The Rise of Tier-II and Tier-III Cities in India's Startup Ecosystem

"Small businesses are the engine of our economy and the heartbeat of our communities." - Karen Mills

India's dynamic startup landscape, traditionally dominated by cities like Bangalore, New Delhi, and Mumbai, is now witnessing a notable rise in smaller cities such as Jaipur, Bhubaneswar, Pune, and Ahmedabad. Driven by a skilled workforce, supportive state government initiatives, growing local investor confidence, and robust infrastructure, more startups are opting for these smaller cities over major hubs.

Currently, Tier-II and Tier-III cities account for about 50 percent of the over 115,000 startups registered under the Department for Promotion of Industry and Internal Trade (DPIIT) as of December 2023. As per the Economic Survey 2022-23, these DPIIT registered startups have created over 9 lakh direct job opportunities since 2017, with a notable 64% increase in 2022 over the average number of new jobs created in the last three years. 

A Deloitte India and Nasscom report highlights that emerging Tier-II and Tier-III cities, which house up to 15% of the nation's tech talent, can drive 50% cost savings for India's $245 billion technology sector. Cities like Ahmedabad, Chandigarh, Indore, Jaipur, Kochi, Mysuru, Warangal, Hubli, Madurai, Raipur, Guwahati, and Visakhapatnam are becoming tech hubs. Notable startups from smaller cities include Razorpay from Jaipur, Saankhya Labs from Visakhapatnam, PhiCommerce from Pune, TechHive from Surat, and LeewayHertz from Chandigarh.

Challenges and Opportunities for Startup Ecosystem in India's Tier II & III Cities

Despite the growth of startups in tier II & III cities, they face challenges including funding, mentoring, legal entity selection, and scalability. Startups in smaller cities struggle with turning ideas into businesses, registering entities, and expanding into larger metropolitan areas due to limited resources and availability of a skilled workforce. This highlights the need for support mechanisms tailored to address the unique needs of startups in non-metropolitan regions.

The survey report "Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India's Tier II and III Cities" by Primus Partners Pvt Ltd highlights that over 40 percent of startups in smaller cities identify funding as a major challenge, with only 12 percent receiving pre-seed funding (funds for early stage product development), 10 percent securing seed funding (first round of funds to strengthen the business), and just 2 percent obtaining Series A funding. Despite this, angel investor networks are now expanding in tier II and III cities such as Ahmedabad, Indore, Dehradun, Rajkot, Coimbatore, Surat, and Nagpur.

Startups in India's Smaller Cities are Leveraging Community and Strategic Partnerships

Amrutam, a Gwalior-based Ayurvedic brand, experienced 240% year-on-year growth in 2021 by leveraging community-building campaigns, such as mental health podcasts and a video documentary series on classical musicians from Gwalior. The company successfully created a community of over 100,000 enthusiasts across 40 countries. Similarly, littlebox, a fashion brand from Guwahati, secured funding on Shark Tank India. Founders Rimjhim and Partha highlighted their commitment to their hometown and their aspiration to inspire local youth towards entrepreneurship. They underscored the supportive startup ecosystem in Assam, attributing much of their success to government initiatives and incubation centres.

Strategic partnerships with top incubation centres significantly boost startups in smaller cities. The Sikkim Entrepreneurship and Economic Development (SEED) Cell in Gangtok is dedicated to the mission of 'One Family, One Entrepreneur.' This initiative aims to inspire and empower college students to pursue entrepreneurship and innovation. A joint analysis by Ernst & Young and the Indian Angel Network shows that these collaborations have increased funding opportunities for Tier II and III city startups by 40%. For instance, the Alliance of Digital India Foundation (ADIF) and IIT Guwahati Technology Incubation Centre signed a two-year MoU in April 2024 to promote entrepreneurship and support technology startups in the state. The Jharkhand Angel Network, initially launched in Ranchi, raised funds for startups like Hanuman (last mile delivery of healthcare services), ZiffyTech (an e-clinic healthcare services), Fydo (business development company), and JhaJi (Pickle business), all based in Patna, Bhubaneswar, and Darbhanga.

Empowering Growth through Government Initiatives 

Government initiatives like Stand-Up India, launched in 2016, support startups by facilitating bank loans of Rs.10 lakh to Rs.1 crore for SC, ST individuals, and women to establish greenfield enterprises. The scheme also created a Rs.500 crore annual credit guarantee fund through SIDBI to boost startups in Tier II and Tier III cities, including semi-urban and rural areas. According to Tracxn, 15 cities in India have seen over 100 startups launched since 2020, with Jaipur, Indore, Lucknow, Kochi, Coimbatore, Ghaziabad, Bhopal, Bhubaneswar, and Nagpur each hosting over 200 startups. Additionally, cities like Mohali, Ranchi, Guwahati, and Prayagraj have over 50 startups each.

Shark Tank India's Impact on Startups and Sustainability in India's Smaller Cities

Since 2021, Shark Tank India has spurred entrepreneurship in both urban and rural areas, offering startups nationwide exposure that boosts demand and sales. For instance, Pizza Galleria from Gohana saw a fourfold increase in sales post-pitch, while Paradyes from Ahmedabad experienced a twentyfold surge in website traffic and doubled its sales.

Moreover, the show sheds light on eco-friendly startups, often overlooked, raising awareness about environmental issues and innovative solutions. Examples include Padcare Labs in Pune for menstrual hygiene management, Econiture in Amravati for waste management and furniture from plastic waste, and Geeani in Ahmedabad for electric tractors. Canvaloop in Surat converts agricultural waste into textile fibres, while Cool The Globe in Pune addresses personal greenhouse gas emissions. Shark Tank India through promotion of sustainable business ventures promotes environmental consciousness and showcases impactful solutions.

While startups in smaller Indian cities are experiencing notable growth, challenges persist, notably in securing funding and Lack of infrastructure compared to major metropolitan areas. However, partnerships with incubation centres and government initiatives like Stand-Up India offer crucial support. With rising recognition and innovation, startups in smaller cities are positioned to contribute significantly to India's economic and technological advancement.

Is your local government supporting startups in your city? Have you noticed any startups in your city that have gained notable recognition?

Let us know in the comments below!