In an exclusive conversation with CXO News and APAC News Network, Charu Malhotra, Co-founder and Chief Human Resources Officer (CHRO), Primus Partners, talks about the shift of startup culture from Tier-1 Indian cities to Tier-2 and Tier-3 cities. Dive into an interesting discussion where she highlights the reasons for this transition, the current trends, and the challenges faced by small city startups.  Â
What trends are you observing in the growth of the startup ecosystem in Tier-2 and Tier-3 cities in India?
A conducive business environment, proactive policies, supportive local governments, and growing skilled talent signify Tier 2 and 3 cities as reasonable laboratories of practice for startups to explore business ideas and investment opportunities. The emerging business trend in tier-2 and tier-3 cities points towards enterprise solutions, e-commerce, educational services, healthcare, agriculture, financial services, biotechnology, sustainable technologies, and gaming. With an increasing focus on technology-based startups and e-commerce, these ventures strategically innovate to meet the evolving consumer needs in smaller cities.
A survey conducted by Primus Partners reveals growing investor interest in technology-based startups and 64% choose to focus on tech-driven innovation. Additionally, 23% of investors are directing their investments towards non-tech startups, showcasing the diverse sectors capturing attention. 13% of investors are demonstrating a commitment to startups with a social impact focus, dedicating their efforts to ventures addressing societal challenges. This underscores a multifaceted and promising landscape within Tier 2 and Tier 3 city startups, with significant emphasis on technology, diversity, and social impact.
In the next 2-3 years, several emerging startup hubs outside of Tier 1 cities are worth keeping a close eye on. Cities like Bhopal, Coimbatore, and Jaipur are gaining traction. Kochi is home to 16 startup headquarters. Besides these, Chandigarh records 15 startups, of which 12 startups are registered in Vadodara and Goa. These hubs stand out for their focus on niche sectors such as clean energy, manufacturing, and health tech. Additionally, Chandigarh and Ahmedabad are emerging as notable startup destinations, driven by a conducive business environment, proactive policies, and a robust entrepreneurial ecosystem. Indore, Jaipur, Kolkata, Coimbatore, and Ahmedabad are emerging as the new micro-IT hubs.
What are the major factors responsible for the shift of startup culture from tier-1 cities to tier-2 and tier-3 cities?
The future of Indian entrepreneurship coincides with a shift in the startup story – the lure of big cityscape giving way to smaller cities. This is not merely a geographical redistribution from metros to smaller cities, but a movement towards smaller towns and cities converging at the intersection of improving infrastructure, clean air and a perceived sense of better quality of life, proactive government policies, and a gradually expanding pool of skilled talent in Tier 1 and 2 cities.
In the last two years, the number of recognized startups has grown by more than 35% in various sectors, covering more than 670 districts all over India. The States Startup Ranking 2022 underscored an eight-year growth trajectory, spotlighting Maharashtra, Odisha, Punjab, Rajasthan, Telangana, Arunachal Pradesh, and Meghalaya as top performers, emphasizing the pivotal role of startups in Tier 2 and Tier 3 cities in driving local solutions and advancing the nation’s developmental journey across diverse sectors.
According to your observation, what kind of startups (in terms of goods and services they produce), majorly emerge out of tier-2 and tier-3 cities? How do they differ from tier-1 city startups?
As cities are catching up on technology and digital connectivity across the country, Tier 2 and 3 cities are emerging as attractive hubs for startups in sectors such as Agri-Tech, Healthcare, and Education Technology. This shift signifies the potential for widespread economic growth beyond traditional metropolitan centers, emphasizing innovation in diverse industries. Particularly we see inroads in rural areas through Agri-tech with use cases in precision farming and online buying and selling and rural social e-commerce platforms that reach goods and services to rural households to name a few.
Startups from Tier 2 and 3 cities can leverage the competitive advantages of regions, focusing on sectors like Agriculture, Tea, Handloom, Ed-Tech, IT, Automotive, Pharmaceutical, Food Processing, Agri-Tech, Handicrafts, Handloom, and E-commerce are gaining prominence. Some of these cities offer unique opportunities for startups, for example, locations like Surat and Kochi offer opportunities in sectors like textiles and seafood, respectively. In Guwahati, startups can address the northeastern region’s socio-economic challenges, while Kota and Patna are ripe for edtech ventures.
This trend signals the potential for widespread economic growth beyond urban areas. The attraction of Tier 2 and 3 cities packages a blend of innovation, regional advantages, and a commitment to fostering a diverse range of startups, making them promising players in the evolving startup landscape outside the traditional Tier 1 hubs.
What are the biggest challenges that startups from tier-2 and tier-3 cities face?
Over 40% grapple with funding hurdles, impeding their growth. Investors are concentrated in metros, making it harder for startups in Tier 2 and 3 cities to secure capital In addition some are hindered by their ability to find suitable co-founders, hires, and ecosystem enablers. Some startups also lament a dearth of networking opportunities and accessible mentorship that could ease their entrepreneurial journey. While digital infrastructure improves, physical infrastructure like transportation can be inadequate. Cultural norms may pose challenges, especially for women entrepreneurs. Limited access to larger markets and brand awareness can hinder growth.
How do you envision the future of startups in tier-2 and tier-3 cities?
Tier 2 and Tier 3 cities are powerhouses that can create a domino effect and disrupt industries even globally. The investment in these cities is an investment in ideas making for sound financial investments. The statistics show a similar trend. India’s startup ecosystem has evolved into the third largest globally, with over 1.12 lakh startups recognized by DPIIT across 763 districts of the country. A major portion of these, more than 49%, originate in Tier 2 and Tier 3 cities. This is not a coincidence; it is a strategic choice made by entrepreneurs who recognize the business advantages offered by these locations. As reported in October 2023, India is home to 111 unicorns with a total valuation of $349.67 Bn.
From an industry perspective, the advantages of Tier 2 and Tier 3 cities include lower operational costs, access to a skilled talent pool, and a supportive local ecosystem that contributes to the appeal of these locations. We need to decongest state capitals and metros and actively foster opportunities in Tier 2 and Tier 3 cities. The future of the Indian startup ecosystem lies in its diversity, and these cities have emerged as epicenters of next-wave innovations.
Anannya Saraswat, APAC News Network
