As per the Economic Survey of 2018-19, of the over 16,500 recognised start-ups (as of March 1, 2019), nearly half were from tier-2 and tier-3 cities. Tier II cities like Ahmedabad, Chandigarh, Dehradun, Pondicherry, Pune etc. have a population of around one million, whereas minor cities with population less than one million like Madurai, Baroda, Nashik and Trichy are termed as Tier III cities. These cities display immense potential in all fields due to inherent advantages like ample availability of land and skilled labour. This potential no longer remains untapped owing to the emergence of startup ecosystems in these cities.
Rising traction
While Mumbai, Bengaluru and Delhi NCR usually take the limelight when it comes to the start-up ecosystem in India, Tier 2 cities are also rapidly emerging as a source of innovation. Often neglected, these cities are bustling with talent and resources and are overcoming the lack of less vigorous support infrastructure such as incubators and accelerators. With the government playing an active role, Tier 2 cities are gradually coming into the reckoning. From Madurai to Indore and Mohali; and from Jaipur to Udupi and Bhubaneswar, stories of successful start-ups are similar in tier 3 cities. As long as the idea is good and the product is of global quality, the location does not matter.
Home to many leading universities, the city of Chandigarh is abundant with innovative minds, startups and the spirit of entrepreneurship. The most successful startups are those striding towards sustainable development and targeting mental health. Nagpur is fluttering with startups and young innovators. Interestingly, it is the hub of a vast number of food-tech startups. The startup ecosystem trend is similar in other fostering tier-2 cities like Indore (inclining towards e-learning), Kochi (focusing on aquaculture) and Ahmedabad (nurturing niche-based startups), to name a few. Evidently, the tier II and tier III cities have cultivated a number of well-known startups and have also showcased a plethora of innovations and skills. But the startup ecosystem in these cities still has to face a number of hurdles to grow.
Reasons for business boom
Tier 2 and tier 3 cities in India are emerging as business pivots, opening up eccentric job opportunities. Many factors are responsible for this growth. Excessive rents and high operational costs in tier 1 cities can be massive deterrents for those just setting up a new business. In comparison, startups find that these initial costs are much lower, skilled personnel more affordable, and local authorities a lot friendlier in tier 2 and tier 3 cities. The new availability of coworking spaces in smaller towns has made it even easier for startups to function without a heavy initial investment. The low cost of living also brings down the overall cost of running the business. Moreover, in recent years, the government has put a major focus on funding incubators and backing up innovation. Programmes like Startup Chhattisgarh and Kerala Startup Mission have set the momentum going for entrepreneurs in smaller Indian cities.
Additionally, tier 2 cities like Jaipur, Patna, Indore and Surat have recorded an economic growth rate of over 40%, making them attractive options for larger firms as well. Larger spaces are available at lower costs, enabling these firms to operate at a larger scale. Tier 2 and tier 3 cities also provide a massive pool of untapped talent. When properly trained, companies can benefit from a large, highly skilled workforce at a fraction of the cost compared to metro cities.
Some millennials seek opportunities that will enable them to live closer to their families; others find that their skills are valued higher and their demand is greater in smaller towns that are not yet saturated with talent. Financial advantage plays a huge role in this decision—the cost of living in a tier 2 or tier 3 city is considerably lower than in a big city. The rise of technology, e-commerce and other advanced facilities in these cities has facilitated in providing most, if not all, opportunities and a lifestyle that a bigger city would.
Hurdles faced
A number of hurdles have led to the sluggish growth of the startup ecosystem in these cities, including the lack of a robust infrastructure and limited access and scope. The ecosystem hasn’t evolved in many of these towns. There is no framework to organise, facilitate and usher in alternative capital for disruptive ideas. Stable utility is also one of the main concerns even though these markets are ripe with opportunities.
The biggest hurdle faced by startups in these cities is the lack of funding. For a startup to function, a significant amount of working capital is essential for scalability and growth. But in terms of drawing investments, startups from these cities have irrefutably come across countless challenges while raising funds. Although raising funds has perhaps always been a major challenge, for entrepreneurs from these cities, it’s on another level altogether. Investors’ reluctance to travel to these smaller cities is a notable reason, along with the limited clientele base and the markets yet to ripen. Lastly, the adaptability in these cities is slow. A majority of startup onlookers believe that the market is ready for sectors like e-commerce, healthcare and transportation, but is yet to prove its acceptance for B2B startups and other sectors like hyperlocal and automobile.
What the future holds
With the Government’s numerous initiatives intending to strengthen the Indian startup ecosystem and unravel digital opportunities, it is high time for startups and entrepreneurs to make the best use of these endeavours. Every state government in India has taken measures to aid the growth of innovations and to boost the contribution of startups in the economy. Entrepreneurs must strive to find the right solutions to pertinent problems with the right tech, instead of chasing hyped funds or duplicate models in overly cluttered segments. Although several obstacles do exist, the odds of failure are far from overwhelming and the fruits of success are great. Who knows, the next unicorn may well emerge out of a tier-3 town.
Author – Vipasha
Entrepreneurship Development Cell 
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