Size matters: Smaller cities can be perfect for startups

July 15, 2021 1:00 AM

Entrepreneurs are shifting to smaller cities to build their startups to stay close to their customers and conserve cash

Chintan Bakshi Portrait

By Chintan Bakshi

India is undergoing a steady but unique trend in the startup ecosystem – highly educated and experienced professionals and startup founders are moving from metros to tier-2 cities to build innovative tech solutions in artificial intelligence, climate technologies, IoT, etc.

India has always been an entrepreneurial hub. Currently, India has the third largest startup ecosystem globally, with 51 startups being valued at over $1 billion, or unicorns. Most of these startups have been concentrated in the top metro cities. However, entrepreneurs are now shifting to smaller cities to build their startups to stay close to their customers and conserve cash.

The Economic Survey of 2018-2019 stated that 16,500 startups were registered by March 2019, and a whopping half of that figure was from tier 2 and tier 3 cities of India. Cities like Ahmedabad, Indore, Chandigarh, Lucknow, Patna, etc., are becoming the go-to options for startups.

The availability of resources like office space and manpower at cheaper rates is a significant factor for pulling startups towards tier 2 and tier 3 cities, especially in the initial phases when startups are bootstrapped. For startups an added advantage to the readily available skilled workforce at lesser cost, is higher retention rate in the smaller cities.

Also, some startups are building for Bharat (as opposed to India which lives in the metros) and it makes sense for such startups to start from a tier 2/3 city rather than a metro to stay close to their customer. For example, DealShare which targets middle-income group customers by offering attractive discounts on products of daily use, shifted from Bengaluru to Jaipur to stay close to customers while building their product.

State governments provide further impetus through startup policies and accelerating initiatives. For example, ‘Punjab Startup Summit 2018’, ‘Startup Chhattisgarh Programme’, ‘Kerala Startup Mission’, and several others. A few noteworthy instances in this regard are the distinct benefits that states like Rajasthan, Gujarat, are offering to their entrepreneurs. Gujarat has also offered special benefits under its Startup Gujarat policy. Some of them include a sustenance allowance of `20,000 per month for a year.

Startups in tier 2 and tier 3 cities also face their share of challenges. One of the biggest challenges in smaller towns is the lack of skilled technical workforce. There is a shortage of AI trained professionals, data scientists, and those having sound knowledge in technologies like IoT. However, it is heartening to see that this trend is changing, thanks to the pandemic which has “levelled the funding playing field” for tier 2 and tier 3 city startups. Jaipur and Ahmedabad saw a significant rise in the number of startups that got funded during 2020. Jaipur had 14 new startups, and the city received a total funding of $35,948,327. (Source: Tracxn).

Similarly, the lack of a startup ecosystem is intelligently being tackled by incubation centres in these locations that facilitate world-class mentorship, appropriate workspace, seed funding, etc. An example here is CIIE.Co’s Bharat Inclusion Initiative. It supports startups catering to low and middle-income groups in finance, skill development, livelihood generation and healthcare sectors.

Entrepreneurship in smaller cities is a healthy trend and was very much required. This will open multiple doors of opportunity for India in the global arena in research and development and boost the economy by providing an internal injection of investment and enthusiasm.

The writer is partner – Incubation, CIIE.CO and CEO – Startup Oasis

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