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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
The author is a associate at Thoma Bravo and head of the agency’s European operations.
Many international software program buyers are nonetheless treating Europe as an afterthought to their core methods. I imagine this represents a big misallocation of funding consideration.
The numbers reveal a rising ecosystem that has been hiding in plain sight: in 2024 alone, software program spending in Europe grew 11 per cent, in line with Gartner analysis. The agency expects this to sluggish to simply below 9 per cent this 12 months however the improve nonetheless far outstrips the EU’s financial progress.
And far of this software program is supplied by native firms. Europe hosts practically 13,000 software program firms that generate greater than $10mn in annual income, with virtually 4,000 exceeding $50mn, in line with Crunchbase information.
Many of those European software program firms are revenue-focused, scaling-up companies that learnt to develop sustainably below totally different constraints from their Silicon Valley counterparts.
This isn’t to disclaim very actual challenges which have lengthy hindered European innovation: regulatory crimson tape stays, productiveness lags behind and threat urge for food is, by some measures, comparatively modest. However the obstacles typically obscure a chance that — for full disclosure — is being focused by one among my agency’s funds.
What’s driving Europe’s software program growth? Three converging forces are creating important tailwinds.
First, the good cloud migration is choosing up steam: 68 per cent of European organisations nonetheless run lower than half their workloads within the cloud, McKinsey estimates. Take Germany, for instance, the place cloud adoption is quickly growing — 46.5 per cent of companies at the moment use the expertise, with a further 11.1 per cent planning to combine it, in line with Inkwood analysis. Shifts of this magnitude are anticipated to usher in tens of billions in software program spending, and enlarge the seen productiveness good points throughout the financial system.
Second, geopolitical tensions are accelerating demand for higher technological sovereignty, from cloud necessities to information localisation mandates to preferences for native help and partnerships. European firms more and more favour regional software program suppliers that may navigate native rules, present in-country information internet hosting and supply proximity for essential enterprise functions.
Third, the funding panorama is reworking. Whereas European software program has attracted important early stage enterprise capital funding over the previous decade, the buyout world has typically ignored the area’s maturing firms. Its software program firms spent many years constructing sturdy companies below constraint, studying to be worthwhile earlier and to give attention to sustainable progress moderately than pursuing scale at any value. Now they want capital to speed up natural progress and facilitate mergers and acquisitions.
It is extremely removed from the investing setting of Silicon Valley. European software program firms function in several regulatory environments, serve prospects with various procurement cycles and have constructed enterprise fashions optimised for profitability over speedy growth. These aren’t inferior traits — they’re particular person worth creation levers that demand specialised approaches.
Take into account the regulatory panorama: critics level to compliance prices from frameworks such because the EU’s new act to manage synthetic intelligence, however regulation creates aggressive benefits for firms that grasp advanced necessities early. If related guidelines unfold globally, European companies practised in navigating regulatory complexity ought to have important head begins in new markets.
The actual take a look at isn’t whether or not Europe can replicate Silicon Valley’s tradition of speedy iteration and risk-taking. It’s whether or not buyers can recognise that totally different innovation fashions profit from totally different capital methods — and deploy sources accordingly. European software program firms might transfer extra intentionally than many Silicon Valley start-ups, however in addition they typically construct extra sturdy companies with stronger unit economics and clearer paths to sustained profitability.
With rates of interest stabilising and so-called “dry powder” — dedicated capital to non-public fairness funds — looking for deployment, European software program provides a chance for what institutional buyers want: worthwhile, rising firms with confirmed enterprise fashions and clear scaling paths. For international software program buyers, Europe isn’t a nice-to-have diversification play anymore. It’s a must have progress engine.
