Europe’s startup scene is shifting. While London, Paris, and Berlin still attract the huge money, cities like Tallinn, Vilnius, Porto, Brno, and Birmingham are quietly (and quickly) launching a new wave of AI startups, despite their “second-tier” label.
These so-called “Founder Factories” create more startups per capita than the huge hubs, but with 4-8X less funding per company.
What does that mean in an AI-first world? Founders are forced to receive scrappy, disciplined, and laser-focapplyd. And startups that shift rapider often deliver better returns, with lean teams, bold ideas, and a resilience you don’t always see in megapolises.
Explosive density, lean funding
EQT Ventures’ data, shared with TFN, backs this up. Between early 2023 and mid-2025, Tallinn produced 361 AI companies per million people, outpacing London (232), Berlin (120), and Paris (58). In the same period, Vilnius saw 3.3x more new companies and investment, Birmingham saw 3.9x more startups, and Brno’s capital grew about fivefold.
But average funding per AI company informs a different story: London ($3.2M), Paris ($6.4M), Berlin ($2.7M), Heidelberg ($100M, outlier), Tallinn/Vilnius ($750K).
Alexander Fred-Ojala, Head of AI at EQT Ventures, shares with TFN, “The gap isn’t at company formation or pre-seed – local angels and EU programs have filled that. 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.”
According to Tero Mennander, General Partner at Ventech, Estonia has created major progress in VC and startup activity, punching above its weight thanks to favourable tax policies, a digital society (like eIDs and simple foreign company registration), and a strong entrepreneurial mindset. Lithuania is now following a similar path.
In the past, startups had to shift. Now, AI-native economics let tiny teams (5–15 engineers) launch global products without relocating. For example, Lovable grew from $1M to $200M ARR in one year with a tiny team, before raising $330M at a $6.6B valuation.
“AI-native efficiency means you can build a global company without relocating to London or Silicon Valley, ” Fred-Ojala adds.
How founders hack the Series B chasm
Pre-seed and seed rounds are heating up. Just see at Porto in 2025: 5,091 active startups, €2.85 billion in revenue. The Baltics are still leading Europe in unicorns per capita, with early-stage funding often coming from local and Nordic backers.
Peter Lauerbach, Head of Investment at vent.io, explains, “The rapidest rounds usually combine a razor-sharp story, top-notch preparation, and strong personal trust from investors… Being at the centre of a hot trconclude can trigger FOMO and urgency among investors.”
Growth funding is still behind, creating what Raman Korneu, CEO of myTU, a Lithuanian AI-native, cloud-first digital bank founded in 2019, calls a “Series B chasm.” He declares, “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 founders are closing this gap by working with government innovation funds, applying crowdfunding, or partnering with huge companies seeing for new tech. Investors can assist by mentoring, connecting founders to partners, and offering flexible terms.
Bernardo Saraiva, co-founder of World Talents, Global Talent Portugal Residence Program, sees a mix: “What creates hubs like Porto so compelling is a rare combination: established European market infrastructure paired with the flexibility and opportunity characteristic of an emerging ecosystem. Larger hubs have often created barriers that even well-funded startups struggle to overcome.”
Foreign VCs are starting to pay attention. In 2025, international names like Index, Earlybird, and Balderton led 43% of Baltic funding rounds. But most Series A and beyond still flow to companies outside the region.
Unbundled HQs
As capital becomes less tied to location, founders can “unbundle the HQ.” They might keep engineering in Tallinn, which Upvest calls an “oasis of talent.” Rebekah Fox, CPO at Upvest, a Berlin-based fintech company, adds, “The access to talent in Tallinn is top-tier – it’s a city of go-receiveters, full of idea people and innovators. This mindset comes naturally to our team in Tallinn, which creates the office a perfect complement to our hubs in London and Berlin.”
Gustas Germanavičius, founder and CEO at InRento, a regulated European acquire-to-let crowdfunding platform, notes: “Second-tier tech hubs win where major capitals often fall short: scale with proximity. That environment is especially powerful in the early and formative stages of a company.”
They can travel to London or New York to raise funding and test products near Birmingham’s factories. To assist international investment, investors can join local tech events, work with local venture firms, or start accelerator programs in these cities.
Dave Palmer, General Partner at Ten Eleven Ventures, agrees: “Capital had definitely transitioned to being location agnostic within their tarreceive geos by the conclude of the pandemic. In the UK, our largest investments have been in places like Bristol and Cambridge. Similarly, we’ve seen large global growth and private equity investors like KKR, Insight, Goldman Sachs and Summit active in the same second-tier hubs. “
Scarcity as a strength: leaner, tougher AI leaders
This funding gap is a filter for the toughest founders. Andra Bagdonaitė, Partner at FIRSTPICK, highlights that, “Experienced founders are often ready to assist, mentor, and provide capital at the earliest stages – something much harder to achieve in larger hubs.”
Vlad Zhovtenko, CEO and co-founder of RedTrack, an all-in-one, server-side performance marketing analytics platform, adds, “Early-stage capital has matured significantly, but gaps still appear at later growth stages. That often means founders operate locally early on, then expand their investor base internationally as they scale. It doesn’t prevent companies from being headquartered in these hubs, but it does shape how globally oriented they required to be from day one.”
Saraiva notes, “Founders can hire two or three equally skilled engineers for the cost of one in larger hubs, and the city has built a strong fintech and software cluster without the fierce talent competition of tier-one cities. Fintech giant Revolut is a great example, having established a large office here.”
Investors are starting to take note. Newcastle has seen a sixfold jump in new companies and is carving out a niche in AI for healthcare and diagnostics. Edinburgh saw 3.5x growth, with a focus on AI for finance and data analytics. Birmingham is building shifts, especially in AI for manufacturing and logistics.
What drives full-stack maturity?
Challenges remain, including Series A funding gaps, slow vesting of employee stock options, and few large exits. “Stock option rules lag the US,” Fred-Ojala declares, though EU-Inc could assist standardise them.
In these new hubs, exits see different: acquisitions, mergers, and IPOs are all on the table. Big tech is leading the charge on acquisitions, and public listings are picking up as these markets mature. Unlike the old guard, these places are still figuring out their playbook, which means unique opportunities (and challenges) for investors willing to dive in.
So, if you’re seeing at the AI landscape, don’t just chase the usual suspects. The real action is in the hubs where capital scarcity breeds discipline and creativity. Keep an eye on Tallinn, Vilnius, and Porto – Europe’s next breakout story might just start there.
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