Step aside Silicon Valley, there is a new tech hub in town

Europe is often viewed as a digital laggard, running far behind the frontier-pushing United States and Asia. But appearances are deceiving. In fact, according to a new report by the London venture capital firm Atomico, European startups are now taking the lead in artificial intelligence, building new tech hubs, and drawing investment from traditional industrial stalwarts. Last year, a record-setting $13.6 billion was invested in Europe’s tech sector, compared with $2.8 billion in 2011.

Gone are the days when Europe’s “tech” sector largely comprised consumer-oriented e-commerce businesses – often blatant knockoffs of successful US companies. Today, Europe is the home of real pioneering innovation, led by what Atomico calls “deep tech” – the kind of artificial intelligence developed by Google’s DeepMind. Deep tech accounted for $1.3 billion of European venture investments in 2015, delivered in 82 rounds, up from $289 million, delivered in 55 rounds, in 2011.

Europe’s new tech hubs are emerging in unexpected places, far beyond the early hotspots of London, Berlin, and Stockholm. Atomico pinpoints Paris, Munich, Zurich, and Copenhagen as the cities to watch over the coming years. The French capital, Atomico points out, is already starting to challenge London and Berlin in terms of the number and volume of venture-capital-financed deals.

Europe’s traditional industries are now awakening to tech. Two-thirds of Europe’s largest corporates by market capitalization have made a direct investment in a tech company. One-third of those companies have acquired a tech company since the beginning of 2015.

Foreign firms are also rushing to take advantage of Europe’s tech talent. Google, Facebook, and Amazon have all announced major expansions of their European tech hubs. Transactions worth more than $88 billion took place last year – compared to just $3.3 billion in 2014 – including SoftBank’s purchase of the British semiconductor-design firm ARM and Qualcomm’s $47 billion purchase of NXP Semiconductors.

Another study, by the Boston Consulting Group, points out that many small export-oriented European Union member countries – namely, the Benelux, Baltic, and Nordic countries – rank well above the US in so-called “e-intensity,” which covers IT infrastructure, Internet access, as well as businesses, consumer, and government engagement in Internet-related activities.

These “digital frontrunners” generate about 8% of their GDP from the Internet, compared to 5% in Europe’s Big Five (Germany, France, Italy, Spain, and the United Kingdom). Digitization is expected to generate between 1.6 million and 2.3 million more jobs than it eliminates in these countries between 2015 and 2020.

Of course, Europe’s tech sector still has its weaknesses, reflected in its failure so far to produce a tech giant to rival the behemoths of Silicon Valley. While European tech entrepreneurs find it as easy as their American counterparts to raise startup funds, US firms enjoy 14 times more later-stage capital. That funding gap would disappear, if European pension funds allocated just 0.6% more of their capital under management to venture investments.

A related weakness is the lack of a true European single digital market. In the US or China, tech entrepreneurs gain immediate access to a massive market. In Europe, they still must navigate 28 different consumer markets and regulatory regimes.

To be sure, the European Commission promised to create a single digital market two years ago, estimating that it could boost the EU economy by €415 billion ($448.5 billion) annually. But Hosuk Lee-Makiyama and Philippe Legrain of the Open Political Economy Network recently delivered a scathing assessment of the results. Europe’s “single digital market,” they argue, currently amounts “to a jumble of outdated, corporatist, counterproductive industrial policies that favor producers over consumers, big companies over small, traditional incumbents over digital startups, and EU firms over foreign ones.”

Instead of liberalizing, the EU wants to regulate. For example, it is working to ban companies from refusing online sales (except for copyright reasons) or setting different prices on the basis of a customer’s home country. Other dangerous possibilities – such as an effort to regulate data ownership, access, and usability – lie on the horizon.

Despite these risks, the overall trend in Europe’s tech sector is a positive one. A new appetite for risk seems to be sweeping the continent; Atomico reports that more than 85% of founders say it is “culturally acceptable” to start one’s own company. Add to that deep research talent – five of the top ten global computer science faculties are within the EU – and Europe’s start-up boom looks sustainable.

Politically, too, there is reason for optimism. Europe’s digital frontrunners are beginning to organize into a potent force, with 16 small EU countries, from Denmark to Ireland and Estonia, having formed a pro-Internet group. Together, these countries have urged the EU to ban data-localization requirements.

At a time when the US is pursuing protectionist, insular, and backward-looking policies, Europe is stepping up as an innovative and forward-looking economic force. Wouldn’t it be ironic if, as now seems likely, it is the supposedly backward EU that ended up leading the way in unlocking the Internet’s true economic potential?