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VCs are going out of their way to find the right entrepreneur, bringing a unique perspective or a unique solution to the market.
India’s Tier-II and Tier-III cities house about 171 million people, 45 percent of the urban population, and contribute to about 37 percent of the country's gross domestic product (GDP). These small cities hold abundant resources and enormous potential for entrepreneurship. A recent report by Primus Partners shows the proliferation of startups in Tier-II and Tier-III cities and investors’ interest shifting towards small-town startups. The report shows that about 90 percent of startups in 2023 emerged from these small towns and received about 22 percent of total funding.
The report says that about 44 percent investors have invested in startups from Tier-II and III cities. The investment in small-town startups has increased from Rs37,500 crore in 2021 and Rs75,000 crore in 2022 to Rs1,12,500 crore in 2023.
“The Tier-II and III stories are not undiscovered anymore. VCs are going out of their way to find the right entrepreneur, bringing a unique perspective or a unique solution to the market.”, says Piyush Soonee, co-founder and VC partner at Amara Partners. He says there has been a culture of entrepreneurship in small towns, but the founders couldn’t monetise it earlier due to lack of access. “The initiative by the government and interventions by VCs are accelerating and helping scale up small-town startups,” Soonee adds.
The report points out that digitalisation and initiatives by central and state governments, such as the Startup India Initiative and National Entrepreneurship Policy, have played a crucial role in connecting the investors with the founders. The report says over 66 percent of investors connect to the founder through government networking platforms.
“Coming from Tier-II we did not have the initial connection that will ease the later process. But we have been fortunate enough to have access to knowledge and technology, as everything has been democratised. That gives us equal footing and the same kind of access that Tier-I founders have,” says Gursimran Kalra, co-founder and COO of Minus Zero which is based in Jalandhar.
The tech-based startups from small towns are catching the eye of investors. According to the report, about 64 percent of VC investments in small towns went to tech-based startups. “Technology has advanced enough to tackle issues in small towns, including healthcare. Additionally, small towns offer easy access to skilled and affordable labour due to the abundance of engineering colleges, making operational costs attractive,” says Ayush Atul Mishra, CEO and co-founder of Tattvan E- Clinics which started from Bareilly and is now headquartered in Gurugram.. Also read: Startups, here's how to survive the freezing funding winter
There has been a threefold increase in the number of jobs created by small-town startups. According to the report, the number of jobs created by these startups has increased from 50 lakhs in 2021 and 100 lakhs in 2023 to 150 lakhs in 2023. Recognizing the role of these local startups in job creation, various state governments have initiated programs, such as iStart Rajasthan, Startup Odisha, Startup Haryana, etc, to support the startups.
Despite the increase in support, most startups in small towns face hurdles in getting funds for growth. The report shows that about 12 percent of these startups received pre-seed funding, 10 percent got seed funding, and only 2 percent of startups secured Series A funding.