Indian startup investors will likely continue to remain cautious in 2023, given the global macroeconomic headwinds. However, the positive news is that trends indicate the ecosystem will emerge more resilient, a report from Bain & Company says.

Titled “India Venture Capital Report 2023,” the report said the downturn in the funding momentum in startups continued during the second half of 2022 but noted, “While these headwinds had an influence on funding in India, the broader economic outlook remained relatively resilient.”

According to the report, 2022 was a year of recalibration as VC funding momentum slowed down across the world, including India. Investments in the country saw a 33% compression from $38.5 billion to $25.7 billion over 2021–2022.

India’s share in Asia-Pacific VC reached ~20%, growing from ~17% in 2021 as investments in Asia-Pacific declined faster than in India in 2022. Consumer tech, fintech, and SaaS continued to dominate VC investments, accounting for ~70% of funding in 2022. However, consumer tech declined in salience, from ~50% to <35%.

Despite this scenario, Bain & Company noted that investors are expected to double down on early-stage dealmaking and innovation in emergent spaces such as gaming, healthtech, electric vehicles (EVs) and AI-led use cases.

Participation from a wider investor base which includes micro VCs, family offices, and global funds foraying into India is likely to sustain, the report said,

However, late-stage startups might have to rethink their next steps as the focus will be on unit economics to drive profitability and conserve cash for a longer runway.

“Some M&A-driven consolidation and potentially flat or down rounds may be in the offing as investors revaluate assets in their portfolios,” the report said.

Given these challenges, the long-term outlook looks encouraging as Bain & Company noted that global investors are likely to remain positive about the India Story given the broad indicators such as solid macro-fundamentals, a large consumption opportunity, a sizeable workforce entering the formal economy, a digitally enabled population, and a deepening innovation ecosystem.

The report highlighted the strides made by the indigenously built technology stack in the country. The year 2023 is likely to mark the beginning of the “India Stack” going global, with cross-border UPI, open APIs to enable eKYC and other services to be leveraged by players in other countries.