Why now is the time to build manufacturing software & AI start-ups in Europe

Despite world-class industrial expertise and centuries of manufacturing excellence, Europe’s manufacturing sector is struggling. The question is, will Europe maintain its once-thriving industrial backbone or continue to fall behind? We think our manufacturing heritage can be transformed into a technological advantage if a new generation of founders builds AI-powered software.

Over the past few months, we’ve taken a deep dive into the industrial technology ecosystem, uncovering a critical insight: European manufacturers desperately seek software & AI solutions to deal with labor shortages, international competition, and rising costs. The timing couldn’t be more perfect for ambitious founders to step in and secure Europe’s industrial future.

Below, we share our investment thesis and a playbook including battle-tested strategies for industrial software sales and deployment. This is based on analyzing more than 400 startups shaping the European startup ecosystem, more than 50 conversations with founders, customers, and operators. We also want to highlight the insightful deep dives and position papers of our peers: The Next Industrial Revolution by Insight Partners (2024), extensive collection of content and interviews by Robin Dechant (2024), From Pixels to Prototype — Software for Hardware by Northzone (2024), and The Most Exciting Time to Invest in Industrial Tech in Decades by NGP Capital (2024).

Current State of Manufacturing in Europe

The European manufacturing market is huge. It remains the largest sector in Europe, with $3.0tn in 2024 accounting for 23.7% of the total value add created (defined as the net output of a sector minus its input costs)¹. However, growth has slowed down, with an expected annual growth rate of 0.78% (CAGR 2024–2029)². Hence, due to its importance to the European economy, even policymakers like Draghi highlight the urgency to innovate in the sector³.

Figure 1: Challenges and Enablers

Challenges

Three converging challenges are forcing the manufacturing sector to embrace technological transformation:

Widening Labor & Skills Crisis: Over 65% of European manufacturers cite labor attraction and retention as a top concern. It is increasingly challenging to attract young & skilled talent to replace the retiring, knowledgeable older generation⁵. Moreover, labor shortages are accelerated by the trend of reshoring, shifting production back locally, fueled by political tensions, and supply chain issues⁶.
Global Competition: Competitors in low-income countries with a heavily subsidized manufacturing industry have a significant advantage compared to European peers, especially in standard large-throughput component manufacturing⁷.
Rising Costs: Energy and input costs are continuing to rise in Europe despite already high levels. This puts pressure on margins, as not all price increases can be passed along to end customers⁸.

Enablers

On the flip side, Europe indeed has all the right ingredients at hand now, to enable the manufacturing sector to get to the next level:

Data Infrastructure Maturity: Explosion and availability of data & tech infrastructure through previous investments in the past two decades in IoT solutions and connectivity. This data and software infrastructure serves as the foundation for new technological advances, value-adding applications, and the viability of new business models⁵.
AI Revolution: Recent advancements in foundation models and agentic workflows are transforming the use of data. This will result in a plethora of new applications across the whole manufacturing value chain, transforming operations, improving efficiency, and unlocking significant business value⁹.
Policy Support & Investment: Policymakers in the EU and US are mobilizing investments at a large scale to bolster local competitiveness and resilience. Notable examples of this are the European Chips Act, the European Green Deal, and the Inflation Reduction Act in the US⁵.

Additionally, the European start-up ecosystem is maturing, providing robust support to innovate in the manufacturing sector. 20% of global venture capital was raised in Europe, a significant leap from just 5% two decades ago¹¹.

DACH Advantage

Specifically, we are bullish on the DACH region. Germany alone is responsible for 27% of the total industrial production value sold in the EU in 2023¹.

Figure 2: EU Industrial Production 2023¹; Note: EU except Cyprus, Luxembourg, Malta

The industrial challenges faced in the EU are even more present in the DACH region. Volkswagen, Germany’s largest automaker, is in the process of a significant cost-cutting initiative due to high production costs and competitive pressure from cheaper Chinese electric cars¹⁰. On the flip side, DACH’s top engineering universities provide a strong foundation in cutting-edge AI, advanced software, and tailored robotics solutions. Moreover, experienced talent with insights from working at manufacturing powerhouses (e.g., BMW, Mercedes, Schaeffler, Hilti) and from start-ups such as NavVis, Tacto, RobCo, SimScale, Marktpilot, Spread, Daedalus, ProGlove, and Celonis.

