ewsba.se
France’s President Emmanuel Macron and Germany’s Chancellor Friedrich Merz at a Berlin summit on Europe’s technological sovereignty in November
Sovereignty has become the word du jour, but some investors worry that imposing geopolitical constraints on portfolios might impact returns.
Reducing dependence on US technology has become a priority for European governments during President Donald Trump’s second term, as transatlantic relations have soured.
Surging tariffs last year, along with the prospect of a tech “kill switch"—where companies would be ordered to suspend services in Europe—have become a new reality that the continent might have to face.
This political urgency has started to influence the flow of capital. In just the past month, the UK launched a £500 million Sovereign AI Fund, German startup Aleph Alpha sold itself on a sovereignty pitch, and now Brussels is weeks away from what it says will be the EU’s most significant digital sovereignty legislation yet.
Against this backdrop, sovereignty is rising up the agenda not just for governments but also among VC investors.
“Sovereignty is the new buzzword at the moment,” Simone Lavizzari, principal at Berlin-based deep tech VC firm Join Capital, said. “When you look at a lot of technology [in Europe], we don’t own it, and it could be taken away from one day to the next. We never thought this could be a possibility, but I’m not so sure that’s the case anymore.”
US tech companies dominate Europe’s digital infrastructure, controlling more than 70% of the region’s cloud market and about 60% of its enterprise software market. Hyperscalers and AI infrastructure are largely concentrated in the US, and European defense relies heavily on American tech.
That is what European governments want to solve, and investors expect startups to play a significant role in offering alternatives.
But Lavizzari notes that while investors talk about sovereignty in strategic terms, money is the more immediate driver.
A significant portion of Europe’s LPs in VC funds are state-backed or have government ties, particularly in smaller countries. The European Investment Fund is by far the largest capital allocator in the region and, with the European Investment Bank and the European Commission as key shareholders, its investment mandates align with EU policy priorities.
The fundraising prospects for European VCs have improved from last year’s record low—capital raised in 2026 has already surpassed last year’s halfway mark, and fund count is also pacing above 2025 levels, according to PitchBook data—but it is still a difficult climate for managers.
“People at high levels of government have realized that [Europe’s dependency on US tech] is an issue, and so there is a lot of money for sovereignty,” Lavizzari said. “At the end of the day, we, as VCs, need money to invest, so we’re going to chase it.”
Despite sovereignty being a priority for many LPs and, subsequently, VCs, not everyone agrees it should be the deciding factor for an investment.
London-based Evantic Capital managing partner Matt Miller was recently quoted as stating that tech sovereignty is “welfare” for weak startups, and he is not alone in that thought.
Tobias Bengtsdahl, Stockholm-based GP with Antler, said: “Investing in a startup that is completely focused on sovereignty sounds a lot scarier to me than one that is all in on growth, and uses US services and clouds. I would rather have a startup that cares about winning globally. If you offer a top-tier service, then the sovereignty discussion is unnecessary.”
According to Bengtsdahl, a startup that relies solely on sovereignty as an edge raises concerns about its long-term defensibility. This is particularly true if relations between current or future administrations in the US and Europe improve, lessening the urgency for the latter to reduce its dependence.
Governments’ desire for sovereignty will create opportunities for European companies to win contracts as they move away from American tech. Countries are already making moves away from the US. The German state of Schleswig-Holstein has begun phasing out Microsoft tools, while France has plans to ban Zoom in favor of its own platform.
The risk, he said, is that such opportunities could be short-term, and startups providing “second-tier” services or products may find themselves outcompeted once the procurement advantage that sustained them disappears. Furthermore, startups that restrict themselves to local technology for sovereignty reasons risk being outbuilt by competitors with access to better tools.
The bigger question, according to Lavizzari, is what it means for future growth to be a sovereign-centered startup. The goal for most VCs is to back companies that become not national brands, but global brands. Being so focused on a domestic market could limit a startup’s total addressable market and prevent it from becoming a world leader. If that were to occur, the investment case for a VC becomes significantly less attractive.
Lavizzari warned that Europe could end up with fragmented markets, with each country building its own sovereign stack, resulting in 20 subscale companies rather than one that can compete globally.
“I would love to see European sovereignty, but we are too stuck in national policies,” he said. “I think we’ll have an Italian strategy, a German one, a UK one and so on. Even combined, that will not reach the level that the US is operating on.”
That said, according to Bengtsdahl, the sovereignty thesis can work if there are structural advantages to being local. He pointed to the example of Intric.ai, which builds AI agents for public-sector and enterprise clients that require strict data sovereignty.
Lavizzari pointed to energy and defense as sectors where the sovereignty thesis is stronger, because governments are both the primary customer and have a direct strategic interest in keeping critical infrastructure out of foreign hands. Several European countries, such as the UK, Germany and France, have awarded contracts to local defense tech startups. French drone maker Harmattan AI has secured multi-million dollar contracts from the UK and another NATO government. German companies Helsing and Stark have won contracts worth up to €4.3 billion to supply their drones to the country’s military, the Financial Times reported.
For startups in the right sectors, sovereignty isn’t just an edge; it’s critical. However, if that opportunity extends only to public-sector procurement and not to enterprise customers, its reach will be limited.
Both Lavizzari and Bengtsdahl agree that Europe’s dependency problem is real and that there are areas where it can credibly build alternatives. But the investment case, both argue, is strongest where sovereignty aligns with genuine technical advantage and procurement opportunities, and weakest where it is driven purely by political fashion.
Investors who will do well are those treating sovereignty as a filter for finding structurally advantaged companies, not as a thesis in itself.
Get our daily digest of private capital markets in the EMEA region.
This article originally appeared on PitchBook News