McKinsey warns that the European software industry is at a crucial 'turning point.'

      The report titled Europe’s Moonshot Moment revealed that the continent is home to over 280 software companies that each generate more than €100 million in annual recurring revenue (ARR). Notable examples of these scaleups include Spotify, Revolut, Adyen, and Vinted.

      However, the report indicates that European software firms typically take an average of 15 years to achieve the €100 million ARR mark, which is five years longer than their counterparts in the US. Additionally, Europe struggles to produce software giants; while between 5–10% of US companies reaching €100 million ARR eventually grow to €1 billion, fewer than 3% of European companies reach that level.

      The report points out several factors contributing to this slow growth: fragmented markets, conservative corporate cultures, and a slower influx of late-stage capital compared to early-stage investments.

      Promising Outlook?

      Despite these challenges, the authors of the report believe that Europe now possesses all the necessary components for success in the software industry. “Europe already has the key elements to foster the next generation of software leaders: substantial talent pools, dynamic founder networks, and a rapidly advancing capital landscape,” stated Ruben Schaubroeck, a senior partner at McKinsey.

      Although Europe fell behind Silicon Valley companies like Google and Microsoft during the early days of the internet, emerging technologies such as AI may present new opportunities for the region's tech startups. Geopolitical changes could also compel governments to invest in local tech ecosystems and reconsider digital sovereignty, according to the report.

      “There’s no doubt that European tech has encountered systemic challenges, but we are at a crucial turning point,” remarked Phill Robinson, CEO and co-founder of Boardwave, speaking to TNW. “New technology sectors, geopolitical factors, and a shifting operational landscape are creating a distinctive opportunity for Europe to enhance innovation.”

      The report argues that Europe must now convert this potential into tangible profits. To facilitate this, it recommends five key actions to strengthen Europe’s software ecosystem:

      1. Increase late-stage funding

      2. Inspire seasoned founders to launch new ventures

      3. Simplify cross-border collaboration for sales and marketing teams to expedite startup growth

      4. Motivate larger European firms to purchase software from local startups through government support or financial incentives

      5. Enhance public-private partnerships to mitigate risks associated with new technologies

      Advancing European Tech

      The McKinsey/Boardwave report arrives shortly after the launch of the EU’s significant Startup and Scaleup Strategy the previous week. This initiative outlines various reforms aimed at removing obstacles to growth for early-stage companies within the bloc.

      “If implemented decisively and swiftly, it could enable Europe to transition from fragmented success stories to a cohesive, continent-wide scale; otherwise, we risk being left behind,” Robinson noted, reflecting on the new strategy.

      The EU’s proposal includes plans for a long-anticipated “28th regime,” allowing companies to operate under a unified set of regulations across the 27 member states. This measure aims to alleviate complications related to taxes, employment laws, and insolvency issues.

      Robinson expressed confidence that the EU’s strategy will enhance Europe’s software ecosystem by facilitating cross-border operations. “We need to function as a single innovation ecosystem rather than 27 separate ones,” he emphasized. “This represents Europe’s moonshot moment. If we unite and take action now, we can lead—not only in Europe but on a global scale.”