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Why The Next Wave Of Start-Up Action Will Come From Tier 2 And 3 Cities

With a large talent pool that can lower operating costs in a growing consumer market, these cities can address regional challenges strategically, and play a significant role in augmenting start-up growth in the country

Why The Next Wave Of Start-Up Action Will Come From Tier 2 And 3 Cities
Shams Tabrej, Founder of Ezeepay
POSTED ON February 17, 2023 3:19 PM

Till some years ago, metros like Bangalore, Delhi and Mumbai emerged as the flagbearers of the flourishing Indian start-up ecosystem. However, a growing number of entrepreneurs and investors are starting to recognize the potential of Tier 2 and Tier 3 cities in India. 

While less well-known than their Tier 1 counterparts, these cities are thriving start-up ecosystems. And unknown to most, they offer unique advantages that make them attractive destinations for start-up activity.

From a large pool of untapped talent to lower operating costs and a growing consumer market, these cities are poised to address the regional challenges strategically, providing unique solutions for regional communities and playing a significant role in the nation's next wave of start-up growth.

Several successful start-ups have emerged from the non-metro cities. For example, while food delivery company Zomato started in Gurugram, it now has a presence in 24 countries. Similarly, edtech Dronstufy and fashion platform Wishbook are based in Surat, which Pune-based hygiene start-up Padcare recently made news for raising capital in the latest Shark Tank reality show season. These companies are not only successful, but have also positively impacted the local economy, creating jobs and driving economic growth.

Staking A Claim 

There are multiple reasons why these cities are likelier to propel the country’s burgeoning start-up ecosystem. One of the most significant advantages is the lower cost of living and doing business here. 

Since these cities are less developed in infrastructure and ecosystems than metros, the cost of rent, salaries, and other expenses are significantly lower. As a result, it can provide a significant advantage for start-ups that have just started venturing out and trying to keep their costs down.

Another advantage of tier 2 and 3 cities is the growing talent pool, as more people move to these cities. As a result, it can give start-ups access to a diverse and skilled workforce that can help them grow their business. 

Additionally, many of these cities have universities and colleges that produce a large number of graduates with the skills and knowledge needed to start a business. Finally, the kick of the start-up culture in these cities may also lead to reverse immigration as people get quality jobs in their hometowns.

Government Gives A Push  

The Indian government has also been making efforts to support start-ups in tier 2 and 3 cities. Several schemes, policies and initiatives have been launched to provide funding, mentorship, and other resources to entrepreneurs in these towns. Additionally, the central government's initiatives like ‘Start-up India’, Digital India Start-up Hub programme and Digital India Investment Fund helped create a more favourable environment for budding entities in these cities.

Even states governments are individually supporting start-up ecoculture with various aids and initiatives like Accelerate Start-ups in Andhra Pradesh (ASAP), Kerala Start-up Mission (KSUM) and Madhya Pradesh Start-up Policy and its Start-up portal.

The reason the administration is making a concentrated push is evident as these cities offer untapped market opportunities for fledging companies to provide their products and services. These cities are less saturated than metros, meaning there is much growth potential. Entrepreneurs who can identify these opportunities can be well-positioned to succeed in these cities.

Some Hurdles Along The Way 

Despite these advantages, start-ups in tier 2 and 3 cities do face their unique set of challenges, with the biggest being the lack of infrastructure and resources. 

Any business needs well-developed ecosystems to survive, and it's easier for ecosystems to develop organically in metros, which gives them an edge over tier 2 and 3 cities. However, since they are not as developed as most leading cities, it could result in limited access to resources like funding and mentorship. Additionally, it can be difficult for start-ups in these cities to scale up their business due to the need for more infrastructure and resources.

In light of these challenges, the government and private sector need to provide support and investment to help these start-ups succeed. Fortunately, state governments have already woken up to the fact and are working to alleviate these issues. 

Headed Where The Talent Is

As start-ups in Tier 2 and 3 cities become successful, it could lead to a reverse talent migration. It could be a good trend for the country's infrastructural balance and economic equity spread, as it could help to distribute economic growth more evenly throughout the country.

According to a report by Nasscom and Zinnov, the number of technology start-ups in tier 2 and 3 cities has increased by 50 per cent over the past three years and is expected to continue to grow. This indicates a growing number of opportunities for young people in these cities, which could lead to a reverse talent migration.

Furthermore, a study by the United Nations projections shows that the current net migration rate for India in 2023 is -0.329 per 1000 population, a 3.8 per cent decline from 2022, indicating that people are starting to find better opportunities in their hometowns.

However, this trend can also be seen as a double-edged sword. While it could help to distribute economic growth more evenly throughout the country, it could also put pressure on the infrastructure in these cities, which may need to be equipped to handle a large influx of people. Additionally, the reverse migration of talent may also cause a loss of human capital in Tier 1 cities, which could negatively affect the country's overall growth.

Overall, the government and private sector need to continue to invest in the infrastructure and resources of Tier 2 and 3 cities to ensure that they can handle the potential influx of people and to ensure that the economic growth is inclusive and equitable.

-    Written by Shams Tabrej, Founder, Ezeepay

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