The current Indian government has helped shape the startup ecosystem through its various policies, and Prime Minister Narendra Modi has been called the Startup PM of India by some. Shining a light on the efforts of the government to boost the startup ecosystem, Modi said India has risen to become one of the top three startup ecosystems in the world.
Speaking at the IIT Madras convocation on September 30, the PM highlighted the role of innovators from Tier 2 and Tier 3 cities in boosting the ecosystem, and also lauded the ability of startups to transcend state boundaries.
“In the world of startups, the language you speak matters far less than the language you can code in. The power of your surname does not matter; you have the opportunity to create your own name. What matters is your merit.”
While Modi went on to praise the incubation efforts of government agencies such as the Atal Innovation Mission, the reality is that Tier 2 and 3 ecosystems lag behind metros and Tier 1 cities in terms of funding and investor presence.
Tier 2, 3 Startups Play Second Fiddle
Analysis by Datalabs by Inc42 shows that only 20% of the total startups in India are based in Tier 2 and Tier 3 cities, with over 5,800 startups in Tier 2 cities alone. The total funding for startups from Tier 2 cities in the alone is $1.3 Bn (2014-Q1 2019). However, when compared to Tier 1, there is a clear imbalance in startups and funding in Tier 2 and 3 cities.
Tier 1 startups accounted for 96.54% of total funding in Q1 2019. While Tier 2 did fine with two deals in Jaipur and one deal each in Surat, Madhya Pradesh, Uttar Pradesh, Punjab, Lucknow, Kolkata, Kochi and Ahmedabad, there was a sharp decline when compared to Tier 3 deals. Besides the difference in funding amounts, the average ticket size for investments in Tier 1 startups was also higher than investments in startups from Tier 2 and beyond.
Further out of approximately 338 active angel investors in India, only 5.92% were active in Tier 2 cities.
Is Investor Interest Truly Rising For Tier 2 India?
DataLabs by Inc42 noted that lower funding for startups in Tier 2 cities could change in the months to come with the government’s push for rural entrepreneurship, as well as improving internet and digital penetration in Tier 2, 3 cities and rural areas.
While many experts believe that investor interest is rapidly growing for the Tier 2 and Tier 3 ecosystem, these efforts have only been gradual. And as a result, the growth has been slow, despite industry efforts to change the status quo.
For instance, in August, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) launched a ‘Startup Elevator Pitch Series’ in over 12 cities — Tier 2 and 3 — to provide a platform to budding startups to pitch for funding and technology partners.
Private accelerators have also turned their focus towards the Tier 2 and 3 markets to look for Indian startups with potential. Last month, Microsoft India announced the launch of “Highway to a Hundred Unicorns” programme to focus particularly on Tier 2 cities.