Amid global economic uncertainty, India shines as a prime destination for long-term investors

1. Quantitative tightening with interest rates hiked by central banks in most parts of the world

2. Geopolitical uncertainty due to war in Europe and a shift in polarity in the Global South

3. Impact of waning of Covid tailwinds for some regions

4. Moderation in consumption in both the consumer and enterprise demand pools.

These many economic and geopolitical forces are interestingly not congruent – ​​some working in one direction and others in the opposite, resulting in an overall churn that makes it hard to predict what the short term will look like. The only thing that is certain is high volatility.

For these reasons, we are seeing a softening of later stage investments globally as it will be difficult for investors who have a short investment horizon to be aggressive at this point of time. Such investors will continue to bet but they will be very selective – only what looks like a very stable and mature enterprise or a solid fundamental business will stand a chance.

Interestingly, for India, despite this short-term volatility, the long-term story remains intact. The reasons are not hard to understand:

1. Demographics. India is one of the few countries where the demographic dividend is yet to work out. Over the next decade, there will be more people earning than those who need to be supported. Of course, there must be avenues of gainful employment for these people.

2. Relatedly, this large workforce is proficient in technology and has a global exposure. They can work on solving local problems and serve the world through indigenously developed products. This will make a huge impact and in turn lead to higher value creation for the ecosystem.

3. Third, India has a large and vibrant local economy. It has also emerged as the fastest growing major economy in the world. A decade ago, India’s GDP was the eleventh largest in the world. Today, we are the fifth largest economy in the world by nominal GDP and the third largest by purchasing power parity (PPP). With a large domestic market and relatively low exposure to international trade flows, the economy is relatively well positioned to weather global spillovers compared to most other emerging markets. India is expected to be among the top three economic powers in the world in the next 10-15 years, backed by its strong democracy and strong partnerships.

Importantly, this growth is backed by a strong government push in the form of support and reforms as well as investment in laying physical and digital infrastructure for development – ​​be it highways, logistics, or payment gateways. In fact, the Government of India recently announced its intention to make India a US$ 5 trillion economy ahead of the International Monetary Fund’s forecast year 2026-27.

4. Lastly, there is adequate capital availability in terms of various types of capital sources. From a handful of institutional investors in India in the period 2005-10, the base of institutional investors in deal stages has increased manifold. Within equity providers, we now see crossover funds, pure domestic funds, pure foreign funds, funds with mixed vehicles (foreign and domestic), venture debt providers, government as an investor through SIDBI, structured solution providers, etc. Are. It highlights the coming era of the startup ecosystem and also reflects the belief that a cross-section of capital providers have in India’s growth story.

That’s why India’s growth story remains quite solid and intact. I believe that while late stage investments may be hit in the short term, action in early stage investing – where the investment horizon is much longer, will yield a stronger return.

Trends to Watch in 2023

regional trends

Tech driven start-ups lead the investments in 2022.

Countries in Southeast Asia, such as Vietnam and Indonesia, are trying to seize the opportunity with India to take advantage of demand diversification of supply (China +1). With similar low labor cost and high labor productivity, India still holds some advantages over these countries due to large population size.

So there is a huge opportunity to make offline supply chains more efficient. In 2023, B2B businesses, especially those solving issues related to offline supply chains, are set to gain a lot of ground. The Indian economy is now entering an aggressive growth phase and B2B businesses that address the challenges of this new economy will contribute significantly to India’s GDP.

With the Internet and 5G networks powering the nation at a tremendous pace, 2023 will also push for true financial inclusion by fintech companies targeting areas beyond Tier 1 and Tier 2 cities.

Climate action has become more important globally, and ventures focusing on the sustainability, renewable energy and EV sectors will attract increased attention from investors.

Other areas including climate technology, blockchain, metaverse, gaming and drone technology for the defense and commercial sectors will see growing interest from entrepreneurs as well as investors for security and entertainment purposes.

investor resources

Times have changed and the scrutiny that investors use to evaluate businesses is changing as well. The bar is likely to be higher and due diligence will be of even greater importance. Before investing, investors will look not only to a venture’s books of accounts and the entrepreneur’s ability to manage business growth, but also to alternative data as a resource when determining a company’s net worth. Data from press releases, social media properties and intangible data such as brand affinity, governance and/or customer perception will play a large role in funding decisions.

in conclusion

While there are many challenges for the world economy at this time, we see India as a bright spot in this. This is not only due to the diversification of supply chain requirement of a lot of enterprises and countries, but also due to fundamental reasons, including the advent of the Indian startup ecosystem.

The ecosystem is more vibrant today, with a lot of unique ideas being discussed and executed, a variety of capital providers willing to support the ecosystem and a variety of ways for these investors to exit. Moreover, the quality of founders no longer comes only from Western countries, which implement foreign models, but also from India’s hinterland.

In the short term – because of what’s happening around the world – there could be some pain for investors with shorter investment horizons. Committed investors to India, who are willing to take very long term bets, will actively invest in early stage companies and continue the momentum of investing in India.

Author: Ashutosh Sharma, Head of Investments – India, Prosus Ventures