Investors Flock to Small Town ‘Desi’ Startups as Funding Surges. Here’s Why VCs are Going beyond Metros
In a significant shift, investors in India are recognizing the untapped potential of small-town startups and redirecting their funding away from traditional metropolitan areas. While Tier-II and Tier-III cities have often been overlooked for building businesses, these small towns are now emerging as hotspots for entrepreneurship, contributing approximately 37% to the country’s gross domestic product.
According to the latest report by Primus Partners, a staggering 90% of startups in 2023 originated from Tier-II and Tier-III cities, receiving around 22% of the total funding. The surge in funding for these small-town startups is evident, with the report stating that about 44% of investors have made investments in businesses based in Tier-II and Tier-III cities. In fact, the funding has risen from ₹37,500 crore in 2021 and ₹75,000 crore in 2022 to an impressive Rs1,12,500 crore in 2023.
The report further highlights that 64% of venture capital investments have been directed towards technology-based startups in Tier-II and Tier-III cities. This trend is driven by the favorable business environment and the impressive growth potential in these regions.
Aside from increased funding, small-town startups have also witnessed significant revenue growth. In 2021, they generated 50 lakhs, which rose to 100 lakhs in 2022 and further escalated to 150 lakhs in 2023. This remarkable growth has prompted state governments to launch initiatives such as iStart Rajasthan, Startup Odisha, and Startup Haryana, recognizing the job creation and economic contributions of these startups.
According to the report, the successful connection between investors and founders owes much to digitalization and state and federal government initiatives like the National Entrepreneurship Policy and Startup India Initiative. Notably, more than 66% of investors establish contact with founders through government networking sites, showcasing the vital role played by these platforms.
However, despite the rise in government support, many small-town startups still encounter obstacles when it comes to securing funds for growth. The report reveals that only 12% of these businesses receive pre-seed funding, 10% obtain seed funding, and a mere 2% secure Series A funding.
Adrija Agarwal, the founder of Sattva Ventures, emphasizes that the flourishing startup ecosystem in Tier-II and Tier-III cities is primarily due to technological advancements that have made it easier for businesses to venture into smaller markets. Social media platforms have also played a pivotal role in leveling the playing field, enabling startups to reach wider audiences with minimal marketing expenditure.
The report outlines five key reasons why investors are increasingly drawn to small-town startups, including untapped markets, cost efficiency, a vast talent pool, government support, and improved digital penetration.
Vinayak Kamath, Co-founder and Partner of Hearth Ventures, points out that hometown connections, understanding of local geography and culture, and the lower fixed costs of doing business make investments in small-town startups favorable for many investors. Furthermore, the focus on value and basic business models in these areas, rather than convenience-driven models, contributes to their appeal.
Payal Jain, CEO of Funngro, attributes the surge in funding to the transformative shift towards digital solutions and the growing reliance on freelance talent. Startups in the technology sector, in particular, have received the lion’s share of funding, with a staggering 70% flowing into this industry.
The success of these startups can be attributed to their ability to adapt swiftly to changing market demands and the increasing prominence of the gig economy. Startups incorporating freelance talent have witnessed a 40% increase in funding compared to traditional models.
The rise of small-town startups marks a cultural shift in India, where entrepreneurship is increasingly celebrated. Encouraged by this change and armed with their in-depth knowledge of local market needs, more individuals are embarking on entrepreneurial journeys.
As investors recognize the immense potential and profitability of small-town startups, they are redirecting their attention and funding away from metropolitan areas. With supportive government initiatives, improved digital infrastructure, and a thriving startup ecosystem, Tier-II and Tier-III cities in India are poised for continued growth and contribution to the country’s economy and innovation landscape.