Furthermore, these start-ups are success stories showing that by solving manufacturing problems with the right software and AI, cutting-edge tech value can be created for all stakeholders. Additionally, now more venture capital firms than ever are dedicated to investing in industrial technology in the region; this include local investors like UVC, and global funds like NGP.

The Founder Opportunity

The historical lag in technology adoption, combined with today’s enablers, creates an unprecedented opportunity for founders. The manufacturing sector’s traditional resistance to change has created pent-up demand for solutions that are:

Verticalized — Built specifically for manufacturing workflows & nuances
Focused on delivering immediate ROI
Capable of addressing acute labor and efficiency challenges

Our Proposed Definition for Slicing the Manufacturing Start-up Landscape

We’ve divided the manufacturing market into five distinct segments. Each represents a different approach to digitalization, with unique dynamics, players, and innovation patterns.

Figure 3: Manufacturing Start-up Landscape

And here is also a non-extensive overview of startups we explored further in each subsegment.

Figure 4: Manufacturing Start-up Landscape Companies

Investment Hypothesis

The challenges and enablers in the manufacturing sector in Europe convince us that the founder and investment opportunity is vast. Below, we share our belief on the most attractive software and AI opportunities that address critical issues in manufacturing:

1. Shift to Faster and Smarter Sales (i.e., Win More Customers by Reduced Lead Times, Accurate Pricing and Customer-Centricity)

Why It’s Important & Why Now

Reducing lead times and accelerating pricing & quotation processes are critical for manufacturing companies facing rising cost pressures and international competition. Long lead times inflate inventory levels, driving up working capital requirements — an expensive burden, especially in industries managing valuable products and high volumes. Additionally, faster lead times are often the deciding factor in winning or losing customers.

Another challenge lies in the slowness and complexity of pricing processes. Many manufacturers operate in environments where products are highly configurable, with complex attributes that demand tailored quotes. As a result, quoting often requires involvement from (sales) engineers, pulling them away from their core value-adding tasks. Moreover, these engineers often lack commercial training and a value-oriented mindset, leading them to default to cost-plus & inconsistent pricing and missing opportunities to capture additional value through value-based pricing. Also, manufacturing companies are often hardware companies by origin that added software as an add-on later. Balancing price levels between soft- & hardware is often decided on without any clear strategic reasoning behind it. For instance, a highly successful manufacturing company with revenues in hundreds of millions admitted that its pricing was determined in a single meeting with minimal justification. This underscores the often-overlooked impact of accurate pricing on margins. For example, even a 1% price increase for a company operating at a 5% margin increases profits by almost 19% (assuming no volume impact).

How Start-Ups Solve It

Emerging start-ups are building AI-native CPQ, CRM & sales engineering solutions to tackle these bottlenecks head-on. These tools help manufacturing companies to be truly customer-centric & efficient in their sales organization. They might be designed to analyze complex RFQs, quickly interpret customer requirements, and automate pricing and quoting processes. By integrating seamlessly with existing ERPs, CRMs, and BOMs, these solutions enable manufacturers to:

Reduce lead times by automating repetitive and time-consuming steps.
Improve accuracy and consistency in pricing, mitigating revenue leakage.
Optimize resource allocation by freeing engineers to focus on high-value tasks.
Serve the long tail of global customer requests as quoting and sales processes become less resource constraint.

Start-Ups Building Here

Logik.io, Phasio, Elfsquad, Werk24, Stealth mode investment Fortino Capital

2. Improving Line Speed & Production Efficiency through AI. A Data-Rich Production Shop Floor Allows for Value-Adding Applications (i.e., Process Mining and Quality/Defect Control).

Why It’s Important & Why Now

To remain competitive in a global landscape dominated by low-cost, highly subsidized markets, European manufacturing companies must enhance their production efficiency. Rising energy prices, which have been volatile and often exorbitant in recent years, pose an additional threat to manufacturers operating on thin margins. Without operational efficiency, these businesses risk becoming unprofitability during periods of cost surges. Extended production times or operational bottlenecks can delay delivery schedules, impacting customer satisfaction and retention.

