Tier 2 & 3 Cities Set to Garner Increased Momentum amidst the Competitive Startup Landscape

The stupendous growth of startups in India is cascading innovation momentum beyond Tier 1 cities of the country today. Unlike the yesteryear phenomenon, nearly 50% of the recognized startups in India are located in Tier 2 and 3 cities that house a population of around 1 Mn and less, respectively, within its borders. With ventures from smaller cities such as CarDekho, Minkspay, Bookingini, Edmingle, ChargeZone, etc. making inroads into the startup ecosystem, close to 70 Tier 2 cities have secured a place in the top investor’s portfolios in the year 2021.

A slew of precursors has worked in favor of smaller cities. Factors such as rising consumer propensity for high-end products and services, higher costs of running ventures in Tier1 cities, fierce competition, and increasing governmental interventions are leading the momentum in garnering increased investor interest for angel investing in smaller cities. The successful startups finding their niche in smaller cities are distinct from their counterparts in metros in their focus on problems chosen to be solved and the offerings packaged to suit the demographics of places. Hence Entrepreneurs on the lookout for alternative destinations need to hedge their ventures from the following pitfalls commonly found in this scenario.

Lack of clarity leading to sector-destination incompatibilities

Thanks to the digital revolution, the escalating affluence of Tier 2 & 3 cities’ populations has opened new avenues of opportunities for ventures old and new. A plethora of new brands across FMCG, Healthcare, Upskilling, Fashion & Apparel, Finance, Agriculture, Gaming, etc. have found wider acceptance through e-commerce mode, especially during the pandemic crisis.  Tier 2 & 3 cities, with their growing consumer base, coupled with the lower costs of infrastructure and talent procurements, are an excellent fit for future growth and scalability for startup ventures and are ideal destinations for startups with easy-to-build, non-intensive infrastructure needs.

Interestingly, the emergence of startups in smaller cities has been sector-specific and could be attributed to the resource abundance, and the favorable policies & incentives granted by the respective state governments. For example, Nagpur is the hub for FoodTech startup, Indore for e-Learning, Kochi for Aquaculture, or Goa state government promoting software exports and tech entrepreneurship in its region in partnership with STPI, etc. Hence it is imperative to ensure the right balance between the Founder’s passion & pedigree, and the resourcefulness of the destination under consideration to avoid future burnout.

Lack of focus on local problems and preferences

The buyers in Tier 2 & 3 desire more value and lesser prices compared to Tier 1 buyers. Hence selection of solutions and business models tailored for local preferences is critical in decreasing the odds of failure, especially for ventures replicating successful Tier 1 solutions across smaller cities. For example, Cash-on-Delivery business models adopted by the D2C startups, the offering of affordable services like access to real-time loans for the underbanked and unbanked masses by the FinTech startups, the hyper-local delivery setups for non-essential items as against delivery of essential goods focused upon in Tier 1 cities by e-Commerce startups, and the regional language e-courses offered with fees financing features by EdTech ventures, etc. The golden principle of demand-supply needs to be reiterated, and solutions and business models need to be altered to find better relevance and acceptability for the solutions that have been super successful in metros.

With the preference for startup destinations tilted in favor of Tier 2 & 3 cities, the startup ecosystem is gearing up to tap into myriads of opportunities across uncharted territories. The Government of India has recognized the need for conducive policies & reforms in creating an ecosystem that would ensure the next wave of 2-3 Lakh startups are from smaller towns. The fiscal and non-fiscal incentives offered through schemes such as Startup India, SAMRIDH, Startup-India Seed Fund, PradhanMantri Mudra Yojna, ASPIRE, etc. aim at minimizing the challenges of limited bandwidth for funding and mentoring requirements in smaller cities. Nevertheless, considering 95 out of the 100+ Unicorns have birthed in metro, replicating the Tier 1 startup ecosystem across Tier 2& 3 is an uphill task, and would require the quantum of efforts to transcend a great deal in optimizing its suitability for startups across sectors.

(This article is written by Nandini Mansinghka, CEO & Co-Founder of Mumbai Angels, and the views expressed in this article are his own)