View: Tier 2 cities are the next frontier for Indian startups

Cut to today, entrepreneurship has found mass acceptance in the country. In fact, it has become something to aspire to.

Today, India is home to the third largest startup ecosystem in the world with well over 60,000 startups and 80+ unicorns. Indian startups have raised over $70 billion in funding between 2014 — 2020, much of it from foreign investors who are eager to corner a piece of the market. Interestingly, these numbers have only shot up despite the pandemic (or perhaps because of it) with the ecosystem raising a massive $36 billion in 2021, leading to the creation of over 40 new unicorns!

These numbers appear less surprising when considered in light of the fact that the country is home to one of the world’s biggest and youngest populations with over 700 million internet users, a number that is set to grow further as internet connectivity continues to reach deeper into semi-urban and rural India. Despite its legacy bureaucratic labyrinth, regulatory hurdles, and red-tape, the Indian government has time and again expressed its interest in promoting entrepreneurship within the country as well, as evinced by initiatives like Startup India, Make in India, and more recently by marking the 16th of January as Startup Day.

However, there is still a singular lack of uniformity in the spread of VC interest in India’s burgeoning startup ecosystem.

Banglore, the Silicon Valley of India, Mumbai, the Financial Hub, and Delhi NCR, the National Capital Region, are startup hotbeds and more importantly, hotspots of investor interest. The other Indian cities, not so much, despite the fact that almost every second startup in the country operates from a tier-2 or -3 city, and well over 80 percent of the country’s population lives out of the metros.

According to data from YourStory Research, the total funding received by Tier 2 city startups between Jan 2015 — July 2021 was only 1.5 percent of the total $76.7 billion raised by Indian startups. This means that well over 98.5 percent of venture capital was funneled into companies operating out of Banglore, Delhi NCR, and Mumbai.

The big 3 were followed by Jaipur, Amravati, Bhubaneshwar, and Chandigarh, which together raised a little under $1 billion in the same period.

Unsurprisingly, of the 44-odd new unicorns created in India in 2021, the vast majority also came from Bengaluru (16), Delhi- NCR (13), and Mumbai (11).

Reports suggest that in 2021, over 90 percent of the total VC capital inflow went to startups based out of the Big 3 cities. However, many other cities were able to make their presence felt as well. In addition to Jaipur and Indore which have been on the startup scene as well as the VC radar for a while now, startups Headquartered in cities like Kottayam and Thiruvananthapuram were also able to capture interest and drive multi-million-dollar raises.

So while there is still a very long way to go in terms of a more uniform distribution of what I like to call innovation equity across the country, things are slowly changing. Cities like Hyderabad, Chennai, Ahmedabad, Lucknow, Chandigarh, and Indore are rapidly becoming home to the next generation of technology-led startups.

This was also highlighted in a recent address by Commerce and Industry Minister Piyush Goyal. According to data from the ministry, as many as 623 districts are home to at least one recognised startup. In the same conversation, the minister called upon VCs to explore investment opportunities in tier 2 and 3 cities in the county.

Most of these cities are host to institutes of higher academic education in both business and technology, providing startup founders with access to a ready talent pool. A relatively lower cost of living also means that nascent startups that are bootstrapped or have yet to raise any significant funding, can get a much greater bang for their buck.

Rapidly increasing internet penetration and improvement in reliability of connections, reduced digital infrastructure gap between tier 1 and 2 Indian cities, high population densities along with a greater acceptance of the internet as a medium of commerce over physical stores in non-metro cities has also helped turn them into ready markets for the kind of services and products many startups offer.

The redistribution of both skilled and unskilled labor driven by the pandemic, along with increased VC willingness to invest over Zoom calls rather than insisting upon in-person meetings, is also expected to help give fresh impetus to the startup ecosystems mushrooming in these tier 2 cities.

In the next article along this series, we will try to hear from the horse’s mouth. While continuing to explore this topic in greater depth, we will discuss the key opportunities, challenges, and outlook directly with a few founders and executives of startups operating out of tier 2 Indian cities.