Synopsis: India’s Tier II and III cities are taking over the startup ecosystem by storm. We analyze the possible reasons for it and their burgeoning contribution to the entrepreneurial boom in India.

The era of dominance of top-tier metro cities’ dominance in the startup landscape has long since passed. With over 49% of the recognized startups based out at Tier II and III cities, India’s remote corners are shining brightly with newly-lit entrepreneurial spirits. 

Ignited by the hopes of transforming their localized problems, egged on by the digital revolution, and faced with an influx of new funding, entrepreneurs from these emerging cities have been setting up new enterprises across various sectors, including agriculture, IT, education, health, energy, aviation, and space.

So, what are the factors fueling the growth of startups in Tier II and III cities? Let’s find out.

5 reasons why Indian startups should amplify their presence in Tier II and III cities

Tech revolution and internet penetration, coupled with reinvigorated self-confidence, are propelling talent and innovation forward in India’s non-metro cities. Indeed, about 33% of 2022’s National Startup Awards’ winners belonged to emerging/Tier II/ Tier III cities. 

What’s even more astounding is that despite being startup hubs, Bengaluru, Delhi, and Mumbai—commonly known as the Big 3, witnessed a decline in funding share in 2022, with Chennai and Hyderabad gaining new ground. In contrast, Tier II and III cities-based startups experienced an 11% growth in their financing, per a YourStory report.

1. Rising Metro Costs

The skyrocketing costs of real estate and labor in metro cities and exorbitant rent demands have been pushing entrepreneurs, especially from IT, software, and e-commerce fields, towards 

Tier II/III cities.  In fact, numerous distinguished developers have been scaling their presence in these cities to capitalize on forthcoming startup growth, thus urbanizing the landscape further.

Besides, lower costs in non-metro cities empower startups to pilot their business despite operating via bootstrapped funds. Many startups consider tier II cities as springboards to eventually establishing themselves in first-tier cities as they grow.

So far, over 51 small cities-based startups have gone public in India, with one (CarDekho) even turning into a unicorn.

2. Qualified Manpower

Skilled and talented manpower is no longer an imperium of metro cities. The COVID-19 pandemic in its wake brought about a redistribution of skillset, with many reverse migrating to their cities. 

Stirred by the successes of various Indian founders, these returnees have kicked into a virtuous cycle of building their own deep tech-driven business models in their cities. Many focus on finding solutions contextualized to local problems, which can later be replicated in similar use cases. As per YourStory, cities like Jaipur, Kochi, and Chandigarh, today, are home to over 41, 16, and 15 startups, respectively.

Consequently, these startups are augmenting the job creation process, while turning their tier II/III cities into an extension of urban areas. Remote and hybrid work models have further stimulated startup growth in these cities.

3. Accelerated Digital Transformation 

Earlier, one major factor impeding growth in non-metro cities was the lack of access to educational and digital resources. But due to the accelerated pace of the smartphone and tech revolution and access to quick and cheap internet, young entrepreneurs can now access varied sources of information, ideas, knowledge, and resources globally. This improved infrastructural support has given a serious push to startups in Tier II/III cities.

4. Evolving Customer Behavior

With the nature of startups undergoing a transformation, how can customers be left behind? Per a BCG report, over 50% of online urban shoppers live in Tier II/III cities, with their proportion set to grow to 58% by 2030.

With consumers in low-tiered cities turning affluent and increasingly becoming exposed to consumerism and materialism trends, their appetite is changing. They are more eager to spend, propelled further by easy access owing to deep internet penetration across the country.

5. Favorable Government Policies

The Indian government has been galvanizing the startup community through several initiatives over the years, with Startup India serving as its crown jewel. Through its latest launch of the “MAARG” portal, the government aims to enhance funding and mentor support to newly-launched enterprises located in remote areas.

Other initiatives, such as Digital India Startup Hub and Digital India Investment Fund, have been improving funding access to compensate for limited venture capital (VC) interest. 

Not to be left behind, even state governments have been taking active measures to give wings to entrepreneurship in their cities. For instance, Karnataka has approved its startup policy 2022-2027, which is targeted at establishing 25,000 more startups and Rs. 100 crores worth of VC funds to support deep-tech companies.

Likewise, the Madhya Pradesh government has offered various fiscal and non-fiscal incentives to startups based in its Tier-II cities of Gwalior, Bhopal, Indore, and Jabalpur. Even Kerala has been scouting for innovative ideas from student startups, with a special emphasis on tech. 

Tier II/III Startup Spectacle

Today, India supports the world’s 3^rd largest startup ecosystem, after the USA and China. In the past 6 years, startups have managed to create 7.68 lakh jobs, with a 14% rise during the pandemic alone.

Moreover, many tier 2 cities, namely Jaipur, Indore, Ahmedabad, and Surat, have reported a massive 40% economic growth on the back of newly-setup startup companies capitalizing on the high availability of economically-priced real estate. 

In fact, emerging cities, such as Chennai, have already transformed into software hubs, with Pune supporting several unicorns (like Firstcry) already. No wonder almost half of the Indian startups are situated in non-metro cities. 

Even on the funding end, Tier II/III cities’ startups have been raising capital at increasingly larger valuations, especially in agritech, foodtech, fintech, edtech, and D2C segments, with no signs of relenting. 

Hence, if anything, Tier-II and III cities are poised to become the new growth vectors in India, backed by low operating costs, experienced professionals, localized solutions, and the digital revolution.

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Protium’s success as a pan-India lending major can be attributed to its strong regional presence and cultural diversity within the organization.

As of January 2023, we have over 2,200 employees spread across 75+ cities, carrying a pan-Indian cultural dividend, all striving toward a single mission – fueling the ambitions of small businesses & consumers. Through our expansive geographical footprint of 84 branches in 65+ cities, we’ve serviced over 5 lakh customers spread across 15,000+ pin codes in the country.  On top of that, our deep understanding of customers has helped us build a loan-book worth Rs.2,300+ crores with disbursements crossing over Rs.4,400 crores. 

The scale at which businesses are getting inroads to the regional parts of the country and leveraging the cultural dividend is monumental, positioning India to be a global powerhouse by the end of this decade. 

At Protium, we are committed to driving financial inclusion through our powerful financing model, bringing more diversity into the mix, and empowering the rapidly-evolving Indian economy.