India’s startup ecosystem remains concentrated in Tier 1 cities
All the 42 unicorns minted in 2021 came from Tier 1 cities
Tier 2/3 cities accounted for only 3% of the total funding raised in 2021
Calling the startup ecosystem to spread beyond Tier 1 cities and reach the smaller towns and cities of the country, DPIIT secretary Anurag Jain, urged the ecosystem to incorporate Bharat in its growth story.
“Take the startup ecosystem to the small towns,” he said, calling for the startup ecosystem to reach the grassroots of the country.
Speaking at the IVCA Conclave on March 9, Jain also called for unicorns to ‘adopt’ a district, and catalyse development in the region.
He further urged, “The unicorns should adopt one district and start working on those districts, to start giving back to society.”
According to the DPIIT secretary, such a move will not only allow the unicorns to give back to society but also promote entrepreneurship in whichever district they choose to adopt.
Calling startups the ‘wealth creator and problem solver’ of the country, Jain noted that the government’s Vision 2047 relies heavily on the startup ecosystem, and hence the proliferation of the ecosystem to every part of the country is key.
India’s startup ecosystem needs to leave India, and gain ground in Bharat, to truly tap into the potential of the youngest population of the world, he emphasised.
An Analogy That Says It All
Speaking at the conclave, the DPIIT secretary drew parallels between the origins of the members of the Indian National Cricket Team and the startup ecosystem.
As he said, 15 years back, the Indian Cricket Team was at the pinnacle of the cricketing world, with the inaugural version of the T20 World Cup just secured in a thrilling final against Pakistan. However, of the starting XI, only four players were from a Tier 2 or 3 city.
The same is true for India’s startup ecosystem. While startups are almost ubiquitous in the country, with almost every district hosting at least one.
Looking at the map, there are a couple of things that are immediately clear; one, India has a lot of districts. Two, there is a startup almost everywhere.
Bar a few pockets within central, northeastern, and in J&K (for obvious reasons), there is at least one startup in each district of India.
Of course, the density of startups varies widely. For one, regions such as South India, West India, and Delhi NCR have a very high density of startups, and these regions host startup hotspots such as Bengaluru and Chennai in the South, Pune and Mumbai in the West, and Delhi, Gurugram and Noida in the North.
According to Inc42’s analysis, Tier 1 cities remained in the top five for early, growth, and late stage startup funding as well, making it clear where the heart of the startup ecosystem beats in India.
Rooting For Bharat
Going back to cricket one more time, if we look at the present-day Indian cricket team, 54% of the current squad of 50 men’s players hail from Tier 2 and 3 cities, according to data from the BCCI website.
The startup ecosystem of the country is young, and as Jain said, “People in tier 2/3 cities come up with brilliant ideas but don’t know how to implement them. If we can figure out how to mentor them, that would be great.”
In these tier 2/3 cities, startups have already started to become a phenomenon; in terms of funding, these cities have started to gain momentum.
In 2021, the total funding amount in the early stage investment to these cities reached $144 Mn, according to Inc42 analysis. Further, $1.16 Bn of total funding in the growth and late stages went to these cities.
Therefore, in all, the startups in these cities accounted for $1.304 Bn in funding across all stages.
However, it is still a relatively small percentage of the total funding at the respective segments; the early stage funding in Tier 2/3 cities accounted for only 9% of total early stage funding in 2021, while the growth and late stage funding in Tier 2/3 cities represented a meagre 3% of the total funding in India in 2021.
Therefore, out of the total $41.707 Bn funding in 2021 across all stages, startups in Tier 2/3 accounted for only about 3%.
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While a lack of funding is the biggest challenge for the startups based in cities below Tier 1, there are other challenges that make it very difficult for startups from smaller cities in the country to grow.
So, how is the government helping?
The Startup India State Ranking is an initiative by the government of India, where it ranks states on the basis of the support the concerned state provides to the startup ecosystem. It is a comprehensive system that takes seven different criteria into consideration, such as incubation, funding, and mentorship support.
According to the 2019 Rankings, Gujarat and Andaman and Nicobar Islands were the ‘Best Performers’, while Karnataka and Kerala secured the ‘Top Performers’ award.
The DPIIT also offers a startup recognition program, wherein a startup can register itself, and once recognised by the department, can avail multiple benefits that come with the recognition.
The recognised startups are exempted from tax under Section 80IAC, and also are exempt from income tax under Section 56(2)(VIIB), along with many compliances and regulatory benefits that the recognised startups can avail from the DPIIT.
