The global race for the AI app layer is intensifying, with Europe and Israel emerging as strong contenders despite the U.S. leading in large AI models. According to Accel’s 2025 Globalscape report, which examines the AI and cloud markets, European and Israeli AI and cloud application startups have raised 66 cents for every dollar raised by their U.S. peers so far in 2025. This marks a significant shift from a decade ago, when Europe’s share was just one-tenth of the U.S. market. Accel partner Philippe Botteri attributes the progress to a decade-long maturation of Europe’s tech ecosystem, with a growing base of founders and investors who understand how to build scalable, software-driven companies. The momentum is not just about talent but also about deep domain expertise. Jonathan Userovici, a general partner at Paris-based Headline, notes that European founders are combining top-tier technical skills with strong market knowledge across industries like legal, healthcare, manufacturing, and marketing. This trend is reflected in Headline’s AI Europe 100 report, which highlights fast-growing, AI-native startups with high potential to become market leaders. A key differentiator in this cycle is speed. Unlike past tech waves, where software companies took decades to scale, today’s AI-native applications are reaching $100 million in annual recurring revenue in just a few years. This growth is driven by exceptional efficiency—revenue per employee is the highest ever seen in the software industry, a trend observed on both sides of the Atlantic. While existing cloud software companies remain relevant, they are rapidly evolving by integrating agentic AI features. Accel’s Public Cloud Index is up 25% year-over-year, and companies like Doctolib, an Accel portfolio company, are being redefined as AI-native due to deep AI integration. However, the outlook for European foundation model companies is more cautious. While Mistral AI has raised hopes, Botteri notes the space is not currently “target-rich” and may be better suited for smaller, specialized models. The real opportunity lies in the application layer, where VCs are actively investing despite concerns about defensibility. Botteri argues that product-led growth with rapid adoption still offers strong moats. Another overlooked area is data. Lotan Levkowitz, a managing partner at Israeli VC Grove Ventures, believes data is undervalued. Companies that build proprietary data sets and data flywheels—where data grows more valuable with use—have significant long-term potential. This shift in focus from models and compute to data could shape the next phase of the AI race. As the AI landscape evolves, Europe and Israel are proving they can do more than supply talent to U.S. tech giants—they are building the next generation of AI-powered software from the ground up.