According to a survey, 44% of domestic investors in 30 domains are concentrating on startups in Tier 2 and 3 cities

Because of the increasing investments in tier 2 and tier 3 cities in recent years, India now has the third-largest startup ecosystem globally. According to a poll conducted by Primus Partners, a well-known management consulting services organization with headquarters in Delhi, over 44% of domestic investors have concentrated on startups in these locations across 30 categories, including IT, food, and agriculture.

According to the Department for Promotion of Industry and Internal Trade’s (DPIIT) State Startup Ranking 2022, the rise of tier 2 and tier 3 city startups eventually contributes to India’s economic development.

As of October 3, 2023, over 1.12 lakh recognized startups and 111 unicorns with a combined net worth of $349.67 billion were present in India spanning 763 districts, according to DPIIT. Indian entrepreneurs are reportedly concentrating on 56 different industrial sectors, according to Invest India, the National Investment Promotion and Facilitation Agency. These sectors include 13% in IT services, 9% in healthcare and life sciences, 7% in education, 5% in agriculture, and 5% in food and beverages, in that order.

According to Primus Partners’ study report, “Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India’s Tier II and Tier III Cities,” 64% of polled investors have opted to support technology-based firms, demonstrating a strong demand for innovation driven by technology.

Additionally, a well-rounded investment portfolio that extends beyond technology is shown by the 23% of investors who have opted to support non-tech companies. Remarkably, 13% of investors have focused specifically on firms with a social impact focus, indicating their commitment to initiatives that address pressing societal concerns. Of the investors questioned for this research, 41% are connected to an Alternative Investment Fund (AIF) or a Fund of Funds (FoF).

What, then, is driving investors to tier 2 and tier 3 cities?

The significance of connections in navigating the challenging world of investing is shown by the fact that 24% of questioned investors reported getting networking help. Furthermore, 19% of investors express pleasure from tax savings, highlighting the favorable tax advantages that attract investors to startup investments.

Apart from the monetary benefits, the residual investors have seen heightened visibility, contributing to the diverse array of benefits that investors get from collaborating with companies in tier 2 and tier 3 areas.

A larger economic and infrastructural transition is indicated by the expansion of tier 2 cities, according to Charu Malhotra, co-founder and managing director of Primus Partners. These firms have persevered in the face of challenges such as inadequate infrastructure, limited finance, and a lack of trained personnel. Their success may be attributed to elements such as these advantages, as well as government initiatives that have supported their expansion.

Furthermore, she said that the realization that 65% of company founders finished their schooling in tier 2 and tier 3 cities highlights the mutually beneficial connection between education, place of origin, and entrepreneurial decisions. Malhotra said, “This complex interplay illuminates the broader story of regional economic development and highlights the need for targeted policies that foster innovation and entrepreneurship in emerging urban hubs.”