Currently, DPIIT recognised 65,450 startups in India.
Speaking of incubation programs, the government has established multiple programs, incentive schemes, working spaces, and testing facilities across UP, Himachal Pradesh, Gujarat, Telangana, Andhra Pradesh, Karnataka, Chhattisgarh, Madhya Pradesh, and Goa.
Speaking at the conclave, the DPIIT Secretary also announced that the government is working on a ‘fund of funds.’
“The government is thinking of introducing a funding vehicle, which would be similar to venture capital funding, but will reduce the debt burden on the startup ecosystem,” the DPIIT Secretary said.
Notably, this comes after the government has already established a venture capital scheme for farmers and the Startup India Seed Fund Scheme.
In all, under the Startup India initiative, the government offers 124 schemes to help India’s fast-evolving startup ecosystem.
Gati Shakti, National Single Window, And The Sunrise Sectors – New Horizons For Startups
Talking about government initiatives for startups, he highlighted how the Union Budget 2022 focused on the startup ecosystem. “Now the PM has told us to create the framework so that the implementation of the budget doesn’t take time; that will be ready before 31st March,” he added.
The latest Union Budget included a series of initiatives for the startup ecosystem. These included the likes of Ease of Doing Business 2.0, extending the startup tax holiday scheme till March 31, 2023, the DESH-Stack portal for skilling, reskilling and upskilling, and a general push for edtech, agritech and drones startups.
The initiatives ensured that the Budget was well-received by the startup ecosystem.
For example, the Union Budget talked about Ease of Doing Business 2.0, extending the startup tax holiday scheme, a digital ecosystem for skilling and livelihood or DESH-Stack portal for skilling, reskilling and upskilling among others. Besides, the FM talked about the push for edtech, agritech and drones startups too.
Further, the PM Gati Shakti Master Plan will see all of the ministries and state governments linked under a single portal, and Jain notified that the same will be done for the startup ecosystem as well, under the National Single Window.
“The National Single Window was launched in 2021. It is still in the process of evolution, and as of now, 21 department permissions are there,” Jain informed, calling on the state governments to guide the startups they host to register at the National Single Window to streamline all their regulatory activities.
“The advantage is that it is an intelligent window. The questionnaire that is presented is an intelligent one, relevant to your industry,” Jain said, highlighting the features of the NSW.
Talking more on the PM Gati Shakti Master Plan, Jain noted how the initiative will make planning and decision making better and implementation faster. “Coupled with this, there is less infrastructure expenditure,” he added.
He also made a huge announcement that the government intends to open up national infrastructure for private entities and startups to access and use. “There is a huge role for startups, we intend to open it for the private sector. It is a huge opportunity for startups,” Jain said.
“We foresee a synergised approach that will increase the use of the existing infrastructure”, he said.
Talking about manufacturing, the DPIIT Secretary noted that within the segment, there are ‘sunrise sectors’ – technologies such as Industry 4.0, automation, Industrial IoT, AI, ML, and XR-enhanced manufacturing practices – that will involve and engage the startup ecosystem at unprecedented levels.
When Jain said that the startups are India’s major vehicle to tap into the knowledge and innovation, the biggest value generators in the economy, he had reasons to believe that. India has fast become the world’s third-largest startup ecosystem, with 84 startups with a valuation of over $1 Bn. These unicorns have a total valuation of close to $300 Bn, per Inc42’s Annual Indian Startup Funding Report 2021.
Out of the 96 unicorns, 42 came into existence in 2021 alone. In 2021, India produced a unicorn every nine days.
Again, looking at the geographies of these new unicorns, there emerges a worrying trend.
With Bengaluru termed as the Silicon Valley of India, the location produced the most number of unicorns in 2021. The city produced 17 unicorns this year, taking the total count to 37.
The second in the spot was the Delhi-NCR region, which saw the making of 13 unicorns in 2021. Delhi-NCR now has 30 total unicorns.
Mumbai saw eight unicorns in 2021, and its neighbouring city Pune too produced two unicorns. So, in total, the region produced nine unicorns in 2021. Therefore, Mumbai now hosts 14 unicorns, while Pune hosts four.
With the current concentration in India’s metros, startups have limited access to not only talent but also markets. Here, Tier 2 and 3 cities can become emerging markets for startups, and expansion to these cities is the next logical step, as Tier 1 cities are fast becoming saturated with startups.
With this, it seems the day isn’t very far when there will be a startup everywhere in the country.