SUMMARY
The narrative of India's startup ecosystem is shifting towards Tier II and Tier III cities, witnessing a substantial increase in startup launches, with nearly half of all new ventures emerging from these lesser-known regions
Due to the low cost of living, startups originating from Tier II and Tier III cities spend less on rental and talent, making starting from these towns less expensive compared to established hubs
In an interaction with Inc42, Charu Malhotra, cofounder & MD of Primus Partners, delved into the rise of startup culture beyond the Tier I startup hubs and the driving factors, trends and challenges surrounding this shift
The narrative of India’s startup ecosystem is undergoing a notable shift, transitioning from bustling metropolises to Tier II and Tier III cities. In these lesser-known corners, a significant surge in startup launches has been observed, with nearly half of all new ventures now originating from these regions.
These cities have less developed infrastructure compared to metros, resulting in significantly lower costs for rent, salaries, and other expenses. This translates to savings of up to 50% on real estate rentals and 25-30% on talent pool costs. The influx of talent attracted by these lower living expenses has been advantageous for startups just starting out, helping them manage their costs effectively.
Numerous startups from these cities have grown multifold. For instance, Jaipur-based autotech firm CarDekho, Patna-based agritech startup DeHaat, and Indore-based B2B procurement platform for grocery retailers ShopKirana have all emerged from humble beginnings to achieve remarkable success and prominence.
Yet, startups in small towns and cities face several challenges, including a lack of access to funding, mentoring, incubation, acceleration and guidance.
“To further bolster the startup ecosystem in Tier II & III cities, a comprehensive roadmap involving local organisations, educational institutions and governments is crucial,” said Charu Malhotra, cofounder and managing director of Primus Partners.
Delhi NCR-based Primus Partners is a management consultancy that aims to navigate through many complex problems of the country with its team of professionals with experience in sectors, such as aerospace and defence, education, emerging technologies, healthcare, housing and real estate and infrastructure and natural resources.
In an interaction with Inc42, Malhotra delved into the rise of startup culture beyond the Tier I startup hubs and the driving factors, trends and challenges surrounding this shift.
Here are the edited excerpts.
Inc42: Do you see any unique opportunities for innovation in Tier II and III, compared to Tier I hubs? How are startups leveraging them to their advantage?
Charu Malhotra: The startup culture is gaining momentum in Tier II and Tier III cities, with half of the recognised startups originating from these areas. Cities like Chandigarh, Surat, Jaipur, Kochi, Indore and Lucknow are emerging as notable hubs in this trend. Despite facing challenges such as inadequate infrastructure and funding limitations, these startups are thriving thanks to the availability of skilled talent, supportive government policies, and lower operational costs.
The impact of the Covid-19 pandemic has led to a reverse brain drain, with professionals returning to their hometowns. This influx of talent has enriched these regions with top-notch expertise. Entrepreneurs are now directing their efforts towards eco-friendly initiatives and catering to local and regional markets, contributing to the growth of the startup ecosystem in these cities.
Inc42: What are some emerging sectors or trends within Tier II & III city startups that you find particularly promising?
Charu Malhotra: Enterprise solutions, ecommerce, educational services, healthcare, agriculture, financial services, biotechnology, sustainable technologies, and gaming are experiencing significant growth and interest.
One of our recent surveys revealed that approximately 64% of investors prefer to invest in technology-based startups, while 23% are directing their investments towards non-tech startups. Additionally, 13% of investors are interested in startups with a social impact focus. This data highlights a promising and multifaceted landscape significantly centring on technology, diversity and social impact.
Inc42: In your opinion, what are the primary government reforms that have contributed to fostering a conducive environment for startup growth in ‘Bharat’?
Charu Malhotra: Initiatives such as Digital India have expanded market opportunities for entrepreneurs in remote areas by enhancing digital infrastructure and connectivity. Similarly, Startup India and the Atmanirbhar Bharat Abhiyan have fostered a robust ecosystem for innovation and entrepreneurship, promoting self-reliance across the nation. Additionally, programmes like “Make in India” have stimulated domestic manufacturing and bolstered indigenous industry growth.
