stage venture capital accounted for only 11 percent of software funding in Europe, compared to 89 percent in the United States. Additionally, institutional investors such as pension funds allocate just 0.02 percent of assets to venture capital in Europe, far below the 2 percent average in the United States. This scarcity of bold, long-term capital restricts the ability of European firms to scale efficiently or invest heavily in strategic growth.
Public capital markets also remain underdeveloped for technology companies. The absence of a unified European stock exchange limits exit options and may contribute to the trend of companies listing abroad. Without a mature capital ecosystem, even promising start-ups may struggle to reach their potential.
To complement capital reforms, educational institutions must do more to integrate entrepreneurial and commercial training into technical programmes. Universities that pair research excellence with business-building skills and start-up support are better able to develop founders with the mindset and tools to scale.
Mobility also matters. Attracting and retaining global talent will depend on streamlined visa systems, consistent regulatory frameworks and improved cross-border collaboration. Some countries have made progress with initiatives like the French Tech Visa, but a pan-European approach could amplify these benefits and reinforce ecosystem growth.
Europe’s technology ecosystem has made significant progress over the past decade, but a gap remains between its promise and its global competitiveness. The raw materials for success are in place: talent, early-stage capital and public sector support. What is needed now is alignment—across leadership, capital markets, regulatory frameworks and cultural norms. By adopting strategies that favour scale, long-term risk-taking and international reach, Europe can move from fragmented progress to systemic momentum. This is a rare opportunity for the continent to transform its innovation trajectory and establish a leadership role in the next generation of global technology.
Source: McKinsey & Company
Image Credit: iStock
