Traditionally, if you wanted to build a startup in India, you were told to pack your bags for metro cities like Bengaluru, Mumbai and Delhi/ NCR. These cities are seen as the natural breeding grounds for innovation and investment. However, the Indian startup landscape has quietly evolved with a notable rise in the Tier 2 city startups.
According to the Economic Survey 2024 stats, more than 45% startups recognised with the Department for Promotion of Industry and Internal Trade (DPIIT) emerged from tier-2 and tier-3 cities. Additionally, Tier – 2 and 3 cities startups raised INR 1.13 Tn, showcasing an increasing investor interest across stages, including pre-seed funding for startups.
The Quiet Evolution of India’s Startup Landscape
The Indian startup ecosystem’s journey began in the early 2000s which was largely shaped by IT and software services companies. The next decade witnessed an uptick in e-commerce, fintech and SaaS companies originating from the technology innovation hubs of Bengaluru, swiftly shifting to NCR in Noida and Gurugram. The success stories of Flipkart, PayTm, Zomato, Ola and many among others set the stage for new-age startups.
Further, the government initiatives like Startup India improved digital infrastructure to increase technology adoption in the populace. This gradually expanded the startup culture beyond metros, spawning the need for startup incubators and accelerators and venture capital funds in India showcasing interest in the smaller town startups.
Additionally, young founders from Tier 2 cities exposed to global trends and a deep understanding of local problems, began building for both India and the globe.
Understanding Why Pre-Seed Funding For Startups Matters
Pre-seed funding for startups is the earliest stage of financing which typically validates an idea, builds an MVP (minimum viable product) and assembles an initial team. The ticket size of this funding ranges from INR 25 Lakh to INR 2 Cr. which often angel investors, accelerators, family offices or micro venture capital funds in India lead.
Even though fundraising at this stage is less complex, it is critical as it sets the foundation for product-market fit, go-to-market strategy and future funding. Traditionally, startup founders from metro cities had a clear edge in funding, considering the ease of investor access and stronger ecosystem networks. That said, the scenario is beginning to change.
The Rise of Tier-II City Startups
The tier 2 & 3 cities like Jaipur, Indore, Lucknow, Kochi, Bhubaneswar, Coimbatore and Chandigarh are emerging as thriving startup communities. There are several factors that contribute to the rise in startup funding in India.
Solving Local Problems
Startups in Tier 2 cities stem from daily realities of India’s semi-urban and rural population. For instance, these solutions include agritech platforms helping farmers get better yields or edtech platforms for small town aspirants or healthcare apps to simplify and make diagnostics accessible. These solutions are deeply embedded in India.
Considering the potential of these startups, investors are increasingly recognising that innovation is not just limited to big cities. In fact, it solves second tier and third tier challenges, often opening doors to wider market adoption or usage.
Cost-Efficient Operations
Keeping a continuous up and running for startups in a Tier 2 city is way more cost-effective than keeping the operations in Tier 1 city. Lower rental expenses, competitive talent pool and reduction in burn rate makes these startups have leaner operating costs and gain market resilience. For investors across all stages, this transitions to more capital efficient ventures in a climate where unit economics matter more than ever.
Evolving Investor Mindset
Micro and multi-stage venture capital funds in India actively scout beyond the metropolitan cities. Leading accelerators like the India Accelerator back founders from Tier 2 cities, often in early stages. For instance, government or university backed incubators play a catalytic role in this scenario.
Remote-First World
The pandemic and rise of remote collaboration has redefined the way startups are built. Tier 2 city founders no longer need to move to Bengaluru, Delhi or any other metropolitan city to attract talent, connect with investors or raise funds. If the startup idea is revolutionary, the founder is execution-focused, location can no longer be a barrier.
Strengthening Community & Peer Networks
Startup events, demo days and mentorship programs are reaching out to Tier 2 cities. For instance, SIDBI and Nasscom are playing an instrumental role in expanding the outreach of startup programs to Tier 2 & 3 cities to support, strengthen and promote the growth of the ecosystem. Startups participating in events like Startup Mahakumbh can leverage strategic collaborations and get access to funding.
Key Takeaway
The success rate of Tier 2 city startups in funding and expanding with leaner operations is growing at an unprecedented rate. It is a reflection of India’s evolving innovation fabric as investors move beyond big-city biases to support founders who are already working to solve real and scalable problems. Aspiring entrepreneurs in Tier 2 cities are capitalising on the accessibility of infrastructure, capital and mentorship. On the other hand, for investors and ecosystem enablers, it is time to double down on startup investments as the next unicorn may emerge from a coworking or a college dorm in Tier 2 city.
