Beyond Metros: India’s Startups Boom Reaches Tier 2 & Tier 3 Towns

Tier 2 and Tier 3 towns have started emerging as hubs for startups as metros face twin challenges of saturation and rising costs. Anannya Saraswat of CXO News and APAC News Network analyses the factors responsible for this shift in the startup ecosystem to smaller cities, the challenges faced, and the future of small-city startups in the coming years.

The Story so far…

The four factors of production or pillars essential for establishing a startup are land, labor, entrepreneur, and capital. Traditionally, the availability of all these four factors has been concentrated in tier-1 cities like Bengaluru, Mumbai, Delhi, etc. Only tier-1 cities had access to key enablers of building a startup ecosystem- robust infrastructure, skilled talent pool from top universities, and venture capital networks.

Additionally, these cities also offered better connectivity, a vibrant business ecosystem, and proximity to corporate hubs, which fostered innovation and collaboration. Moreover, tier-1 cities benefited from higher consumer demand, early adoption of technology, and the presence of accelerators, incubators, and mentorship programs. In contrast, tier-2 and tier-3 cities have traditionally lacked the same level of infrastructure, financial access, and ecosystem maturity, creating barriers to entrepreneurial growth.

The Changing Scenario

However, recently it has been observed that tier-2 and tier-3 cities are emerging as attractive hubs for startups as bigger cities start facing acute resource shortages and rising costs. According to data from the Economic Survey 2024, more than 45% or around 56,000 Department for Promotion of Industry and Internal Trade (DPIIT)-recognized startups are emerging out of tier-2 and tier-3 cities. In 2023, startups in these cities raised nearly 1.13 trillion rupees in funding, up from 375 billion in 2021. Due to a combination of factors such as lower operational costs, rising local talent, and digital penetration, startup culture has started shifting from tier-1 cities to tier-2 and tier-3 cities.

Tracking Small Town Protagonists

Anil Thontepu, Sasi Dharani, and Charu Malhotra are some key stakeholders who have walked the talk in starting up in smaller towns.

Anil Thontepu is the Co-Founder of SuperK, a franchise grocery retail chain startup based out of a small town of Kadapa in Andhra Pradesh.  The company rebrands existing small-format retail stores and provides them with the benefits of procurements, tech systems, intelligence, and marketing at scale to create mini supermarkets. There are around 120 SuperK stores in the southern part of Andhra Pradesh as of now. Their thesis is to bridge the gap between the traditional Kirana stores and the modern trade verticals, by empowering local entrepreneurs to set up mini-supermarkets (800-1000 sq ft) that are run using technology.

Sasi Dharani is the Founder of eduSeed, an online education platform focused on teaching coding and math to kids through live sessions led by experienced instructors. Based out of the small city of Virudhunagar in the state of Tamil Nadu, the startup began as an in-house Lego Robotics center for students in Virudhunagar under the banner Seed Robotics. It was later rebranded into eduSeed, offering a range of interactive courses in programming languages like Scratch, Python, Java, and JavaScript, as well as engaging math programs. Till now, 300 students have benefited from the courses run by eduSeed.

Charu Malhotra is the Co-founder and CHRO of Primus Partners, a business and management consulting firm. The firm provides innovative and practical solutions to both Indian and Global organizations across various sectors in order to drive their growth.

Dissecting the Shift Dynamics

Low operational cost- One of the reasons for the shift is the significantly lower operational costs in smaller cities as compared to tier-1 cities. Sasi Dharani emphasizes the importance of this factor. “Operating costs, including rent, salaries, and utilities, tend to be lower in tier-2 and tier-3 cities as compared to tier-1 cities,” she says. “This helps us allocate more resources towards growth and innovation,’ adds Dharani. Additionally, the lower cost of living makes it easier to attract and retain talent at competitive salaries, further improving the startup’s sustainability and growth prospects.

Access to skilled talent– Access to skilled talent is another major advantage for startups in tier-2 and tier-3 cities, as these regions are home to a growing pool of skilled graduates from local universities and technical institutes. Unlike tier-1 cities, where talent competition is intense and employee turnover is high, startups in smaller cities can attract dedicated professionals with lower hiring costs.

“Growing skilled talent is one of the important factors that signify Tier 2 and 3 cities as reasonable laboratories of practice for startups to explore business ideas and investment opportunities,” highlights Charu Malhotra.  Sasi reemphasizes this in the context of her startup- ‘We are easily able to access untapped local talent here, providing us with proficient educators, who are passionate about teaching,’ she informs.

