Europe’s “second-tier” cities are building more AI startups—on far less money
Europe’s AI startup geography is changing. While traditional magnets such as London, Paris and Berlin continue to attract the largest funding rounds, a growing share of new AI company formation is happening in smaller, often overlooked ecosystems—cities including Tallinn, Vilnius, Porto, Brno and Birmingham.
New data shared by EQT Ventures suggests these “Founder Factory” hubs are generating AI startups at a faster per-capita rate than Europe’s biggest capitals, but with dramatically less capital available per company. Investors and founders say the imbalance is reshaping how companies are built, how they scale, and where they keep their teams.
High AI density, low dollars per company
Between early 2023 and mid-2025, Tallinn produced 361 AI companies per million people, according to EQT Ventures. That compares with London (232), Berlin (120) and Paris (58). Other emerging hubs also showed rapid acceleration: Vilnius recorded 3.3x more new companies and investment over the period, Birmingham saw 3.9x more startups, and Brno experienced roughly fivefold capital growth.
However, average funding per AI company highlights a stark divide. In the same dataset, average funding per company stood at roughly $3.2M in London, $6.4M in Paris and $2.7M in Berlin. By contrast, Tallinn and Vilnius averaged about $750K per AI company. (One city, Heidelberg, appeared as an outlier at around $100M.)
Alexander Fred-Ojala, Head of AI at EQT Ventures, said the problem is not at the earliest stages. “The gap isn’t at company formation or pre-seed—local angels and EU programs have filled that,” he said. “The gap is Series A and beyond. Founder Factories like Tallinn and Vilnius are generating companies at extraordinary rates, but the capital per company is 4–8x lower than major hubs.”
Why smaller hubs can move faster in an AI-first economy
Several investors argue that AI’s economics increasingly favor leaner teams and faster iteration, reducing the traditional advantage of being headquartered in a mega-hub. Tero Mennander, General Partner at Ventech, pointed to Estonia’s favorable tax approach, digital public infrastructure such as e-identities and streamlined company formation, and a strong entrepreneurial culture—factors that helped it “punch above its weight” in venture activity. He said Lithuania is now following a similar trajectory.
Founders and backers also say AI-native product development allows small groups—often 5–15 engineers—to ship globally competitive software without relocating. Fred-Ojala described this as “AI-native efficiency,” arguing it reduces pressure to move to London or Silicon Valley to access customers, talent and early capital.
The “Series B chasm” and how founders are working around it
Early-stage rounds are increasingly active across Europe’s emerging hubs. Porto, for example, was cited as having thousands of active startups and growing revenue output, reflecting a broader rise in seed activity outside the biggest capitals.
Yet later-stage funding remains harder to secure locally. Raman Korneu, CEO of myTU, described a persistent “Series B chasm” in smaller ecosystems: “While pre-seed and seed capital are abundant, we still face a ‘Series B chasm.’ For myTU, we actually bypassed traditional VCs for our €10M Series A, relying on strategic partners instead.”
Other companies are using a mix of government innovation funds, corporate partnerships and alternative financing such as crowdfunding to bridge the gap. Peter Lauerbach, Head of Investment at vent.io, said the fastest rounds tend to combine a clear narrative, strong preparation and trust with investors, adding that being at the center of a hot theme can create urgency and “FOMO.”
Location-agnostic capital and “unbundled HQs”
As venture and growth investors become more comfortable backing distributed teams, founders are increasingly “unbundling” the idea of a headquarters. Engineering may remain in Tallinn—described by some operators as an “oasis of talent”—while commercial leadership and fundraising activity happens in London, New York or other financial centers.
Rebekah Fox, CPO at Upvest, said the company’s presence in Tallinn complements its other hubs: “The access to talent in Tallinn is top-tier… which makes the office a perfect complement to our hubs in London and Berlin.”
Dave Palmer, General Partner at Ten Eleven Ventures, said capital has become more location-agnostic since the pandemic, with major investors increasingly active beyond the largest capitals. He pointed to UK activity in places such as Bristol and Cambridge, and noted that large growth and private equity firms—including KKR, Insight, Goldman Sachs and Summit—have also been active in second-tier hubs.
Scarcity as a filter—and what still needs to change
Supporters of these ecosystems argue that capital scarcity can be an advantage: it forces discipline, sharper prioritization and globally oriented go-to-market strategies from day one. Andra Bagdonaitė, Partner at FIRSTPICK, said early-stage mentorship and founder-to-founder support can be easier to access in smaller hubs than in crowded capitals.
Still, structural challenges remain. Founders and investors cite the shortage of large local exits, uneven late-stage capital availability, and employee equity rules that lag the US. Fred-Ojala said European stock option frameworks remain a constraint, though efforts such as EU-Inc could help standardize approaches across markets.
Even with those hurdles, the direction of travel is clear: Europe’s AI momentum is no longer confined to its biggest capitals. For investors, the emerging opportunity may lie in the places producing the most companies per capita—where constraints are turning into a competitive edge, and where the next generation of AI leaders is being built with less money, but often more urgency.
Related
