Why This Matters Now

Accel’s 2025 Globalscape report says the U.S. remains far ahead on large foundation models, but Europe and Israel are rapidly closing the gap in AI applications-attracting private funding equal to 66% of U.S. levels so far in 2025. The practical takeaway: the center of gravity for near‑term enterprise value is shifting to the application layer, while model leadership remains concentrated in the U.S.

This matters because AI-native apps are reaching $100M ARR in a few years with unusually high revenue per employee, altering how operators budget for adoption, how investors price defensibility, and where talent and GTM focus should move. The risk: moats at the app layer are still fragile, and model commoditization won’t save teams without proprietary data or distribution.

Key Takeaways

  • Europe+Israel’s AI and cloud apps raised funding equal to 66% of U.S. levels in 2025 YTD-up sharply from a decade ago-signaling real competition for application leadership.
  • U.S. retains a strong lead in large foundation models; European model winners remain uncertain, with better odds in smaller, specialized models.
  • AI-native apps are reaching $100M ARR in years, not decades, with top-quartile efficiency (high revenue per headcount).
  • Existing SaaS isn’t standing still: public cloud software performance is up and vendors are integrating “agentic” capabilities.
  • Data-centric businesses may be undervalued; proprietary data flywheels are emerging as the most durable moat at the app layer.

Breaking Down the Announcement

Accel’s analysis splits the market into models, infrastructure/compute, data, and applications. The U.S. dominates foundation models, while Europe and Israel are punching above their weight in applications with emerging category players such as Lovable and Synthesia. Accel highlights a decade of ecosystem maturation in Europe—experienced founders, repeat operators, and deeper early-stage capital—as the engine of this catch-up.

The report also notes a key change in performance dynamics: AI-native applications are scaling revenue faster and with better efficiency than prior SaaS waves. Meanwhile, public cloud software remains resilient (Accel cites a 25% YoY rise in its index), and incumbents are layering agentic features rather than ceding ground.

On models, Accel is cautious about Europe’s prospects for frontier leadership. Capital intensity, talent concentration, and distribution advantages favor U.S. labs. However, smaller, specialized models—particularly where latency, privacy, or cost constraints matter—still look viable for European leaders. On defensibility, Accel and other VCs are leaning into product-led adoption and speed, but the report underscores that proprietary data and data flywheels remain underpriced by the market.

Industry Context: Where the Moats Are Shifting

As APIs standardize access to high-performing models and orchestration tooling matures, product differentiation shifts toward workflow depth, domain expertise, and owned data. Vertical apps with tight integrations and measurable outcomes—think clinical documentation, industrial maintenance, or marketing asset generation—are best positioned to sustain adoption and pricing power.

Europe’s strengths align with these verticals: regulated industries, multilingual markets, and talent with domain depth. Israel’s edge in data tooling, security, and developer infrastructure also maps well to the application and data layers. The constraint remains: reliance on third-party model providers introduces platform risk, and regulatory requirements (e.g., model transparency, data residency) can slow rollout unless addressed early.

Incumbent SaaS vendors are not spectators. By embedding agentic capabilities into existing workflows and contracts, they can blunt net-new AI entrants—especially where switching costs are high. New entrants need clear ROI evidence and differentiated data access to win.

What This Changes for Operators and Buyers

Expect more credible vendors from Europe and Israel across legal, healthcare, manufacturing, and marketing. Procurement strategies should anticipate multi-vendor AI portfolios and prioritize contractual protections for model changes (audit logs, version pinning, and fallbacks) as apps increasingly rely on external models.

Budgeting will shift toward application ROI, not raw model access. Track metrics such as time-to-value (weeks to go-live), agent task success rates, and unit economics at inference (cost per completed task, not per token). In regulated environments, data residency and evaluation transparency will be table stakes; shortlist vendors who can prove lineage and guardrails.

On the build side, teams should assume commoditization at the model API layer and invest in proprietary data pipelines, customer feedback loops, and domain-specific evaluation harnesses. Where latency, privacy, or cost dominate, smaller or on-prem models may beat frontier APIs on total cost of ownership and governance.

Recommendations

  • For CIOs/CTOs: Run competitive pilots with at least one EU/Israeli AI app vendor per critical workflow. Require model versioning SLAs, offline fallbacks, and monitoring of agent actions and errors.
  • For Product Leaders: Build or buy data flywheels now. Prioritize exclusive data partnerships, synthetic data validation, and user-in-the-loop systems to reinforce quality and defensibility.
  • For FinOps: Model inference spending at the task level (cost per accurate outcome). Stress-test costs under agentic workflows, where tool-use can spike tokens and latency.
  • For Security/Compliance: Pre-negotiate data residency, retention windows, and model transparency disclosures to align with EU requirements and sector regulations.
  • For Investors/Corp Dev: Re-rate application startups that pair rapid adoption with proprietary data access. Be cautious on pure “thin wrapper” plays without workflow depth or data advantages.

Bottom line: U.S. labs still anchor foundation models, but the battleground for enterprise value in 2025 is the application and data layers—where Europe and Israel are now credible contenders. Move budgets and diligence accordingly.