Stringent regulations such as the proposed EU Artificial Intelligence Act could potentially undermine the global competitiveness of European AI startups, likely pushing more companies to shift to place like the United States —a seismic blow to Europe’s tech ecosystem, ET has learnt after speaking with multiple industry executives, global founders, and investors at the Slush 2024 event in Helsinki.

“The reality is that the regulations here are far removed from the reality of how businesses operate,” said Andreas Klinger, founder of Prototype Capital, an early-stage solo general partner fund based in Berlin. “If we look at the high-risk aspects, everyone will agree, but things get muddier very quickly. I invest in artificial intelligence startups, so I have a good sense of what is likely to happen.”

He said the concept of future preemptive regulations is stifling technological innovation in the continent, as companies face the risk of being sued and then having to determine in court what went wrong.

Klinger, a former chief technology officer of Product Hunt, has backed over 90 companies including Remote.com, Lumalabs, Fly.io and Acquire. His Prototype Capital has also backed Indian startups like PierSight, a maritime surveillance-focused spacetech startup, and Noida-based Skillbee, a jobs platform for migrant workers.

He co-initiated EU.inc, a collective of European entrepreneurs, startup founders and investors aiming to establish a unified legal framework to streamline regulatory challenges and promote cross-border collaboration to make Europe a globally competitive innovation hub.

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The EU Artificial Intelligence Act, scheduled to take effect on August 2, 2026, will require startups to allocate significant resources to comply with its requirements, especially for ‘high-risk’ AI applications.11x. ai, a London-based startup that raised $50 million from Andreessen Horowitz in September, relocated to the US recently, largely driven by the requirements of its investors to set up shop in the Bay Area.

A recent survey by Atomico, an early-stage venture capital firm that has backed companies like Stripe, Klarna, and Skype, revealed that a sixth of the value created by European startups is lost due to US relocation and this migration contributes to a loss of talent, knowledge, capital, and economic output within Europe.

The survey said an increasing number of high-profile initial public offerings (IPOs) are opting to list in the US. A notable example is ARM, the UK-based tech giant, which bypassed London to go public in New York last year.

Startups that relocated accounted for a significant 17% of the total value generated by European startups at the time of exit, whether through IPOs or acquisitions, it said.

“Despite all the progress over the past decade, there is real concern across the ecosystem about the way forward,” said Tom Wehmeier, partner at Atomico. “On the one hand, there are more new founders starting tech companies in Europe than anywhere else in the world, but on the other hand, there are questions being asked about Europe’s attractiveness as a place to start and scale a tech company.”

Slush, the annual startup and technology event named after Helsinki’s slushy winter streets, brought together over 13,000 participants, including 5,500 startup founders and operators, and approximately 3,300 investors managing a combined $4 trillion in assets.

The attendees included executives from leading tech firms like Nvidia, Revolut, Figma, Meta, OpenAI and Stripe, as well as prominent venture capital firms such as Sequoia Capital, Lightspeed Venture Partners, Andreessen Horowitz, Accel, Pear VC and Atomico.

Growth hurdles

Slush CEO Aino Bergius said that while fundraising remains the biggest challenge for European startups, as investors are now more focused on revenue growth, the ongoing development of new EU regulations is reshaping the priorities of businesses and policymakers in ways that were not fully anticipated.

Atomico projects that total investment in European tech startups will drop to $45 billion in 2024, a 55% decline from 2021, when investment volumes exceeded $100 billion for the first time. This also marks a decline from the $47 billion invested in 2023.

Further, founders and investors noted that European companies are facing considerable obstacles in scaling beyond the early stages due to the regulatory complexities and the pronounced growth funding gap. Over the past decade, this gap has resulted in an estimated $375 billion shortfall for European growth-stage companies.

“Funding in EU startups is not what’s missing; it’s the scale-up investment, and we’ve also seen European startups moving to the US due to this gap,” said Alessandro Ronzoni, investment officer at the European Investment Bank (EIB).

The EIB is investing in a fund of funds to support European late-stage venture capital firms, channelling scale-up capital to promising startups.

Regulation vs innovation

“I think regulation is both inevitable and necessary. However, if we are regulating a vacuum cleaner or a self-driving vehicle, we need to approach them differently and regulate the application or use case. You can use this technology for harmful purposes like any other tool, and while there may be cases where we clearly need to ensure it isn’t harmful, we must also ensure it allows for value creation,” said Peter Sarlin, founder and CEO of Silo AI, a Helsinki-based private AI lab training large language models for low-resource languages.

Silo AI was acquired by American semiconductor company Advanced Micro Devices (AMD) earlier this year in an all-cash deal worth approximately $665 million.

Sarlin said a key challenge European startups face in securing funding is the lack of talent, which can be addressed by attracting and educating more skilled workers, as well as by building more concentrated European markets. This approach would enable companies to expand within a unified European market, rather than navigating fragmented, smaller national markets.

The reporter was in Helsinki at the invite of Business Finland