India is currently home to the third largest startup ecosystem in the world due to increased investment in tier 2 and tier 3 cities in recent years. A survey by Primus Partners, a renowned Delhi-based management consulting services provider, revealed that around 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 recognized 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 focused on 56 different industrial sectors, including 13% respectively in IT services, 9% in healthcare and life sciences, 7% in education, Agriculture comprises 5% and food and beverages comprise 5%.
The survey report “Small Cities, Big Ideas: The Rise of Innovation and Entrepreneurship in India’s Tier II and III Cities”, conducted by Primus Partners, found that 64% of investors surveyed chose to finance technology-based businesses, which Indicates a strong desire. For innovation driven by technology.
Additionally, 23% of investors chose to support non-technology firms, demonstrating a well-rounded investment portfolio that goes beyond technology. In particular, 13% of investors have paid special attention to startups with an emphasis on social impact, reflecting their dedication to projects that tackle urgent social issues. 41% of investors surveyed in the report are associated with either fund of funds (FOF) or alternative investment funds (AIF).
Then why are investors moving towards tier 2 and tier 3 cities?
24% of investors surveyed reported receiving networking support, highlighting the importance of relationships in navigating the difficult investment environment. Furthermore, tax savings are a source of satisfaction for 19% of investors, demonstrating the favorable financial incentives that make investing in startups attractive.
In addition to financial gains, remaining investors have benefited from increased visibility, which adds to the wide range of benefits investors receive when working with startups in Tier 2 and Tier 3 locations.
Charu Malhotra, Co-Founder and Managing Director, Primus Partners, said, “The growth of Tier 2 cities is emblematic of broader economic and infrastructural transformation. Despite grappling with issues such as lack of infrastructure, lack of funding and talent shortage, the resilience of these startups points to factors such as skilled talent, cost-effective operations and favorable government policies that are contributing to their growth.
Furthermore, he said, the insight that 65% of startup founders completed their education in Tier 2 and Tier 3 cities emphasizes the symbiotic relationship between education, geographical roots and entrepreneurial choices. “This subtle 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 centres,” Malhotra said.
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