How Investors Can Power Startups’ Growth In Tier 2 And Tier 3 Cities

A few years ago, I participated in a workshop organised by Startup India. The primary objective was to have a conversation about the criteria set for the State Startup Ranking Framework. 

While we were going through each of the criteria and discussing investment sessions for startups at the incubator level, a representative from Hyderabad (if I remember correctly) stated that this was an overly simple criterion in the framework because they hold such sessions almost every two weeks. 

At this juncture, I thought it was essential to bring up the point that despite how simple it might appear to be for people living in metropolitan cities, it can be extremely challenging for individuals such as myself (I was representing J&K) to bring investors even twice a year for events like these.

Startup Ecosystem Beyond Beyond Tier 1

Even today, the alternate finances haven’t made their way into smaller cities and towns. A significant proportion of startups still do not have access to finance in the same manner that the startups in major urban areas have. The startups born in small towns and cities still depend on bank loans and government grants.  Therefore, the startup revolution is yet to start in a way. 

Not to take away from the fact that we have seen an unprecedented boom in the number of startups in the last few years. The barriers to brick-and-mortar businesses that traditionally hindered the expansion of businesses in smaller cities and towns have been erased. 

Startups have essentially become platforms to bring equitable growth across the regions. Therefore, it doesn’t surprise that India is one of the fastest-growing and the third-largest startup ecosystem globally and home to more than 100 unicorns. 

However, in order to stay up with the rate at which the Indian startup ecosystem is expanding, the smaller cities and towns must come up on the startup map. The startups that think big should not always have to relocate because the investors want to put money into them if they are headquartered in any of the metropolitans. 

Of course, it’s not always about the money. Many of them move to find the right kind of startup ecosystem, which provides them with options at varying levels, including acquiring talent, access to capital and mentors from the industry. 

Though there is nothing wrong with the startups relocating, it might hinder the growth of many more startups that will come from these smaller cities and towns. 

As we all know, once a startup begins to experience growth, it attracts the right kind of talent. This results in the creation of job opportunities on a local and national scale, which in turn drives the economic cycle with a much greater degree of intensity and brings about more equitable growth.

Mending The Gaps In The Startup Ecosystem

However, alternate funding routes such as VCs and angels, crowdfunding or popular revenue-based financing don’t exist in smaller cities and towns. 

Take J&K for example, I can say this with quite an experience whether or not you ever launch a business or become an entrepreneur depends on the relationship you have with J&K Bank. They, to a large extent, decide your fate. 

Not to take away from the fact that J&K Bank has the highest credit deposit ratio in J&K, while most other public and private institutions refuse to provide loans. Additionally, in the absence of collaterals and guarantees, none of the startups is able to convince the bankers to fund their innovative projects. Also, absent from these markets are the specialised startup desks set up by private banks in the metropolitans.

Therefore, the need for both angel investment networks and venture capital firms to find their way into smaller towns and cities has come. This will not only help offer the opportunity for startups but also get substantial returns for the investments they make. 

Most importantly, tapping into the community financing routes in places like J&K for angel investment networks is the way to move forward. In this scenario, highly specialised local offices can be set up, and tailor-made financial support, mentorship, and networking opportunities can be provided to the young people who aspire to make it big. 

This is an opportunity currently waiting to be taken advantage of. The startups and local-only businesses could also leverage and achieve more excellent growth outcomes in their local communities.

At the very least, these possibilities could demonstrate to founders what they are capable of doing, even if they had not previously been presented with similar chances and the opportunity to grow at a scale.