While Europe’s technology consumption is dominated by giant foreign tech groups, the continent is now setting up a strategy to grow its own. The European Union recently outlined an attempt to restore what officials called “technological sovereignty” seeking tougher regulation of the world’s biggest tech platforms, new rules to protect strategic areas and more public spending for the tech sector.

This search for tech sovereignty reflects a growing concern among European leaders that countries in the region are overly dependent on services provided by foreign companies.

This article will examine the reasons why European officials are extending their control over foreign investment, what these rising investments say about the state of the European startup ecosystem and if it actually involves risks for the continent technological sovereignty.

Achieving tech sovereignty and independence from oversea tech providers

Even if cities like London, Berlin and Paris have already demonstrated their capacity to foster startups worth $1 billion and more, their figures are still dwarfed by those of the United States and China.  “It’s not too late to achieve technological sovereignty in some critical technology areas” Ursula von der Leyen stated in her speech to the incoming European Commission. Public policies are now being developed with a tougher stance on foreign players scooping up European tech firms. Indeed local governments, such as France, are already blocking potential foreign takeovers in so-called strategic domains, such as Artificial Intelligence.

Should we be afraid of foreign investments in European startups?

When it comes to foreign investments, the risk for European countries is to see some of their most promising startups being acquired by foreigners when they reach their peak of potential. In that case, the purchaser takes ownership of the patents and the technology developed by the venture – therefore threatening the local government’s tech sovereignty. So it is easy to understand why governments are trying to prevent losing the research and progress made by their home-grown companies and are fighting the risks of external interference.

The risk of seeing users’ data collected by the foreign investor can also raise some fears. When Chinese giant Tencent entered the capital of French fintech Lydia, Cyril Chiche, the co-founder, had to answer a certain anxiety by explaining that none of Lydia’s investors had access to the users’ information.

Still, the growing interest of foreign investors in the European startup ecosystem should also be perceived as a positive sign.

How can foreign investors help the European startup ecosystem thrive?

So why is this a good sign, you may ask? First, the money coming from abroad is also dedicated to being reused through the European ecosystem. Indeed, if startups succeed in raising more capital, they will have more resources to hire local talents. They will also gain the capacity to grow bigger, increasing their chances of filing successful IPOs and then raising capital that trickles down into more funding and talent for other startups. On top of the cash injection, foreign VCs can provide valuable knowledge and expertise in conquering international market, something that European startups have frequently had difficulties with. US and Chinese VCs have a much greater knowledge of how to build unicorns and complete successful IPOs.

For instance, French startup Lydia raised a $45 million Series B round (€40 million) led by Tencent. This is the first time that the Chinese company behind the WeChat Pay mobile app, which has more than a billion users, has invested in a French financial startup. Cyril Chiche explained in an interview that having Tencent as an investor is a real asset. He believes they will benefit from Tencent’s support especially in their scaling strategy, as the group has already accompanied multiple companies through hyper-growth.

Foreign equity investments also provide access to funding that does not exist in Europe. Typically, when a European startup begins looking for funding after its series A or B, it tends to drift overseas, where the chequebooks are bigger. In fact, raising funds from international funds, such as Blablacar’s $100 million, enhances the value of companies by making them grow sufficiently in their home market.

American and Asian investors increasingly interested in European startups

American and Asian funds have already demonstrated a strong interest in European startups. One in five rounds raised in Europe in 2019 involved the participation of at least one US or Asian investor, up from just 10% in 2015, according to the 2019 State of European Tech Report by Atomico. These investors have also been particularly important for the rise of large-scale funding rounds of more than $100M in Europe. In 2019, 90% of all $100M+ rounds involved the participation of at least one investor from the US or Asia.

American and Asian VCs are realizing that investing in Europe not only gives them the chance to diversify their portfolio but also ensures they don’t miss out on some of the next-generation technology being created here. One recent example is UK-based Checkout.com, a global payment solutions provider which completed the largest-ever fintech Series A in Europe ($230 million) last year, in a round that included US-based Insight Partners and Endeavor Catalyst. Insight Partners also recently invested in German challenger bank N26, as part of a $300 million Series D.

In the next few years, American and Asians investors will continue to grow their presence in Europe, meaning the competition and amounts raised in series A and B rounds will grow with it. As more capital enters the ecosystem, we can expect more mega-deals as well as a higher conversion of Seed investments to Series A, particularly from the top-tier seed funds.

How can Europe keep control of its tech champions?

While it would be preferable for startups to work primarily with local investors, the benefits of foreign VC currently outweigh the risks for the European startup ecosystem. The risk of not being able to continue to develop new technology because of a lack of funds should not be minimized, especially when companies abroad continue to grow.

In order to play a meaningful role in bringing innovation to the market that can overtake China and the US, European policymakers have many opportunities. To compete against the tech companies that control much of the world’s data, they have outlined standards for industries to share data within the European Union, making it easier for companies and researchers to protect the information they collect.

To help their local startups grow sufficiently, European financial institutions and investors need to succeed in raising more capital. The lack of sufficient growth capital appears to be the main challenge to the development of European tech champions. They also have to diversify their funding proposition for startups, such as venture lending, which is already well-established overseas but lacking in Europe. There is therefore much to do if the Old Continent wants to achieve tech sovereignty while also fostering tomorrow’s tech giants.