How Start-Ups Solve It

Emerging start-ups are using advanced AI-driven technologies to tackle inefficiencies, focusing on two key streams:

Improving and streamlining the entire production process on the shop floor
Many manufacturers lack full visibility into their production processes, making it difficult to pinpoint bottlenecks or inefficiencies. Start-ups have developed process mining software to address this gap. These tools connect seamlessly with existing IT &/or OT systems to analyze operational data. By creating a digital twin — a virtual model of the organization’s value chain — these solutions offer a clear visualization of how processes are executed. Leveraging AI, they identify bottlenecks, optimize workflows, and streamline operations, resulting in improved resource allocation and increased efficiency.
Automating specific parts of the production process: quality/process control
Start-ups are leveraging AI-powered camera and sensor technology to automate and enhance quality control processes. Specifically, when production is disrupted by a machine breakdown or an error, AI analyzes the incoming data and immediately identifies the faulty machine. What once required hours of manual investigation & downtime can now be resolved in mere seconds.

Start-Ups Building Here

Oniq, Datagon, Ethon.ai, Cerrion, VIUN, Juna.AI

3. Leveraging LLMs to Institutionalize and Monetize Expertise for Machine Maintenance, Operations & Repairs

Why It’s Important & Why Now

As machinery becomes increasingly complex and diverse, the expertise required to operate, repair, and maintain these systems is becoming harder to institutionalize. A significant portion of critical knowledge is often scattered across service manuals, technical reports, or, worse, stored implicitly in the minds of experienced workers. This reliance on key personnel creates a major vulnerability for manufacturers, especially as seasoned workers retire or leave, taking their expertise with them.

The stakes are high: downtime caused by maintenance delays or errors can significantly impact production schedules, revenue, and customer satisfaction. Moreover, the rapid pace of technological advancements in manufacturing further complicates the process, making it essential for companies to ensure their workforce can access and leverage institutional knowledge efficiently. Further, machine manufacturing companies can, if done correctly, create new high-margin revenue streams by providing services & software themselves here.

How Start-Ups Solve It

Start-ups are stepping in to address this gap by leveraging LLMs to transform how knowledge is captured, organized, and distributed. Concretely, they aggregate and digitize diverse sources of knowledge, such as service reports, manuals, and technical documentation. Leveraging LLMs, they interpret technician queries and provide structured, actionable guidance for resolving issues.

This creates a scalable, accessible knowledge repository that reduces dependence on individual experts and ensures continuity when personnel changes occur, which helps both manufacturers in their operations and in their offering to end customers. Ultimately, this has a direct impact on the bottom line and provides additional revenue streams.

Start-Ups Building Here

Knowron, Flipsight, Opus, Autonoma, Remberg

4. Autonomous and Outsourced Manufacturing

Why It’s Important & Why Now

As mentioned above, the manufacturing industry is grappling with a talent shortage, with over 65% of manufacturers identifying the challenge of attracting and retaining skilled workers as their top concern⁵. Compounding this issue is the perception of manufacturing jobs as less appealing to younger generations, further limiting the available talent pool.

Simultaneously, market demands are becoming more dynamic, requiring manufacturers to adapt production processes more quickly than before. Companies often lack the internal resources or agility needed to scale operations or launch new products at speed. Building these capabilities in-house is not only time-consuming but also financially prohibitive, especially in Western economies facing higher labor costs.

How Start-Ups Solve It

Start-ups are responding to this dual challenge by offering outsourced manufacturing solutions. These models enable companies to reduce their reliance on scarce local labor while increasing operational flexibility, ensuring they can stay competitive in an era of rapid change. Some are leveraging partnerships with vetted global suppliers to provide on-demand manufacturing capabilities. Other start-ups manufacture specialized parts in-house. They can do this better & faster as they have digitally mapped the processes beforehand. These solutions help manufacturers:

Accelerate product development and time-to-market without investing in new production lines or additional in-house staff.
Adapt quickly to shifting demand by offering flexible, scalable production solutions.
Minimize reliance on local labor by tapping into global manufacturing networks, reducing costs, and alleviating workforce constraints.