Active initiatives like the Fund of Funds (FFS) and Atal Incubation Mission have also been instrumental in supporting startups. For instance, the government has established an FFS with a corpus of INR 10,000 Cr to address the funding needs of startups. Regional programmes such as iStart Rajasthan, Startup Odisha, Startup Haryana, and iCreate provide vital platforms for idea incubation, access to funding, and mentorship. With approximately 4,000 startups benefiting from these government programmes, it’s evident that these efforts have been successful in nurturing entrepreneurial ventures nationwide.
Inc42: What challenges do startups face due to the absence of organised entrepreneurship communities, mentorship, and a supportive business environment in Tier II & III cities? How can startup ecosystem enablers address these challenges?
Charu Malhotra: If we examine the startup ecosystem in these regions, we find that these deficits stem from economic disparities, limited investment, educational gaps, infrastructure deficiencies, and cultural factors shaping societal attitudes toward entrepreneurship. Addressing these challenges requires a comprehensive strategy involving governments, organisations, and individuals.
Infrastructure investment, improved digital connectivity, and enhanced access to capital are crucial. Additionally, educational programmes, supportive policies, mentorship networks, local entrepreneurship promotion, and fostering a cultural shift toward risk-taking should also receive due consideration.
Inc42: Which startup sectors in Tier II & III cities attract the most investors? Are there specific sectors or themes that stand out?
Charu Malhotra: Agritech, healthcare, and edtech are poised to thrive with improved technology and digital connectivity. Startups in Tier II & III cities could capitalise on their competitive regional advantages, particularly in sectors such as agriculture, handloom, edtech, IT, automotive, pharmaceuticals, food processing, and ecommerce. Each city offers distinct opportunities; for example, Surat is ideal for textiles, while Kochi is renowned for its seafood industry.
Inc42: There’s a debate where Tier I investors often urge startups to relocate to key startup hubs. What potential impact do such relocations have on local startup ecosystems?
Charu Malhotra: Well, these moves can have significant positive and negative outcomes. Relocating to established hubs may offer startups access to more funding and networking opportunities, yet it could also widen the economic disparity between metropolitan and smaller regions.
The pressure for startups to shift to these key hubs might lead to a concentration of innovation and resources, potentially neglecting the growth and nurturing of local ecosystems in Tier II and III cities. Striking a balance between the benefits of central hubs and promoting regional diversity is crucial.
Inc42: In your opinion, which emerging startup hubs outside of Tier I cities are worth watching in the next two to three years? What makes them stand out?
Charu Malhotra: Cities like Bhopal, Coimbatore and Jaipur are gaining momentum due to their growing infrastructure, supportive local governments and skilled workforce. Chandigarh and Ahmedabad are also emerging as prominent startup destinations, driven by a conducive business climate and proactive government policies. Additionally, Indore, Kolkata and Coimbatore are emerging as the new micro-IT hubs. These cities exhibit promising potential, combining innovation with regional advantages.
Inc42: One of the key takeaways in Primus’ recent report “Small Towns, Big Ideas” is that Tier II & III startups find local support satisfactory. Considering this, what roadmap would you suggest for local organisations, educational institutions, and governments to drive startup growth in these regions?
Charu Malhotra: Charu Malhotra: Our findings indicate that nearly 24% of educational institutions in Tier II & III cities offer incubation centres. They should further enhance support by providing specialised courses and workshops focused. Local organisations can contribute by hosting more networking events, mentorship programmes, and facilitating funding avenues to connect startups with resources and potential investors.
Governments play a key role in bolstering the ecosystem by offering infrastructure, regulatory support, and incentives to attract investments. For example, Kerala Startup Mission (KSUM) has granted INR 25 Cr in innovation grants to tech startups since 2017 and identified 8,000 innovative ideas in the last five years, including those from student-led startups.
Inc42: What would be your most important advice for entrepreneurs looking to build successful businesses in Tier II & III regions?
Charu Malhotra: Transitioning from a small business owner to an industry leader requires unconventional strategies. They must adopt a growth mindset, network actively, collaborate with industry peers, and view failure as a stepping stone to success. They should ensure that the problem which they are trying to solve addresses real-life challenges to maintain relevance, while also prioritising profitability to sustain operations. The future belongs to those who dare to innovate and persistently pursue excellence.
