Three decades of the digital economy have been an era of missed opportunity for Europe. While it can boast of research excellence, it can hardly claim to have exported much world-conquering technology – unlike the Big Tech giants of Silicon Valley. The current AI wave looks like more of the same: dominated by the data-saturated Magnificent Seven that were forged in the internet era and have never loosened their grip since.

The fact is that Europe, for all its engineering talent and capital depth, is the least competitive of the major digital economies. This has opened up a value creation gap that could run into the trillions. 

What’s new? Actually, a lot, if Europe plays its card right. A second wave of AI-era innovation might hand the Old Continent something the technology industry rarely offers: the chance to run the race again.

Europe’s strengths

AI development today is largely about bigger foundation models mainly trained on internet data, larger data centres and ever more capital-intensive computational scale. This is where the vast majority of investment currently goes. Nobody can know today if these huge bets, often framed as a race to agentic AI or artificial general intelligence (AGI), will pay off for the latecomers to the Nvidia, OpenAI and Anthropic gamble. 

But one thing is now becoming clear: the next phase of AI innovation will be won where intelligence meets matter – robotics and manufacturing, chemistry and materials, bio-pharma and healthcare, energy systems, logistics networks, and industrial operations. In other words, in the physical and scientific domains. 

Three key factors may be even more critical than they were in the internet-dominated AI era: scientific talent, industrial strength and production know-how, and ecosystems across multiple sectors. 

This is precisely where Europe’s underlying advantages are hiding in plain sight. Companies like Siemens and Bosch, Airbus and Dassault Systèmes, Stellantis and Scania, BASF and Bayer, ASML and SAP, and Roche and Novo Nordisk operate some of the world’s most advanced industrial systems. Europe’s factories, supply chains, energy grids, laboratories and engineering workflows generate vast streams of high-quality real-world data. Yet Europe has barely begun to turn this resource into AI-native industrial platforms and new global champions.

The following numbers may surprise European as well as American investors. The European Union produces 22% of global AI research journal articles, compared to 17% by researchers based in the United States. Some 2.2 million people graduate with STEM diplomas from European universities each year, compared to 1.4 million from American ones. Europe employs 2.15 million researchers and spent €403 billion on R&D in 2024. And unlike the US, which is strong mainly in software, Europe’s industrial base is enormous and automation-ready: EU manufacturing generates €2.5 trillion in value-add and operates 219 industrial robots per 10,000 employees – exactly the substrate where AI’s next productivity wave will land. 

Finally, Europe’s underestimated advantage is that it already runs EU-funded, cross-border ecosystems that stitch together universities, industry, startups and the public sector. Horizon Europe, the EU’s key funding programme for research and innovation, pours €93.5–€95.5 billion into collaborative R&I across fields from health and energy to mobility and manufacturing between 2021 and 2027.

The US has clearly taken note. It is no coincidence that Washington recently launched the Genesis Project aimed at strengthening American industrial, manufacturing and scientific domains.

It’s about scientific talent, industrial strength and sectorial breadth

The depth as well as breadth of Europe’s industrial sectors provide not only data and know-how, but also the necessary market conditions for innovation. Every startup needs customers above all. Investors’ money is good, but customers’ is better. And every investor, as well as every founder, needs exit paths. And here lies another often overlooked key European advantage. 

For years, success in tech entrepreneurship and investment has been defined either as an IPO or an acquisition by one of the Big Tech companies. In the era of physical AI, this is about to change fundamentally, to the benefit of Europe’s tech founders and their investors. AI entrepreneurs will not have to hope for a lucky punch with the deep-pocketed Magnificent Seven Big Tech in the US but charter new exit paths with hundreds of industrial players on home soil. 

Europe can create a win-win environment at scale: Entrepreneurs and investors have plenty more reasons to start and fund a company, while current industrial players have access to the latest innovations from the labs. Some of today’s industrial Goliaths may be disrupted by the AI newcomers, others will only be strengthened through innovation. In both cases, value will be created and captured either by a cohort of new players: AI-native global industry leaders or incumbents infused with startup AI. 

It’s time to finance the commercialisation of innovations

Europe’s central challenge is not invention but innovation in the Schumpeterian sense of the term: building companies at scale to conquer markets. In 2024, US startups captured roughly 74% of global AI venture funding while Europe attracted about 12%. The US spawns about four times as many AI unicorns than Europe. Analysts estimate the broader EU-US investment gap in information and communications technology and cloud computing at US$1.36 trillion, underscoring how much industrial digital infrastructure Europe still needs to build.

The new physical AI-driven market presents a huge opportunity for a comeback. The next wave of European AI companies could capture over 25% of the global next-generation AI market, in line with its research and industrial contributions – if the region manages a step change in turning breakthroughs into venture-scale businesses.

The bottleneck is neither talent nor ecosystems. It is the commercialisation capacity of new ideas at speed and scale: connecting labs across borders, building stronger pathways from discovery to company formation, and linking European deep-tech founders to global capital, customers, talent and distribution networks.

Encouragingly, policymakers are beginning to respond with historic ambition. Earlier this year, the European Commission launched its €200 billion InvestAI initiative, including €20 billion earmarked for AI gigafactories. For the first time, Europe is signalling its intention to match scientific excellence with industrial-scale capital.

The timing matters. AI adoption is accelerating rapidly across the economy. OECD data show that the share of firms using AI has risen sharply – from 8.7% in 2023 to over 20% in 2025. AI transformation is no longer confined to Silicon Valley labs. It is spreading across factories, hospitals, laboratories, logistics networks and energy systems – precisely where Europe retains deep structural strengths.

For venture capital, private equity and institutional investors alike, this second chance at AI is also one of the most compelling investment opportunities of the coming decade. Backing the next generation of research-driven AI companies can generate outsized returns as Europe converts its talent and industrial advantages into global market leadership.

Importantly, Europe’s opportunity is not to emulate Silicon Valley model for model. It is to innovate differently: to build AI-native companies rooted in scientific depth, industrial integration and responsible governance. Moreover, Europe’s diversity, strong institutions and commitment to rule of law can become competitive advantages in a world increasingly shaped by trust, security and social complexity.

From laggard to leader

As the new AI wave unfolds, Europe may transform from laggard to leader. Unlike incumbent ecosystems, which have already invested, or perhaps sunk, hundreds of billions into today’s foundation-model architecture, Europe’s current generation of AI researchers and entrepreneurs can start fresh. Entire nations can be disrupted as well. 

Political scientist Jeffrey Ding recently argued that major technological transitions have repeatedly reshaped global power – from Britain in the first Industrial Revolution, to Germany’s rise in the age of chemicals and engineering, and American dominance in the era of mass production, computing and the internet. History rarely offers second chances. The coming AI wave might be one for Europe. The Old Continent should seize it. 

A version of this article was published in Fortune.