What is driving this wave of innovation in Tier 2 and Tier 3 cities? Several factors have contributed to this rise. Let us explore some of them below:
1. Increased knowledge of startups – The rise in media coverage by national and regional players about the startup ecosystem has provided everyone with an additional career avenue, which was previously limited to corporate jobs in urban cities.
2. Enhanced Government Support – The Government of India has been actively promoting innovation and fostering ecosystem growth through multiple initiatives. This includes the provision of an active fund of funds, support for incubators, and Atal Incubation Centres. Additionally, regional governments focus on supporting regional incubators and startups by providing capital and knowledge.
3. Sharks – Despite being a recent addition to the Indian startup scene, Shark Tank‘s ability to simplify concepts and reach a wider audience has fuelled the entrepreneurial spirit in Tier 2 and Tier 3 cities, instilling the belief that anyone can start a successful business and dream big.
4. Covid19 – The aftermath of the Covid-19 pandemic has witnessed a surge in remote working, leading to talent being distributed across the country. This ripple effect has accelerated startup growth in alternative towns, as talent availability and visibility of problems demanding solutions have increased.
How small-town founders disrupting traditional industries
Access to information, driven by the reduction in internet costs, has revolutionized the way people think and conduct activities. Coupled with the aforementioned factors driving innovation, this has provided founders in India’s small towns with a perfect platform for innovation and experimentation. Decentralisation of information is crucial for the growth of any ecosystem, and its early effects can already be observed in the growth of cities and towns.Founders in these towns can relate existing or new solutions to the industries, demographics, and geographical conditions specific to their regions, thereby creating suitable augmentations. This approach has resulted in innovative solutions, particularly in sectors such as manufacturing, supply chain management, e-commerce, agriculture, and healthcare. Businesses in these areas are developed with a focus on the target region, often becoming profitable from the outset due to their deep market understanding. Furthermore, founders in smaller towns are not swayed by the optimism prevalent in cities like Bangalore, which encourages them to prioritize building sustainable businesses rather than focusing on rapid growth or disruption.
While DeepTech ventures in smaller towns are still relatively scarce, the increased grassroots development suggests that this situation will not persist for long.
How can VC attention propel growth
An increased focus of capital in these small towns will help in building the ecosystem from the ground up. It will have a range of effects –
1. Availability of Capital – Between 2015 and 2021, startups from smaller towns raised $1.12 billion. However, this is just the tip of the iceberg considering that Indian startups collectively raised approximately $100 billion during the same period. This indicates a capital penetration of only around 1% in such towns. To strengthen the foundation of the ecosystem, funds need to expand their horizons and establish systems for sourcing opportunities in these towns. This will lead to increased availability and access to capital, not only encouraging more founders to emerge but also fostering the growth of ecosystem enablers and communities that provide the necessary support.
2. Knowledge & experience – Raw knowledge today is present in every part of the country. However, the right combination of knowledge and experience makes all the difference. With more VCs joining the fold, Founders will get a chance to learn from their experiences and combine it with the raw knowledge they have, driving further growth.
3. Profitable innovation – Founders in smaller towns have the advantage of building businesses profitably due to reduced hiring costs, which typically constitute over 50% of the budget for early-stage startups. By supporting founders in smaller cities and towns, investors can play a crucial role in bringing industry-best practices and expertise to assist them in optimising their hiring strategies and operational efficiencies.
4. Network & community – Providing access to a network and community remains one of the biggest contributors of any investor. If founders in these cities and towns can tap into this vast pool of knowledge while building their companies, it can reshape the perception of popular cities like Bangalore, Delhi, Mumbai, and Chennai as the sole hubs for entrepreneurial endeavours.
Shubham Jhuria is Partner & CFO at Aeravti Ventures.
