With over 100,000 registered startups, India is now the world’s third-largest ecosystem for new-age companies. The focal point of entrepreneurs is steadily shifting beyond metro, tier-1 cities. Primarily retail and ecommerce are the sunshine sectors in lower-tier cities.
Among other important reasons, one of the key factors driving the shift from big cities to smaller ones is the growing desires of consumers in these areas. This is partly due to the technological advances that are boosting the economy and at the same time helping to bring about a social and economic change.
Many new businesses have limited funds. It is important to cut costs, including those for hiring and training. In large cities, employees often leave their jobs more frequently because they have more options. In small towns, employees are less likely to leave because there are fewer opportunities, which creates more loyalty. “We have seen multiple startups first-hand, choosing to work out of Tier II and III cities to overcome the cost and attrition challenges of Tier I cities. Building the product (and the company) will be cost-efficient in Tier II (and beyond) cities due to lower cost of infra, lower cost of resources and significantly less attrition. The challenge was always whether senior resources (architects, product managers) could be available in these towns. This is where Covid helped as many senior resources went back to their native places and many are keen to continue there.” says Pentathlon Ventures’ Managing Partner Gireendra Kasmalkar.
Exploring The Untapped Market
A new trend is emerging where startups are favouring smaller cities, especially if their founders are from these areas, while larger startups in big cities may establish product and support teams in smaller cities. This shift is expected to lead to the production of better engineers in these cities due to the growing presence of startups. In 2024, the focus will shift to the growth rates of startups in these cities rather than just the total number of startups.
The focus of startups, especially the ecommerce companies, has shifted from big cities to smaller towns, as shown in multiple data. Hence, targeting non-metro regions is the startups’ could be a well planned strategy. Highlighting the same, Seafund’s Managing Partner Mayuresh Raut states, “Smaller cities are becoming promising for businesses in 2024 due to increased internet usage, growing young population with higher purchasing power, and the potential for new brands to enter the market. The improving infrastructure and connectivity in smaller cities facilitate business operations and sales.”
India’s countryside is where nearly 70 per cent of its people live. There is huge potential for new businesses in these areas because they have not been explored much. The internet and broadband are getting better in these places, which is helping the rural and city areas work together more. This is causing more people to buy things and helping new businesses grow faster because it’s easier for them to reach the people they want to sell to.
Lower-tier Cities Hijacking Business?
Unicorn India Ventures’ Managing Partner Anil Joshi says that rural areas are one of the major contributors to almost all ecommerce companies and this has become possible due to better infra across India. While the early days saw lower adoption, pandemic helped in establishing as one of the options and gave wider choices to the customers and at their fingertips. Going forward lower tier cities will keep hijacking the business.
Joshi commenting on what needs to be done to make lower-tier cities an appealing destination to investors, says, “The regular engagement of startups and investors at lower-tier cities will help build the confidence in the startups from the cities. It will be a long process and need to be done at regular intervals.” However, Raut states that state governments can provide benefits like discounted land rates, subsidised office spaces and tax rebates to attract investors interested in funding startups in smaller cities. Creating branded innovation hubs and industry-specific startup incubators in smaller cities will help create a thriving ecosystem. By easing labour laws, streamlining compliance processes and implementing a single-window clearance system for operational licences, it would be easier for businesses to get started quickly. Improving flight and rail connectivity to smaller cities from major urban centres would make it easier for investors to stay involved and monitor their investments.
Long-standing Demand For Better Infrastructure, Incubators
Lower-tier cities have been demanding for better infrastructure, last-mile connectivity and incubators. The government is making efforts in helping with incubators, typically in colleges and universities, focused on domains and technologies in lower-tier cities. Very early-stage funding is also available to them. “However, the focus has so far been on really young startups and founders. Instead, if the focus shifts to attracting larger startups to these incubators in tierII (and beyond) towns, young graduates/engineers will have employment opportunities in established startups, which would boost the start-up ecosystem there much better, as compared to these young graduates trying to be founders themselves (undoubtedly, a more romantic idea). Incentivising the successful diaspora of these lower-tier towns to open their offices in their native places would go a long way,” says Kasmalkar.
Both the Central and State Governments are making big efforts to support India’s startup ecosystem. Governments offer perks like tax holidays, land subsidies and other benefits, especially to startups in smaller cities. In 2023, The Union Minister for Commerce and Industry urged the National Startup Advisory Council to focus on tier 2 and tier 3 cities where there is currently limited venture capital funding. The Department for Promotion of Industry and Internal Trade has also emphasised the need to promote the startup ecosystem in small towns and suggested that successful startups could contribute to the development of these areas. Additionally, State Governments across India are competing to provide attractive incentives for startups to establish and grow within their regions, aiming to boost employment opportunities.
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