Stockholm recently hosted Techarena, bringing together 12,000 founders, investors, and policymakers under the theme “Becoming the Best in the World.” Contrary to the common narrative of Europe turning into a museum, having missed out on the digital revolution, Sweden offers a welcome counterpoint – while, in an era of transatlantic tensions, highlights the potential danger of depending on US tech.

Stockholm is second per capita only to Silicon Valley in terms of unicorns – startups worth over $1 billion. Sweden’s approach to tech is ambitious, yet pragmatic. It lacks ambitions to create Silicon Valley giants or replace American technology. Instead, it aims to partner with US tech. And it calls on Europe to reduce regulatory burden.

Although Europe suffers from a crisis of confidence in tech, it is brimming with talent and startups. Investment in European startups has grown by an average of 13% per year over the past decade, compared to 8% in the US. Funding for Europe’s AI startups hit a record high of $11 billion last year.

Even so, around 40% of founders feel less optimistic about the future of European tech than the previous year — up from 8% in 2015 — according to VC firm Atomico’s State of European Tech report. A mindset shift is needed. “It’s a European problem to talk about the problem,” says the Swedish entrepreneur Niklas Zennström, CEO of Atomico and co-founder of Skype. “There is so much exciting data that shows we are actually catching up”.

Sweden shows evidence of this catch-up. The Nordic country of 10 million ranks as the world’s 2nd most innovative economy, having produced 41 unicorns, including marquee names Spotify, Klarna, Kry, and Voi. Swedish startups doubled in value over the past five years, and are now valued at €239 billion.

The country’s success factors include high education levels, cheap green energy, access to venture capital, and a strong social safety net that encourages risk-taking. In innovation hubs like Stockholm, successful startups and scaleups create a positive cycle, explains Oliver Åstrand, co-founder and CTO of Tandem, an AI startup providing automated medical notes. Former employees at fintech giant Klarna have created 62 startups. Founders often end up becoming angel investors themselves, in turn supporting new startups. Companies such as streamer Spotify and fintech Klarna serve as inspiration, adds Noah Langert Hedman, co-founder and CEO of the AI edtech startup Gradr.

Sweden lacks challengers to US giants, including in capital-intensive AI foundation models. “Competing successfully in these areas is not impossible, but relatively difficult for a small country,” according to Sweden’s AI Commission, which released a national roadmap for AI in November. Despite European efforts to catch up, the Commission concludes, “we will continue to depend on the American tools and platforms for a considerable time.”

By contrast, Sweden aims to lead the world in applying digital technologies. The AI Commission argues that “it is in the application of AI that Swedish actors have their comparative advantage.” This application layer, the Commission writes, is where the greatest economic and societal value lies, as opposed to the early stages of the AI value chain. Skype founder Zennström concurs. “Europe can still win in AI despite US dominance,” he says. “European companies can build on top of [AI platforms] whether they are from France or from the US.”

A good example is the medical startup Tandem. It is built using OpenAI’s GPT-4 and the open-source speech recognition system Whisper. CTO Åstrand fine-tuned the models for Swedish healthcare settings, producing an AI scribe adept at local medical systems and diagnosis codes. Founded in Stockholm in 2023, Tandem raised $9.5 million from angel investors in 2024 and has now expanded to the UK, Spain, Portugal, and Italy.

Another Swedish startup, Gradr, seeks to reduce administrative burdens in education. By fine-tuning OpenAI’s GPT-4, Gradr provides detailed and individualized assignment feedback to students, specialized to the requirements of the Swedish school system. The startup received early-stage funding from venture capital firms and angel investors and has partnered with over 50 schools across Sweden. It would be impossible to provide their service without US AI companies, Gradr CEO Langert Hedman says.

Transatlantic tensions threaten this success. Many Swedish municipalities hesitate to adopt AI tools due to concerns over data security, Langert Hedman notes. According to the 2018 CLOUD Act, US authorities can request access to data stored by US-based tech companies, even if the data is hosted on servers in Europe.

Another drawback of an application strategy is the dependency it creates on US companies. In the past year, companies such as Google, Meta, and Apple all delayed the release of AI tools and services in Europe, blaming regulatory uncertainty. To ensure access to the latest and most advanced AI tools, Sweden’s AI Commission emphasizes the need to reduce regulatory obstacles and uncertainties at the EU level.

As a small, export-driven country, Sweden stands to gain from both strengthened transatlantic ties and European collaboration. Sweden’s weak digital policy in recent years and tendency to stay silent in Brussels cannot continue, the AI Commission argues. Speakers at Techarena agree. “We need to play a more proactive role in shaping EU tech policy,” says Darja Isaksson, Director General of Vinnova, Sweden’s innovation agency.

Reducing the regulatory burden is a top priority for Swedish policymakers and founders. Startups are not staffed to handle EU digital regulation, explains Daniella Waldfogel, CEO of the Stockholm Chamber of Commerce. Regulation also needs to be flexible. “How to regulate something that shapeshifts constantly?” asked Sweden’s Deputy Prime Minister Ebba Busch at Techarena. “Start by putting a minimalistic regulatory framework in place,” she answered, and then pick your fights.

More than half of European founders think that the EU AI Act negatively impacts the conditions for starting and scaling a tech company. Among them is Tandem CTO Åstrand, who laments the barriers it creates for startups due to high compliance costs and uncertainty. Despite Tandem being considered “limited risk” under the AI Act, the startup needs to hire lawyers to explain the AI Act to customers. Åstrand wants to see less, and clearer, EU regulation. “Regulation has to be for the good of society,” he says.

Yet, Sweden shows that regulation is not killing off European tech. The continent is full of innovative companies. To become the best in the world, it needs a confidence boost. “Who wins?” asks Robert Egnell, Vice-Chancellor of the Swedish Defence University, at Techarena. The most innovative actors, he says – those who can adapt societal systems to a rapidly changing world. Sweden and Europe are still in the race.

Oona Lagercrantz was a Project Assistant with the Tech Policy Program at the Center for European Policy Analysis (CEPA) in Brussels. She is currently an AI Governance Fellow at the Talos Network. Oona holds a bachelor’s and a master’s degree from the University of Cambridge.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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