Primus Partners Pvt Ltd (Primus) – a leading management consulting services provider – has announced the launch of its survey report titled “Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India’s Tier 2 and Tier 3 Cities” which provides a detailed analysis of the developing start-up landscape in Tier 2 and Tier 3 cities, offering key insights and recommendations for sustainable growth. According to the report, about 44% of surveyed investors have actively participated in supporting startups within Tier 2 & 3 cities, indicating a keen interest in the untapped potential of emerging markets.
Within this investor segment, an overwhelming 64% have directed their investments towards technology-based startups, signaling a substantial appetite for tech-driven innovation. This robust interest in the tech sector suggests a recognition of its transformative potential and its ability to drive economic growth. Furthermore, 23% of investors have opted to support non-tech startups, showcasing a diversified investment portfolio that extends beyond the realm of technology. A noteworthy 13% of investors have specifically backed startups with a social impact focus, emphasizing a commitment to ventures that address pressing societal challenges.
The recently announced States Startup Ranking 2022 released by the Department for Promotion of Industry and Internal Trade (DPIIT) indicates how the nation’s startup ecosystem has made progress over the last eight years. The rankings are a testament to the survey and show that the growth of startups from Tier 2 and Tier 3 cities eventually boosts India’s developmental journey. The states that have been categorized as the top performers are Maharashtra, Odisha, Punjab, Rajasthan, Telangana, Arunachal Pradesh, and Meghalaya.
Charu Malhotra, Co-Founder & Managing Director at Primus Partners shared her views on the people’s opportunities, stating, “The growth of Tier II cities signifies a broader economic and infrastructural transformation. Despite grappling with issues like infrastructure gaps, funding constraints, and talent shortages, the resilience of these startups points to factors like skilled talent, cost-effective operations, and favorable government policies that have been contributing to their growth. Moreover, the insight that 65% of startup founders completed their education in Tier 2 and Tier 3 Cities, emphasizes the symbiotic relationship between education, geographical roots, and entrepreneurial choices. This nuanced interplay sheds light on the larger narrative of regional economic development, underscoring the need for targeted policies that foster innovation and entrepreneurship in emerging urban hubs.”
An additional 24% of surveyed investors have benefited from networking support, underscoring the significance of connections in navigating the complex landscape of investments. Additionally, a substantial 41% of the investors are affiliated with Alternative Investment Funds (AIF) or Fund of Funds (FoF) syndicates, highlighting the collaborative nature of their involvement in financing startups. Moreover, 19% of investors are enjoying tax benefits as a result of their investments, showcasing favorable fiscal incentives that contribute to the attractiveness of investing in startups. Beyond financial advantages, the remaining investors have experienced additional perks, including enhanced visibility, further enhancing the multifaceted benefits that investors accrue in their engagement with startups in Tier 2 and Tier 3 cities.
The survey also unveils the challenges faced by startups from emerging cities, with over 40% identifying funding as a major growth hurdle. The survey details that only 12% of these startups have received pre-seed funding, 10% secured seed funding, and a mere 2% managed to secure Series A funding. Beyond funding challenges, startups in these regions face talent scarcity, networking limitations, and a lack of accessible mentorship, collectively impacting their ability to connect, collaborate, and receive crucial guidance for their entrepreneurial journey.
The report concludes with strategic recommendations for government action to empower startups and foster economic growth in Tier 2 and Tier 3 cities. Enhancing the funding ecosystem for startups in such cities- through dedicated funds and partnerships, strengthening entrepreneurial education with a focus on innovation-centric curriculum integration and workshops, expanding mentorship and incubation networks, and maintaining supportive government initiatives such as tax incentives and simplified regulations is the need of the hour. The comprehensive approach outlined in Primus Partner’s report aims to create a conducive environment, empowering startups in Tier 2 and Tier 3 cities and fostering economic growth, innovation, and overall entrepreneurship activity in these regions.