Digital Technologies– The widespread internet penetration and affordable access to cloud services have enabled entrepreneurs to build, manage, and scale their businesses remotely. As Sasi remarks, “Digital technologies have made it easy for entrepreneurs in smaller cities to access resources. Cloud services and digital marketing have enabled startups to start scaling without a heavy investment. Social media and content marketing help them build their brand and engage with potential customers.”

Mobile Applications – In addition, mobile applications empower startups to reach broader markets and promote their products without needing physical infrastructure. Tools like AI and automation make it easier to run businesses efficiently with smaller teams. Anil Thontepu highlights how his venture SuperK is leveraging the use of mobile applications for logistical purposes and customer outreach.

“The SuperK Store Partner mobile application helps local partners easily confirm and track their store orders. In addition, the SuperK consumer mobile application helps the customer see all the offers that are available at a store so that they can go and redeem those offers. Going further, the company also plans to leverage AI-powered recommendation systems in its mobile application to recommend products to store partners and the best offers available at stores to customers.”

Furthermore, the rise of remote work culture allows startups to collaborate with experts, mentors, and customers across regions, creating opportunities previously limited to larger urban settings. In this regard, Sasi points out that the ability to work remotely is one of the reasons for the growth of her startup. ‘Since our educators can work remotely, they continue with us even after shifting to other cities.’  Thus, remote work helps in overcoming systemic as well as geographical barriers for small-city startups in their growth phase.

Scope for innovation and diversification- Startups in smaller cities have the opportunity to develop localized solutions in sectors like agritech, healthcare, education, and fintech, addressing the specific requirements of the semi-urban population. “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. 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, and E-commerce”, says Charu.

She further continues and explains how some tier-2 and 3 cities are providing unique opportunities to startups in varied sectors. ‘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.’

Untapped Demand and Lack of Competition- Tier-2 and Tier-3 city startups have the unique opportunity to capitalize on the untapped demand of consumers in the region. An increased demand for products and services in sectors like e-commerce, education, healthcare, etc, which is often overlooked by traditional providers, allows startups in these regions to scale quickly with a ‘first-mover advantage.’ Anil’s reason to start in a small city was driven by a similar idea. He explains, ‘the lack of modern trade stores in smaller towns offered an opportunity where their 1000 sq ft format would make a significant difference for the customers. In contrast, opening a similar store in a metro city would not have had the same impact.’

Similarly, Sasi, while explaining why she started eduSeed in the small city of Virudhunagar, shares that she wanted to address the lack of learning opportunities in the city for students in the areas of coding and math. ‘As my son entered first grade, I was actively looking for after-school classes for him to learn new things. It was at that time that I looked at a video of a little girl building a robot in a WhatsApp group. I found it interesting and wanted my son to learn the same. I started looking for Robotics classes in and around our town on Google but, I was unable to find any. It made me even wonder if there were fewer opportunities in tier-3 cities. It then struck to me,  ‘Why don’t I start one?’ There was a need and I wanted to fill that space. I visited places,  met people who were in the field, got input, and did a lot of self-study. That was the beginning of eduSeed!’

In addition, Sasi highlights that the lack of competition in smaller cities also allows entrepreneurs to experiment and indulge and creative problem-solving. ‘There is less competition in tier-2 and tier-3 cities. This allowed us to establish eduSeed more easily and capture the market in our place.’

Government incentives- Government support and proactive policies are crucial factors driving the shift of startup culture to tier-2 and tier-3 cities in India, as both central and state governments are actively promoting entrepreneurship in smaller regions through subsidies, tax benefits, and grants.

Initiatives like Startup India and state-specific policies such as Kerala Startup Mission (KSUM), Karnataka Startup Policy (2022-2027), Uttar Pradesh Startup Policy (2020-2025), etc provide financial support, easier compliance processes, and access to incubation centers and accelerators. Additionally, governments offer infrastructure development, including co-working spaces and mentorship programs, to nurture local startups. These incentives reduce entry barriers, encourage risk-taking, and create a favorable ecosystem for startups to emerge and thrive in non-metro cities.

Major Roadblocks

Having looked at the opportunities provided by tier-2 and tier-3 cities to entrepreneurs for establishing their ventures, let us also look at some of the major challenges faced by them and highlighted by the experts we talked to.

