India is currently home to the third-largest startup ecosystem in the world due to the growing investments in tier 2 and tier 3 cities in recent years. A survey by Primus Partners, a Delhi-based renowned management consulting services provider, reported that about 44% of domestic investors across 30 domains, including IT, food, and agriculture, have focused on startups in these cities.
The State Startup Ranking 2022, released by the Department for Promotion of Industry and Internal Trade (DPIIT), shows that the expansion of tier 2 and tier 3 city startups ultimately helps India’s economic growth.
According to DPIIT, India had over 1.12 lakh recognised startups and 111 unicorns with a net valuation of $349.67 billion across 763 districts in the country as of October 3, 2023. Invest India, the National Investment Promotion and Facilitation Agency, estimates that Indian entrepreneurs are focusing on 56 different industrial sectors, including 13% in IT services, 9% in healthcare and life sciences, 7% in education, 5% in agriculture, and 5% in food and beverages, respectively.
“Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India’s Tier II and Tier III Cities”, the survey report by Primus Partners, found that 64% of surveyed investors have chosen to fund technology-based businesses, indicating a strong desire for innovation driven by technology.
In addition, 23% of investors have chosen to back non-tech firms, demonstrating a well-rounded investment portfolio that goes beyond technology. Notably, 13% of investors have given special attention to startups with a social impact emphasis, demonstrating their dedication to projects that tackle urgent societal issues. 41% of surveyed investors in the report are associated with either a Fund of Funds (FoF) or an Alternative Investment Fund (AIF).
So why are investors moving towards tier 2 and tier 3 cities?
24% of surveyed investors reported receiving networking support, highlighting the importance of relationships in navigating the difficult environment of investments. Also, tax savings are a source of satisfaction for 19% of investors, demonstrating the favourable fiscal incentives that make investing in startups appealing.
In addition to the financial gains, the remaining investors have benefited from increased visibility, which adds to the wide range of advantages that investors receive when they work with startups in tier 2 and tier 3 locations.
Charu Malhotra, co-founder and managing director of Primus Partners, said, “The growth of tier 2 cities signifies a broader economic and infrastructural transformation. Despite grappling with issues like infrastructure gaps, funding constraints, and talent shortages, the resilience of these startups points to factors like skilled talent, cost-effective operations, and favourable government policies that have been contributing to their growth.”
Moreover, she said, the insight that 65% of startup founders completed their education in tier 2 and tier 3 cities emphasises the symbiotic relationship between education, geographical roots, and entrepreneurial choices. “This nuanced interplay sheds light on the larger narrative of regional economic development, underscoring the need for targeted policies that foster innovation and entrepreneurship in emerging urban hubs,” Malhotra added.
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