European software sector at critical ‘inflection point,’ warns McKinsey

The report, Europe’s Moonshot Moment, found that the continent has over 280 software companies generating more than €100 million in annual recurring revenue (ARR). These scaleups include the likes of Spotify, Revolut, Adyen, and Vinted.

However, European software businesses that reach the €100 million ARR threshold take 15 years on average to get there. That’s five years longer than their US peers, the report found.

Europe also lags in birthing software giants. While 5–10% of US firms reaching €100 million in ARR subsequently scale to €1 billion, fewer than 3% of their European peers reach that milestone.

The report highlighted some of the reasons for this stalled growth: fragmented markets, conservative corporate norms, and a slower flow of late-stage capital relative to early-stage investment.

Turning point?

The 💜 of EU tech

The latest rumblings from the EU tech scene, a story from our wise ol’ founder Boris, and some questionable AI art. It’s free, every week, in your inbox. Sign up now!

Despite the hurdles, the report’s authors are confident that all the ingredients for Europe’s success in software are now in place.

“Europe already holds the essentials to create the world’s next generation of software champions: deep talent pools, vibrant founder networks, and a rapidly maturing capital base,” said Ruben Schaubroeck, senior partner at McKinsey.

While Europe lost out to Silicon Valley firms like Google and Microsoft in the early internet era, emerging technologies like AI may offer a new opening for the region’s tech startups. Geopolitical shifts could also drive governments to invest in local tech ecosystems and rethink digital sovereignty, said the report.

“There’s no denying that European tech has faced structural barriers, but we’re at a genuine inflection point,” Phill Robinson, CEO and co-founder at Boardwave, told TNW. “New technology arenas, geopolitics, and an evolving operating environment are creating a unique opportunity for Europe to boost innovation.”

Now Europe must turn that potential into profits, the report argues. To that end, it suggests five key interventions to boost Europe’s software ecosystem:

• Expand late-stage funding
• Encourage experienced founders to start new companies
• Make it easier for sales and marketing teams to work across borders and help startups grow faster
• Encourage more large firms in Europe to buy software from European startups by offering government support or financial incentives
• Strengthen public-private partnerships to de-risk new technologies

Scaling up European tech

The McKinsey/Boardwave report comes hot on the heels of the EU’s landmark Startup and Scaleup Strategy, launched last week. The plan set out several reforms designed to remove barriers to growth for the bloc’s early-stage companies.

“If implemented boldly, and most importantly quickly, it can help Europe move from fragmented success stories to systemic, continent-wide scale; otherwise, we risk being left behind,” said Robinson, commenting on the new strategy.

The EU’s proposal includes provisions for a long-awaited “28th regime,” which would allow companies to operate under a single set of rules across the 27 member states. It is intended to reduce headaches around taxes, employment rules, and insolvency.

Robinson said he believes the EU’s new strategy will strengthen Europe’s software ecosystem by making it easier to operate across borders.

“We need to act as one innovation ecosystem, not 27 different ones,” he said. “That’s what makes this Europe’s moonshot moment. If we connect and act now, we can lead. And not just in Europe, but globally.”

Meet the Anker 20W USB C Power Strip, the ultimate desk power solution! With 9,659 ratings and a stellar 4.6 out of 5 stars, it’s a trusted favorite for its reliability and performance. Over 3K+ units were bought in the past month!

This compact power cube features 3 AC outlets, 2 USB-A ports, and 1 USB-C port to power everything on your desk with ease. Equipped with a 7-point safety system, including fire resistance, circuit-overload protection, and short-circuit protection, it gives you peace of mind. Plus, enjoy super-fast charging for your devices.

Grab this versatile power strip for only $13.99. Buy Now on Amazon!

Help Power Techcratic’s Future – Scan To Support

If Techcratic’s content and insights have helped you, consider giving back by supporting the platform with crypto. Every contribution makes a difference, whether it’s for high-quality content, server maintenance, or future updates. Techcratic is constantly evolving, and your support helps drive that progress.

As a solo operator who wears all the hats, creating content, managing the tech, and running the site, your support allows me to stay focused on delivering valuable resources. Your support keeps everything running smoothly and enables me to continue creating the content you love. I’m deeply grateful for your support, it truly means the world to me! Thank you!