As urban markets become saturated, investors are turning their gaze towards the untapped potential of small-town innovation, driven by a desire to foster economic growth while embracing India's diverse cultural heritage. This case study delves into the burgeoning trend of investor interest in such ventures, focusing on the unique challenges and opportunities they present.

Tier 2 and tier 3 cities: Catalysts of India's economic growth and innovation

According to a report by the National Council of Applied Economic Research (NCAER) featured in Outlook India, the contribution of tier 2 and tier 3 cities to India's GDP is projected to rise from approximately 40% in 2015 to 45% by 2025. This underscores the increasing economic importance of these cities within the national context.

Data from the Ministry of Housing and Urban Affairs indicates that nearly 45% of the urban population resides in tier 2 and tier 3 cities, highlighting their pivotal role in the country's economic landscape. The expected population growth in these cities to 63.1 crore by 2040 from 42.3 crore in 2020 suggests a widening market and an emerging talent pool, poised to drive economic growth and development. This demographic shift presents a fertile ground for start-ups and innovation, underpinning the potential for significant economic development and entrepreneurship opportunities.

The trajectory of India's economic growth, alongside the evolving role of tier 2 and tier 3 cities, marks a transformative phase in the economic development. Expansion of these urban centres is indicative of their growing contribution to the national GDP, fuelled by innovation, entrepreneurship, and an increasing urban population. As these cities continue to develop, their impact on the economic landscape is expected to deepen, offering new avenues for growth and development within the broader context of India's ascending trajectory on the global economic stage.

Start-up ecosystem in India: An overview

Due to the impact of various government initiatives, the country is experiencing a surge in entrepreneurial enthusiasm. In households across strata, individuals aspire to set up businesses, emphasizing the proven connection between innovation, problem-solving passion, and a thriving start-up ecosystem. India has positioned itself as the world's third-largest start-up ecosystem, demonstrating remarkable growth. This evolution reached a significant milestone in June 2023, surpassing 1,00,000 recognised start-ups under Startup India, a number that expanded to 1,23,364 by March 7, 2024, reflecting ~350% growth over the past five years.

The Indian start-up ecosystem is experiencing not only a surge in quantity but also notable prosperity, evident in the annual rise of unicorn companies. At present, there are 113 Indian unicorns that have collectively secured US$ 100 billion in funding and hold a combined valuation of approximately US$ 350 billion, according to data disclosed by Inc 42. Of these unicorns, 72% has materialised in the last five years, underscoring the rapid expansion of the start-up sector. This growth is ascribed to governmental initiatives, increased consumer expenditure and a favourable business climate.

The dynamism of India's start-up ecosystem extends beyond the metropolitan centres, with tier 2 and tier 3 cities witnessing a noticeable rise in entrepreneurial activities. These regions, once peripheral to the start-up narrative dominated by cities such as Bengaluru, Delhi, and Mumbai, are now central to the unfolding story of Indian innovation and enterprise. The shift indicates a broader recognition of the potential harboured by tier 2 and tier 3 cities, known for their unique advantages such as access to untapped talent, lower operational costs, and a burgeoning consumer market. These cities are increasingly viewed as strategic locations to address local challenges with innovative solutions, contributing significantly to the country's next phase of start-up growth.

This trend is illustrated by the success stories of start-ups originating from non-metro cities. For instance, Zomato, which began its journey in Gurugram, expanded operations across 24 countries. Similarly, Surat has given rise to notable start-ups like the edtech firm Dronstudy, and the fashion platform Wishbook. Furthermore, Pune's Padcare Labs gained attention for its innovative hygiene solutions, securing funding on a prominent reality show. These examples underscore the impactful role of start-ups from tier 2 and tier 3 cities in fuelling local economies, generating employment, and driving regional economic development, thereby redefining the landscape of Indian entrepreneurship.