Decoding the Emerging Startup Culture in Tier 2 Cities

A budding stage startup is nothing less than a toddler which needs to be nourished and prepared to face all the obstacles that lie ahead. Previously, larger cities such as Delhi, Mumbai, and Bangalore were the only one's who provided that grooming for the startup, but now the focus is shifting towards smaller cities, which are preparing themselves to incubate and support entre preneurial startups. The global buzz surrounding the startup culture has made it even more vital than ever to foster innovation, and it's encouraging to see that even small Indian cities like Chennai, Hyderabad, Pune, Ahmedabad, and Jaipur are taking this seriously. As a result, dozens of new startup hubs have already sprouted up across the smaller cities of the country.

Chennai is developing into a software/deeptech hub, Jaipur is leading as a fast-growing Tier II startup hub, and Pune has already attracted its share of unicorns (Firstcry, Druva, Icertis, MindTickle).

For startup founders and investors, Jaipur is emerging as the most favoured headquarters among Tier II cities. Currently, Jaipur is home to more than 40 venture-backed firms. Chandigarh (14), Goa (12), Indore (20), Kochi (18), and Vadodara (18) are some of the other major startup centres (11).

Why there is this shift towards smaller cities?
Building propositions and scaling businesses has been easier nowadays as the internet has become more widely used. With the pandemic and lockdown, remote working enabled access to consumers and talent in these cities, as well as the creation of startups - all built from Tier II cities, for Tier II city requirements. As a result of the Covid pandemic, some people have returned from big cities like Delhi and Mumbai, as well as the worldwide market, to tier 2 and tier 3 cities like Jodhpur, Jaipur, Bikaner, Indore, and elsewhere.

Startups in these locations are experiencing exponential growth due to faster adoption of technology and a growing number of smartphone users. Small businesses require local solutions to survive, and startups originating in Tier II cities may be better positioned to provide these solutions in these areas.
As a result, while national players handle larger concerns, Tier II city startups stand out for their focus on developing local solutions. Some of these solutions have gone on to have a global impact.

Following the pandemic outbreak, industries such as finance, enterprisetech, retail/ consumer brands, direct-to-consumer (D2C) brands, agritech, edtech, and foodtech, among others, witnessed tailwinds and scale at an accelerated rate. Perhaps this is why, even during the pandemic period of 2020-2021, some Tier II city companies raised larger ticket size rounds.

Finova Capital ($55 million), LEAP India ($23 million), Milk Mantra ($10 million), Pushp Spices ($16.3 million), Zaara Biotech ($10 million), and CareStack ($22.5 million) are among the major firms in Tier 2 and Tire 3 cities.

Funding is what aids in promoting these startups
According to Research, Tier-II city startups in India raised $1.12 billion in capital across 305 deals between January 2015 and July 2021. Due to the impact of the COVID-19 outbreak the amount raised in 2020 fell by more than 48.4% from the previous year.

Surprisingly, the total number of deals is almost the same. This suggests that investors have been consistently betting on and exploring the country's Tier II potential. Furthermore, Tier II firms have already raised $80 million in 39 agreements in the first seven months of 2021.

Marwari Catalysts, a startup accelerator and venture fund capitalist, has come as a lifesaver for entrepreneurs in tier 2 and tier 3 cities that have passed the earliest phases.

Marwari Catalysts, based in Jodhpur, was founded almost two years ago in 2019 by Sushil Sharma, and has made significant progress, providing funds to dozens of startups that had passed the incubation and ideation stages, as well as guiding them through the next stages of obtaining investors and accelerating their growth.

"I feel that tier 2 and tier 3 cities in India are a very big talent pool, a very big market and have always been a much-untapped market and because I always operated in tier 2 cities and met with technology and international exposure. I feel that the tier 2 market has come up in a big way in India, and after Covid, there has been a big advantage for tier 2 cities because there has been reverse brain drain. Many people have returned from Delhi, Mumbai, Bengaluru and international markets to small cities",says, Sushil Sharma.

Marwari Catalysts, a partnership firm that plans to go public shortly, altered the game because it came with skin in the game. It does so by writing a cheque to the founders for anywhere between Rs 10 lakh and Rs 50 lakh, thereby purchasing a certain amount of equity in the startup and indicating to the founders that they are in it for the long haul.

Marwari Catalyst partners feel that the future of startup growth will be primarily in tier 2 and 3 cities, which is why they are concentrating their efforts there. It appears that these locations will produce the majority of the talent pool.