A survey report titled "Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India's Tier 2 and Tier 3 Cities" notes a growing investor interest in funding start-ups in these cities. 

The report, conducted by management consulting services provider Primus Partners, reveals that about 44 per cent of surveyed investors actively support start-ups in Tier 2 and Tier 3 cities. This underscores a significant enthusiasm for exploring the untapped potential within emerging markets.

Within this investor segment, an overwhelming 64 per cent have directed their investments towards technology-based start-ups, signaling a substantial appetite for tech-driven innovation, the report added.  

Furthermore, 23 per cent of investors have opted to support non-tech start-ups. A noteworthy 13 per cent of investors have specifically backed start-ups with a social impact focus, emphasising a commitment to ventures that address pressing societal challenges.  

The recently announced States Start-Up 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 start-ups from Tier 2 and Tier 3 cities eventually boosts India’s developmental journey. The states that have been categorised as the top performers are Maharashtra, Odisha, Punjab, Rajasthan, Telangana, Arunachal Pradesh, and Meghalaya.  

Charu Malhotra, co-founder and managing director at Primus Partners shared her views on report, said, “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 start-ups points to factors like skilled talent, cost-effective operations, and favorable government policies that have been contributing to their growth.” 

The report added that about 19 per cent of investors are enjoying tax benefits as a result of their investments, showcasing favorable fiscal incentives that contribute to the attractiveness of investing in start-ups.  

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 start-ups in Tier 2 and Tier 3 cities.   

The survey highlights challenges faced by start-ups in emerging cities, with 40 per cent citing funding as a significant growth obstacle. Only 12 per cent received pre-seed funding, 10 per cent secured seed funding, and 2 per cent obtained Series A funding.  

Additionally, start-ups in these areas grapple with talent scarcity, networking constraints, and a shortage of accessible mentorship, collectively hampering their ability to connect, collaborate, and receive vital guidance for their entrepreneurial journey, it added.