Robots, not chatbots: where Northzone sees the real money in AI

Venture capital is back in Europe, but the money is concentrating in fewer, larger rounds. Northzone’s Pär-Jörgen Pärson sees the next big shift as physical AI, which addresses problems of far greater economic value than today’s AI. He also warns that Swedish industry is too comfortable to keep up.

Capital is not scarce in Europe’s startup world this autumn. But the market looks very different from the peak year of 2021 and the trough of 2023.

“Big rounds are moving at a tremendous pace, there’s no doubt about that. And it’s still very much about AI,” says Pär-Jörgen Pärson, Partner at venture capital firm Northzone.

The money is not primarily going to AI applications, however, but to the infrastructure layer, what he calls the efficiency layer.

“Different kinds of methods for getting more bang for the buck, so to speak.”

Fewer, fatter rounds

According to Pärson, rounds are getting very large, very early. Few companies can carry that, and it crowds out smaller, less capital-hungry companies.

“‘Fewer, fatter rounds’ – you can safely say that.”

Total investment volume has risen, which is positive. The downside hits companies with a more traditional model, decent growth, and modest capital needs. They don’t get the attention of venture capital.

But Pärson is reluctant to call it a problem.

“It’s just the way it is. Capital is very quick to react to new phenomena, and you have to adapt. We have companies growing like crazy that maybe aren’t as hot because they were part of the old SaaS model. The old model has to prove itself somehow.”

A thin ecosystem in Stockholm

This spring, Pärson warned that the AI boom is overheated. He describes Stockholm as a fairly thin ecosystem, where only three really big companies have emerged recently: Lovable, Legora and Tandem Health.

“Then there are a few promising candidates in the pipeline, like Brickanta and Strawberry, which have raised decent money and are well positioned. But they’re not yet anywhere near Lovable, Legora and Tandem.”

He hopes to see more activity in physical AI and so-called world models.

“We have a proud tradition with ABB Robotics. There’s a robotics lab out in Frihamnen in Stockholm and a few exciting startups, but there are still quite few of them.”

Swedish industry is too comfortable

Northzone recently brought in a partner focused on physical AI. With its industrial base, Europe should be well placed to build momentum in the sector, Pärson argues. But that requires entrepreneurial activity, and that is where Swedish industrial companies fall short.

“Unfortunately, Swedish industrial companies are quite bad at engaging with the startup ecosystem, compared with, for example, American industrial companies.”

American companies often have forward-leaning corporate development teams that work closely with startups. That tradition is weak in Sweden, which Pärson believes is bad both for industry and for the startup world.

German colleagues report the same thing, Pärson says. But Germany does have a few extremely forward-leaning companies with significant corporate venture capital arms.

“I think they have also been under pressure because the entire car industry is threatened by Chinese automation. Swedish companies haven’t been as exposed, not yet anyway, and so haven’t had to rethink their businesses in the same way.”

Swedish industrial companies need to create incentives for their employees to think about what happens when robotics arrives, he says.

“They have to evaluate other paths forward, and maybe even invest in them, to make sure they don’t become obsolete. A huge transformation of the whole industry lies ahead of us. The physical AI wave is many, many times bigger and more complex than the AI wave we are experiencing now. It solves problems of significantly greater economic value.”

American investors see opportunity in Europe

Pärson works from both Stockholm and New York. Despite tariffs, regulation and geopolitical uncertainty, he sees strong American interest in Europe.

“We have a much lower cost base here, a level of talent that is definitely on par, and access to significant markets. There’s quite a lot to be enthusiastic about as an American investor.”

Nor does he want to exaggerate the turbulence. The startup market moves in entirely different cycles from the rapid political announcements that dominate the news.

“What we invest in today is something we believe will be fantastic in 8–10 years. Growth in the US has been incredibly strong despite all the disruptions.”

The risk, however, is if the bow snaps.

“If the bow is drawn very tight, as it is now, the fall is all the harder. Then people tend to focus more on their home market and their core, and that could hit quite a few European funding processes.”

“It’s not fair to write Europe off”

Pärson has previously said there is no reason to paint a doom-and-gloom picture of Europe’s competitiveness. He stands by that.

“There’s talent, there’s capital, and there’s a market.”

He has followed the scene for a long time, from the days when new companies mostly sold a bit of software and rarely changed much.

“Now there are companies that completely change the operating conditions of large ecosystems. Startups can turn the world upside down in a way they couldn’t 20 years ago. Ten years ago there were no companies worth 10 billion dollars in Europe, now there are nearly 100, I believe. It’s a big shift in the landscape, and so I don’t think it’s true or fair to write Europe off. We have enormous potential.”

Rules that slow down – and rules that build

There are still tangible differences between Europe and the world’s best environments for building companies, Pärson says.

“If you’re a top talent in the US, you’ll be discovered and rewarded. You get a high salary and surely an incredible amount of incentives too. There’s a structural opportunity for risk-taking that is much harder to execute in Europe.”

Much of this comes down to tax legislation and to the rules that determine how quickly you can build something new. But regulation itself is not always the problem, rather that it slows the pace.

“There is regulation that has been very good for Europe. Revolut wouldn’t be as big if it weren’t for the EU’s harmonised financial legislation, which lets you operate as a bank outside your home market. You can’t even do that in the US, where you have to apply for a new licence for every state.”

And one thing has fundamentally changed, he says.

“Today there are so many role models in Europe. Entrepreneurs who have succeeded big and are now sharing their experience and networks. That didn’t exist before, and it’s worth an incredible amount.”