Outlook for 2023: How Investors View Indian Startups In 2023, investors will look at how differentiated startups are, their scalability and ability to grow and how they are reducing cash burns

There are global headwinds for the economy, with predictions of a looming recession and inflationary trends. India has in the past weathered such economic storms owing to strong business fundamentals. In 2023, we can expect India to be a haven for investments despite these challenges. Indian startups have now begun prioritising profitability and are focused on getting their fundamentals right. The attitudinal shift makes the Indian startup ecosystem attractive to investors. India may see 100-plus matured, large-scale, profitable startups in the next five years, according to a report by Redseer Strategy Consultants. About 20 of these startups are already being listed and the others can look at an IPO journey.

Until 2021, investors had a fear of missing out and had made several investments without due diligence. In 2022, we witnessed a gradual shift in the investment approach. In 2023, startups have to show how differentiated they are. They must demonstrate their scalability and ability to grow and demonstrate how they are reducing cash burns.

Investor approach to funding has changed

In 2022, venture firms stockpiled funds to the tune of USD 1.3 trillion for private equity and USD 580 billion globally according to some estimates. However, funding to startups slowed significantly.

As investors aim to deploy their capital in the coming year, they are likely to be more selective in their choices, focusing on startups with solid ideas and a capable team that can execute effectively. Only startups that meet these criteria are likely to secure funding in 2023 and beyond. Investors will be cautious about having idle resources sitting around. Expect them to be more meticulous in their due diligence process and fund only the startups that have a clear path to success.

The funding now happens only when the startup can demonstrate a clear month-to-month path to profitability. They now seek clarity from the startups on the metrics, especially the cost of customer acquisition and the lifetime value of their product or service. Startups now must explain how they plan on making returns from advertisement spending and other such metrics. There is much more scrutiny by investors, which is a healthy approach to investment. It has had a positive impact on the ecosystem, with startup founders paying more attention to the business fundamentals besides the solution they provide.

The impact of a global recession will surely be felt, but it is likely to be limited to mid- to-large startups looking for late-stage funding. The investment scenario will be more challenging than the last two years as investors will focus on startups that have demonstrated strong metrics. We can expect some consolidation mostly among startups that are unable to get their later-stage funding. With investors becoming more diligent, we can probably see Mergers and Acquisitions (M&As) getting accentuated this year.

Technology will lead the way

Healthtech , as a sector, grew prominent during the COVID-19 pandemic. The sector was valued at INR 252.92 billion in 2021 and is expected to reach INR 882.79 billion by FY 2027 suggests a report by Markets and Research. Startups working towards better healthcare access and providing technology solutions to reduce costs will be of keen interest to investors in 2023.

Startups working in the space of optimizing supply chain, warehousing and logistics have much to look forward to. The sector has the potential for tremendous growth and with the changing geopolitical landscape, enterprises are taking cognizance of supply chain becoming a competitive differentiator.

The deep tech sector where startups working on AI, blockchain, biotech, robotics and quantum computing will also be a key focus area for investors.

Over the last two years, we saw several tech giants exploring the potential of the metaverse. We can expect investor interest in startups that work with the underlying technologies that enable the development of a metaverse, such as AR/VR and 3D development. Investor interest in fintech solutions can also continue well into this year. However, investors may be cautious in the tech sector, as the education sector straddles the online and traditional classrooms.

For Indian startups, now is a good time to go back and re-examine their fundamentals to stay relevant in the investment landscape. They need to ask themselves some difficult questions and figure out how to build a sustainable business model. Navigating the year ahead would require startups to hunker down and manage expectations of growth and profitability. They will need to demonstrate they can manage money, be frugal and still achieve growth in challenging times.

In addition, Indian startups should also focus on diversifying their revenue streams, building a loyal customer base, and staying adaptive to the changing market trends. It is also important for startups to have a clear vision and mission for their company, and communicate it effectively to investors and stakeholders.