Start-Ups Building Here

Makerverse, Assemblean, Daedalus

Trends in the Manufacturing Software Start-Up Scene in Europe

A Shifting Landscape: Start-Up Activity and Funding Trend

The manufacturing software start-up ecosystem experienced a significant rise in traction between 2015 and 2022, as seen in the growing number of start-ups, increasing funding volumes, and a surge in closed funding rounds. However, the end of the ZIRP era (Zero Interest Rate Policy) and heightened economic uncertainty post-2022 also caused a slowdown of new incorporation and investments in the manufacturing segment.

Figure 5: Evolution of manufacturing software funding, rounds & founded start-ups

Despite this recent setback, we believe the rising trend will continue over the next decade.

Observation 1: “Pure Manufacturing Software” Becomes Increasingly Important

Existing manufacturing software struggles to address today’s increasingly complex products and supply chains. These outdated systems hinder operational efficiency, creating a high demand for modern, innovative solutions.

Figure 6: Evolution of manufacturing software founded start-ups by sub-segment

Observation 2: IIoT Infrastructure Software Is Past Its Hype

Between 2006 and 2015, technological advancements in IoT spurred a significant rollout of sensors and related software. While IoT infrastructure is now widespread, the focus has shifted to extracting actionable insights from the data. This change has contributed to a decline in new IIoT ventures but underscores opportunities in data-driven applications.

Observation 3: Limited Security Solutions

Manufacturing-specific cybersecurity software remains underdeveloped. Many manufacturers rely on generic IT solutions, which may not address operational technology (OT) risks adequately. While these solutions often lack clear short-term ROI, the growing threat of cyberattacks targeting OT devices will drive increased demand. This rising threat landscape positions start-ups in this space to become highly relevant.

Observation 4: Startups Are Predominantly Located Around Existing Industrial Hubs

Manufacturing start-ups logically predominantly emerge in regions with strong manufacturing ecosystems, with Germany leading the charge. This is a natural outcome of proximity to large industrial players, which facilitates access to pilot projects and networks. Additionally, many founders hail from established manufacturing companies, leveraging deep industry expertise and connections to fuel growth.

Figure 7: Distribution of founded startups in manufacturing software by country

Deep-Dive on “Pure Manufacturing Software” Trends

We also dove a bit deeper into the pure manufacturing software segment since 2006 and discovered the following:

Observation 1: ERP and Supply Chain Software Players Continue to Increase

The growing complexity of supply chains and products has heightened the demand for robust ERP and supply chain solutions. These tools address critical pain points, enabling manufacturers to navigate intricate global networks and specialized materials more effectively.

Figure 8: Distribution of founded startups per period by sub-segment in manufacturing software segment

Observation 2: CPQ Software Predominant Since 2019

Configure, Price, Quote (CPQ) solutions have gained prominence in recent years. CPQ tools reduce reliance on scarce (engineering) resources & improve pricing accuracy.

Other areas like Manufacturing Execution Systems (MES), Quality Control, and HR software show no clear upward or downward trend, their sustained presence indicates ongoing opportunities to address unmet needs.

Our Learnings for Entrepreneurs Reshaping the Future of Manufacturing in Europe

Through numerous conversations with start-up founders, customers, and operators working on the future of manufacturing, we have distilled key go-to-market strategies & learnings:

Where to Play: How to Pick the Right Segments, Use Cases & Processes

1. Production as One of the Core Opportunities but Toughest Nut to Crack

Production and the shop floor lie at the heart of every manufacturing company, making it both the most challenging and rewarding segment to target. Improving production processes offers unparalleled value but comes with high stakes — mistakes can cause substantial financial damage, as one missed production day in a large factory can cost millions. Building trust through smaller, low-risk projects is key to gaining access to this critical area.

Start-ups experiencing sales cycles of more than a year are the standard or even perceived rather fast for software affecting the core production of a plant. Start-ups typically work with a multi-phase approach, including demos and pilots, to help build accelerated trust. Once start-ups have launched one project within an enterprise, the flywheel can take off, leading to numerous other projects.

2. Clear ROI as a Prerequisite and Leveraging All Budgets

Manufacturing companies are inherently focused on optimization, typically led by mechanical engineers who drive these efforts. Solutions must demonstrate a clear ROI to align with their priorities. Especially in tough macroeconomic times, new vendors entering existing processes need to prove an ROI of 3–4x within the first months.