Lack of trust from Customers- A lack of trust by customers is a significant challenge faced by startups in tier-2 and tier-3 cities, as consumers in these regions tend to be more conservative and cautious when adopting new products or services, especially from lesser-known brands. Unlike established businesses from metro areas, local startups often struggle to build brand credibility and consumer confidence, which is crucial for gaining market acceptance. Concerns over product quality, reliability, and after-sales support can further hinder customer trust.

Anil highlights this lack of trust as the major challenge he faced while building SuperK. He explains, ‘For people in the small towns, it’s not easy for them to trust anyone. People initially doubted the way we operate and our franchise model. As technology is something that is behind the scenes and not on the face, initially, the challenge was to win the trust of people and convert a franchisee partner to take up our store, and then convince customers that we are a reliable, trustworthy brand at which they can come and shop.’

Lack of networking opportunities- Networking is essential for startups to connect with mentors, investors, partners, and fellow entrepreneurs who can offer guidance, collaboration, and funding.  According to Sasi, ‘there are very few networking opportunities in Tier-3 cities. This makes it hard to connect with other entrepreneurs and investors. This doesn’t give us good visibility in the startup world. Startup meet-ups or workshops rarely occur and there is limited access to mentorship. It takes us a pretty long time to devise our strategies, test them out, and find what works best.’

Charu too re-emphasizes this challenge as she mentions, ‘startups in small cities lament a dearth of networking opportunities and accessible mentorship that could ease their entrepreneurial journey.’ Due to this barrier, startups may miss out on valuable knowledge-sharing and peer support. To overcome this, companies need to actively leverage online platforms, virtual events, and regional business networks to expand their connections.

Funding hurdles- Charu points out that ‘over 40% of startups in tier-2 and 3 cities 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’. Investors may perceive startups from smaller cities as riskier investments due to limited market validation and a lack of established networks. This funding gap makes it harder for startups to secure seed capital, scale operations, or invest in technology and talent, forcing many to rely on bootstrapping, local grants, or personal savings.

Limited access to Market- ‘In smaller cities, limited access to larger markets and brand awareness can hinder growth in some cases’, says Charu. Startups in tier-2 and tier-3 cities often struggle to connect with large customer bases, distributors, and corporate clients concentrated in metro areas. Without proximity to major commercial hubs, these startups face difficulties in reaching target audiences, building brand visibility, and establishing partnerships with key stakeholders.

Cultural and Social barriers-  ‘Cultural norms may pose challenges, especially for women entrepreneurs’, highlights Charu.  According to her, women entrepreneurs face greater societal constraints in smaller cities, limiting their participation in business.

Additionally, traditional mindsets often discourage small-city startups from getting fully established.  There may be resistance to adopting new products or services, with local consumers favoring known brands or traditional solutions over startups. Overcoming these barriers requires startups to build community trust, raise awareness about entrepreneurship, and engage with local stakeholders to foster a more supportive ecosystem.

What lies ahead?

Despite the challenges, the future of startups in tier-2 and tier-3 cities is definitely bright! According to Charu, 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. 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.’

Sasi too believes that the coming decade will witness a boom in the growth of startup culture in smaller towns and cities, owing to various government initiatives and digital technologies. ‘The coming decade is likely to witness a steady growth in the the number of startups in  tier-2 and tier-3 cities. Organizations like StartupIndia and StartupTN are working to bridge the gap and improve the startup ecosystem in these places. The emerging trend in digital technologies will make it possible for people to access the resources from anywhere. We also see a strong drive for sustainability and social impact. This will lead to  the growth of social enterprises solving local problems and then scaling it to other places.’

With improved infrastructure, better internet connectivity, and growing awareness about entrepreneurship, these cities are becoming hubs of innovation. As all the industry experts above pointed out, emerging sectors such as agritech, health tech, edtech, fintech, and e-commerce will play a pivotal role in these small cities addressing regional challenges with innovative solutions. Additionally, as local ecosystems evolve with incubators, co-working spaces, and investor networks, startups will find it easier to access resources and scale their operations. The entrepreneurial landscape in smaller cities is set to flourish, contributing significantly to India’s economic growth and job creation.

Some prominent emerging startups in tier-2 and tier-3 cities

Let us briefly look at the some of startups across various sectors, based out of small cities but showcasing big dreams!