Nearly half of the startups that are recognized in India come from Tier 2 cities and Tier 3. Over 90% of capital is directed to Tier 1 cities. Bangalore, Delhi, NCR and Mumbai are the main beneficiaries. This trend, however, is slowly changing, as more entrepreneurs are establishing their businesses in Tier 2 or Tier 3 cities.
What drives this innovation wave in cities of Tier 2 or Tier 3? Many factors have led to the rise. Here are some.
1. Increased knowledge of startups – The rise in media coverage by national and regional players about the startup ecosystem has provided everyone with an additional career avenue, which was previously limited to corporate jobs in urban cities.
2. Enhanced Government Support – The Government of India has been actively promoting innovation and fostering ecosystem growth through multiple initiatives. There is a fund for active funds and support of incubators. Moreover, the regional governments support regional startups and incubators by providing them with capital and expertise.
3. Sharks – Despite being a recent addition to the Indian startup scene, Shark Tank’s ability to simplify concepts and reach a wider audience has fuelled the entrepreneurial spirit in Tier 2 and Tier 3 cities, instilling the belief that anyone can start a successful business and dream big.
4. Covid19 – The aftermath of the Covid-19 pandemic has witnessed a surge in remote working, leading to talent being distributed across the country. As talent became more available and problems demanded solutions were made visible, this ripple effect has increased startup growth.
The impact of small-town startups on traditional industries
Internet costs have decreased, allowing people to access more information. This has changed the way we think and act. Coupled with the aforementioned factors driving innovation, this has provided founders in India’s small towns with a perfect platform for innovation and experimentation. It is evident that decentralisation has a positive impact on the development of ecosystems. The approach used has led to innovative solutions in many sectors, including manufacturing, supply-chain management, ecommerce, agriculture and healthcare. These businesses are built with an eye on their target market and often become profitable right from the start due to a deep understanding of the local markets. In addition, entrepreneurs in small towns don’t get affected by the optimism of cities such as Bangalore. This encourages them instead to focus on sustainable business growth rather than rapid growth.
The increased development of grassroots suggests this will change soon.
Can VC attention drive growth?
A greater focus on capital for these small towns can help build the ecosystem. It will have a range of effects –
1. Availability of Capital – Between 2015 and 2021, startups from smaller towns raised $1.12 billion. But this is only a small portion of what Indian startups have raised collectively over $100 billion. It is estimated that capital has only penetrated around 1% of such towns. Funds need to broaden their horizons in order to strengthen the ecosystem. They also have a responsibility for creating systems that will help them source opportunities within these towns. It will increase the availability and accessibility of capital. This not only encourages more founders but also fosters the growth and development of ecosystem enablers, and communities who provide the needed support.
2. Knowledge & experience – Raw knowledge today is present in every part of the country. But the combination of both knowledge and experience is what makes a difference. With the addition of more VCs, Founders can learn from the experiences they’ve had and use that knowledge to drive further growth.
3. Profitable innovation – Founders in smaller towns have the advantage of building businesses profitably due to reduced hiring costs, which typically constitute over 50% of the budget for early-stage startups. Investors can help founders of smaller towns and cities by bringing them industry best practices, expertise and knowledge to optimise their hiring strategy and operational efficiency.
4. Network & community – Providing access to a network and community remains one of the biggest contributors of any investor. The founders of these towns and cities can benefit from this wealth of information as they build their business. It will change the way people perceive cities like Bangalore and Mumbai.
Shubham Jhuria is Partner & CFO at Aeravti Ventures.