IT budgets at manufacturing companies historically have grown; however, they remain relatively small compared to project and service budgets of entire departments. It’s Ok to monetize on services. Hence, don’t only chase scarce & volatile IT budgets, project-driven budgets might be 10x the size, scalable, and stable. Try to anchor in both, and you’ll monetize and scale faster.

3. Move Beyond Data Collection to Provide Value — Opportunity Lies in the Application Layer of AI

Many manufacturers have already embraced basic data collection through connected devices as part of the Industry 4.0 cycle. Data capture has become mature, and now is the time to transform that data abundance into value — either by generating insights or automating processes. While in recent years, the amount of data has increased significantly, it is still often chaotic and poorly standardized. In the past, fixing this required substantial data engineering efforts, making it cumbersome and expensive. However, recent advancements in LLMs and AI technologies enable data engineering to be done quickly and at scale, unlocking the potential for fast, valuable data-driven outcomes.

4. You Don’t Have to Build a New CRM/ERP to Make It

Building a CRM/ERP from scratch is capital-intensive and time-consuming. While there’s certainly room for improvement in these software types, the challenge is significant, and convincing customers of your solution’s reliability can take a long time, especially given the critical role these systems play in their core business. Additionally, there are many other areas to address. Often, it’s faster and more efficient to build solutions on top of existing, proven stacks. While your market may be smaller compared to the total CRM/ERP TAM, the manufacturing sector is large enough to achieve a substantial TAM with more “niche” solutions.

How to Win: GtM Tactics to Consider

1. Ensure You Can Be Trusted By Having a Phased Product Approach

Manufacturing companies often have decades-long histories (unlike typical B2B SaaS clients, which may only have a 10-year lifespan). They need long-term, reliable partners who demonstrate an in-depth understanding of their domain. Prove you can live up to these expectations, although you are ‘the new kid in town’.

One effective approach involves addressing the challenges of replacing mission-critical solutions offered by large incumbents. Rather than attempting an immediate overhaul, companies can start by providing add-on features that integrate seamlessly with existing systems. This strategy allows them to demonstrate their expertise and reliability, offering a strategic entry point that facilitates the eventual adoption of their full solution.

2. Be Focused and Use Partnerships to Your Advantage

The manufacturing sector is huge & very broad, containing many sub-industries. Targeting a specific sub-vertical (e.g., electronics, filtration processing) allows companies to tailor their entire strategy — product features, pricing, channels, and sales motions — to a well-defined audience. Define segments where your product adds the most value & has a considerable TAM. Tailor your GtM strategy (channel, product, price, sales) to it to overcome historically long sales cycles. Leveraging multipliers like associations (e.g., VDMA) and industry fairs can further amplify these efforts.

On the indirect sales side, especially in industries with strong customer lock-in, partnerships are an effective entry wedge. Collaborating with distributors and service companies not only makes it more cost-effective but also proves credibility to end customers and enables faster scaling, benefiting from shorter sales cycles.

3. Engage in Real-Life Networking

Physical presence is critical in manufacturing. Attending and participating in niche industry fairs, such as those for filtration technologies or logistics tech, is essential for building credibility and visibility. Furthermore, building a community in your sub-vertical is a strong moat and growth driver.

4. Stick to Your Price Points

In the early stages of launching a new product, making sales can be challenging, and cash flow is often tight. Offering discounts may seem like a quick way to secure early wins, but it can significantly impact your future profitability. Once a customer becomes accustomed to a certain price, raising it later becomes difficult. If you do decide to offer a discount, be clear that it’s exceptional and temporary. While there may be strategic reasons for discounting — such as securing a high-profile customer to build credibility — too often, discounts become the default rather than the rare exception.

Vision for Industrial Software in Europe

We see a Europe where industrial software & AI empowers manufacturers to sustain and expand their global leadership. This future is built on bold founders embracing advanced technologies to address labor shortages, international competition, and rising costs. Europe’s unparalleled industrial expertise, cutting-edge research, and technical talent will continue to provide a sustainable advantage. Moreover, industrial technology will be a driving force in securing Europe’s economic strength.

As European-based investors, we are committed to playing our part in enabling this vision. With our office in Munich dedicated to serving the DACH region, we welcome conversations with those who share our vision. Let’s build the future of manufacturing together.

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