What's Behind Small-Town Start-up Boom Tier 2 and 3 cities are homes to nearly 50 per cent of recognised startups in the country, according to a report by Ministry of Commerce and Industry.

The charm of tier I cites is slowing fading away when it comes to setting a start-up there. In the last few years, many start-up have emerged from tier 2 and 3 cities or hinterlands. Take for instance, Jaipur which has gained spotlight due to presence of CarDekho, MagicPin and CredR. Another notable example is Patna-based online marketplace for farmers, DeHaat. Cleantech start-up Genrobotic Innovations' Bandicoot is based out of Thiruvanthapuram. In fact, according to a Ministry of Commerce and Industry report, tier 2 and 3 cities are homes to nearly 50 per cent of recognised startups in the country.

However, despite a surge in start-ups coming from hinterlands, one cannot deny the fact that most of the resources, capital availability, human resources are still concentrated in metros. Commenting on this, Hemandra Mathur, Venture Partner, Bharat Innovation Fund and co-founder, ThinkAg said, "Income pyramids in metros are more like diamonds with middle class bulging. That phenomenon has been set in rural areas or hinterland. Another important parameter is that aspirations which are becoming homogenous. Thanks to good internet connectivity, social media, and smartphones, a person in Barabanki is equally aware of what's happening around the world. So I don't think the aspiration levels are different when we compare Bharat with India, but for any business model to be successful you need to crack four As-Aspiration, Awareness, Accessibility and Affordability. I believe we have cracked the first two. I am hopeful, accessibly is improving in the next five years thanks to highways and expressways. That is bound to change the landscape of the hinterland. Both digital and physical connectivity will make more and more products and services accessible to smaller towns. Biggest challenge for any start-up is the first and last mile. With those, transaction costs can come down significantly because of better logistics. Affordability is a matter of time. I am very optimistic things are bound to change."

Manish Bafna, Director, Responsive India agrees and attributes this phenomenon to the good internet connectivity and remote working culture: "With connectivity like 4G and 5G, I don't think cities matter now. Instead of competing, tier 2 cities like Coimbatore are today complementing the tier-1 cities. There is a big talent pool sitting in tier 2 cities like Coimbatore and Salem. Because of this hybrid and remote work, they are settling there. So it's an opportunity for big enterprises for offices in these cities and complementing their bigger cities."

However, according to Shashank Kumar, the CEO & Co-founder of DeHaat, which is a start-up headquartered in Patna, for any sector or sub sector, there is no fixed template to run the machine or pursue the dream.

"When we felt that we were not getting tech talent from Patna, we set up our Gurgaon office. As of date, we are still headquartered in Patna. Most of our workforce is located in its core districts. Regarding raising funds for us it was important that the person who is going to invest in us had an equal amount of excitement. We have found enough set of people to visit hinterland. We don't find challenge in recruiting people as digital connectivity is at different level. Wherever you go today you would find amazing physical and digital connectivity. As a problem solver you have to stay close to problem, then whatever traction we are seeing in hinterland is obvious. And nobody is feeling shy in visiting those hinterland. Each of the investors visited field location. We also hold board meetings at field site," said Kumar.

While start-ups are quick to set shop in hinterlands, what is equally true is that they move quickly to core areas. According to Mathur, there are several pain points. "Firstly, Incubation in tier 2 and 3 is either lacking or poor. Secondly, talent is an issue. Finding Data Scientists in Chandigarh is easy, but in tier 2 and 3 cities, it is difficult. There are enough talent factories in those areas. Talents don't stay there because the ecosystem is underdeveloped. You have to build reasons and opportunities for them to stay. Also, investors should go to deals. There is a bit of saturation in bigger towns. So they are looking for propriety deals. I think, Tier 2 and 3 are perfect to go and scout the deals."

The comments were made at Entrepreneur 2023 summit held at New Delhi on 7th & 8th August. The session was led by Sparsh Kumar, Vice-President, Unicorn India Ventures.