AI is the primary catalyst revitalising the venture capital (VC) market, explained Johannes Virkkunen, head of technology investments (equity) at the European Investment Fund (EIF). Last year, AI-related companies captured approximately 35% of all venture funding in Europe, while in the more tech-heavy US market, this figure exceeded 60%. “Without the AI financing, the market is fairly flat,” he added.

The AI revolution and the power law of venture capital

Investment in this sector is dictated by the “power law,” where a minority of category leaders generate the maturity of returns in an institutional portfolio. He noted that even with high valuations for pre-revenue companies, the potential upside of an AI leader is immense.  OpenAI raised $110bn in late February, valuing the company at $730bn. “Most companies will fail, but if you manage to invest in one or two of the category leaders, you will generate venture-type returns.”

A significant milestone in the European ecosystem is the emergence of massive seed rounds for high-profile founders. AMI labs, founded by Yann LeCun, a French researcher formerly at Meta, recently raised an unprecedented $1bn seed round to develop “physical AI”—systems that use sensors and cameras to perceive and react to their physical environment.

Such rounds are increasingly bifurcated, with renowned founders able to select a global mix of institutional (e.g.Temasek), corporate, and family office investors such as Dassault. “With a very strong name and track record, you raise capital with considerable flexibility,” he said.

Software disruption and accelerated growth

AI is fundamentally reshaping the software industry, which Virkkunen described as being at the centre of AI-driven disruption. Traditional Software-as-a-Service (SaaS) giants like Salesforce and Workday are facing pressure to reprice or innovate by embedding AI, while  AI-native startups develop similar functionalities at a fraction of the cost. “Anthropic’s launch of its Claude co-working agent was a wake-up call for many of these legacy or incumbent software businesses,” he said.

The speed of this disruption is highlighted by the Swedish company Lovable, an AI-supported coding platform that reportedly reached €300m in annual recurring revenue (ARR) just 14 months after its founding.

Virkkunen observed that this shift is changing the entrepreneurial mindset. Founders now view AI skills as a prerequisite for recruitment to remain competitive. While incumbent SaaS companies are protected by the time it takes large organisations to adopt new software, the long-term trend points toward AI-driven automation of documentation-heavy “white-collar” tasks in fields such as law, finance, and consultancy.

Physical AI and Europe’s industrial renewal

Beyond software, this shift is extending into the physical world. Virkkunen argued that Europe’s next phase of innovation lies in the convergence of its mechanical engineering heritage with advanced software.

Neura Robotics in Germany exemplifies this, having secured an order book exceeding €1bn for humanoid industrial platforms. Unlike earlier academic robotics projects, the platform uses AI to learn tasks on the job through “physical sensing.” This directly addresses labour shortages by offering a solution to demographic declines hitting sectors like the German automotive industry.

Some are arguing that we may be running out of data centre capacity as early as this year

Johannes Virkkunen, head of technology investments (equity, European Investment Fund

This “industrial rejuvenation” is a key theme of Mario Draghi’s 2024 report. Virkkunen argued that the German Mittelstand—often family-owned businesses with a strong entrepreneurial DNA but still using legacy software—can leverage AI to automate mundane processes and maintain margins against global competitors. The goal is a “rising tide” where startups and incumbents coexist to sustain the European way of life for the next 50 years.

Infrastructure constraints and energy challenges

However, this rapid expansion is not without constraints. AI faces significant infrastructure bottlenecks, particularly regarding energy consumption. Data centres powering AI already consume as much electricity as Japan, the world’s fifth-largest economy. “Some are arguing that we may be running out of data centre capacity as early as this year,” he added.

Virkkunen highlighted that Europe is well-positioned to address this through its strength in the green transition and “ample” energy in some parts of Europe. In addition, Europe benefits from strong semiconductor leadership, including companies such as AMD, STMicroelectronics, Infineon, and ASML, which has already invested in Mistral.

Furthermore, Europe is developing specialised “centres of excellence,” such as AI in Paris, defence tech and aerospace in Munich, and quantum computing in the Nordics. For instance, the Finnish quantum firm IQM recently announced a $1.8bn listing in New York, the highest such listing for a European quantum company. Startups are also emerging to optimise chip architecture and cooling to reduce energy needs, ensuring that the technological shift remains sustainable.

AI is becoming embedded across all technologies, blurring the line between software and hardware. From robotics to quantum and defence tech, companies must integrate both to stay competitive, with value increasingly created through their interaction rather than in isolation.

Talent repatriation and technological sovereignty

A defining trend for the continent is a “reverse brain drain,” with high-level experts repatriating from Silicon Valley to start companies and funds in Europe. This influx of talent, including founders such as Arthur Mensch (Mistral) and those behind AMI Labs, supports the growing policy objective of “technological sovereignty.” Governments, particularly in France, are increasingly pushing to prioritise European software over dominant US providers to ensure local self-sustainability.

To bridge the funding gap for late-stage companies, the EIF launched the European Tech Champions Initiative, backing over a dozen funds targeting €1bn each. This initiative aims to provide the scale-up capital traditionally supplied by US investors, allowing European firms to become global category leaders without selling out prematurely. “We would like to see the next €100bn or even trillion companies in the software space emerging from Europe and remaining here,” he added.

Virkkunen noted that many second- or third-time founders are now driven by the ambition to “rejuvenate the European industrial landscape” rather than seeking an early exit.

If these dynamics persist, AI may not only revive venture capital, but also redefine Europe’s position in the global technology landscape.

Professional evolution and role of the EIF

Johannes Virkkunen, a lawyer by training, joined the EIF in 2007 as part of the equity legal team. After completing an MBA, he transitioned to the investment side in 2012, primarily focusing on venture capital in German-speaking regions during a period of rapid ecosystem growth.

From 2013 onward, he noted that the Berlin venture capital scene expanded from just one or two managers to over 20 in a decade. These funds were behind Rocket Internet, Delivery Hero and the Zalando exit, the e-commerce platform, in 2014. The market shifted from founders with consultancy or finance backgrounds to those with operator and angel investment experience, which helped strengthen the ecosystem.

Historically, EIF was organised by investment stage, but later shifted to a thematic structure better aligned with emerging technologies and societal priorities, explained Virkkunen.  

As a fund of funds, he noted that the EIF’s primary function is to facilitate a “win-win” environment by ensuring “hygiene factors” such as investor protection, alignment of interest, and proper legal structuring are in place. He emphasised that the EIF does not seek to second-guess fund managers but rather provides the stable setting required for them to succeed.