Start-ups [1] like CarDekho, Jugnoo, Leap India, Milk Mantra, and others, which were born outside the metros and Tier-1 cities of India have proved that they are no less than the rest. In 2021 alone 10 new Tier-2 cities viz, Thrissur, Silvassa, Roorkee, Ranchi, Panchkula, Palakkad, Mangalore, Ludhiana, Jabalpur, Raipur have entered the list with new startups. Does this mark the beginning of a shift in funding focus for startups in India?
Growth Outside the Tier 1 Cities
During the last decade, Tier 2 and Tier 3 cities along with small towns received five times more investments in retail infrastructure [2] compared to metros and tier-1 cities marking a shift in the retail boom trend. This shift during the last decade, evidences the faster growth rate in disposable income, digital adoption equal to that of metros and the necessary support infrastructure, of Tier 2 and Tier 3 cities, transforming them into fertile land for startups.
The Pandemic Swing
The real thrust for transformation came in 2020, with the pandemic redefining the work culture and workforce dynamics particularly of the service sector. Lockdowns brought with them, the hybrid work cultures like work-from-home, half-time work, remote work, etc. which brought in untapped talents outside the Tier 1 cities resulting in increased productivity. As now that talents need not stay in Tier 1 cities away from their families, many started moving back to their homes [3] in Tier 2 & Tier 3 cities and working from the comforts of their home environments.
Fertile Land for Startups
Not only did the productivity increase [4] but employees also started having a good balance of work and life when working from their hometowns and cities. Many firms started hiring employees for entry-level talent from Tier 2 and Tier 3 cities, resulting not only in higher disposable incomes but also the retention of the talent pool in those places. Where disposable incomes rise and talents pool, startups begin to germinate. The social distancing norms and frequent lockdowns compelled many businesses to reinvent themselves and replace conventional methods with digitally-driven operations, creating entirely novel avenues in the market for startups [5].
The Shift
Exorbitant rents and inordinate costs of operating in metros act as serious deterrents for startups [6] which survive on limited funds. In Tier 2 and Tier 3 cities of India, the setting up costs are considerably less, office spaces and quality personnel are available at significantly lower prices and local authorities are also more approachable. Also, the Governments of those states that don’t have metros, focussed on funding incubators and supported innovation to set the momentum going for entrepreneurs in their Tier 2 and Tier 3 cities.
Funding Issues
Unlike the national-level players which were born out of addressing an urban challenge, the Tier-II startups come up with a focus on the local problems but soon may scale up addressing a bigger problem with wider implications. Between January 2015 and August 2021, Indian startups raised a total of $ 79.96 billion, of which a meagre $ 1.14 billion amounting to 1.42% was the share of startups from Tier 2 cities [7]. While the number of cities that are outside the list of Tier 1, in which investors are interested is growing day by day, the funding seems marginal. The main reason for this is the smaller ticket size of investments in those cities. The rising number of small-ticket investments channeling into Tier-II cities like Jaipur, Indore, Chandigarh, Kochi, Goa, Vadodara, Bhubaneswar, Coimbatore, Lucknow, Patna, and Surat, etc. signifies the endorsement by investors the solutions promised by these humble startups in locations outside the metros. With the increasing support of the respective state governments and improving infrastructural facilities of these non-metros, this funding trend is only going to increase. In the coming 3 to 5 years, it is estimated that Tier 2 and Tier 3 cities are going to drive growth in the Fintech space [8].
Conclusion
On September 30, 2019, speaking at the IIT Madras convocation, Hon. Prime Minister Mr Narendra Modi, highlighting the role of a robust ecosystem for innovation, incubation, and research & development in the country, opined that India’s stride in the start-up ecosystem, was being powered by startups from Tier-2, Tier-3 cities to place India in the top 3 in the world [9]. This not only emphasizes the recognition of the contributions of Startups from Tier-2 & Tier-3 but an endorsement for funding, by the political leadership too.
Learners’ Opportunity
Opportunity in non-metro India is waiting to explode. If you want to scope your opportunity explore our program @ https://online.ifheindia.org/
Discussion Question
Do you think startup community beyond metros are getting enough support to sustain their business? Give three reasons.
[5] P. Ruparel, “India is becoming a global unicorn hub. Here’s why,” Fortune India, Feb 8, 2021.