44% investors funding startup growth in smaller cities: Report

Grassroot growth: Over half, or 44 per cent of investors are investing in startups in Tier 2 and 3 cites, as per a report.

Underlining interest in the potential of emerging markets, a report by management consulting platform Primus Partners surveyed startups in 30 domains including food, agriculture as well as information technology and deep or emerging technologies sectors.

A majority of these investments were directed towards technology-based startups at 64 per cent, which indicates interest towards technological growth.

The report, titled “Small Towns, Big Ideas: The Rise of Innovation and Entrepreneurship in India's Tier 2 and Tier 3 Cities” also took into account the responses of startups, academic institutions, and key investors across Rajasthan, Haryana, Uttar Pradesh, Odisha, and Gujarat. 

Among the investors surveyed, 23 per cent of investors surveyed vouched to invest in non-tech startups, which reflects a diversification in their investment portfolio beyond technology. 

Interest also emerged for social impact as 13 per cent of investors opted to support startups with a focus on societal impression.

Challenges that startups from emerging cities face in their path to growth include funding, wherein 40 per cent report difficulty in receiving funds. Only 12 per cent of the startups received pre-seed funding, and Series A funding was secured by a mere 2 per cent. Other key challenges apart from funding include talent scarcity, limitations for networking and a lack of accessible mentorship. 

Charu Malhotra, Co-Founder & Managing Director, Primus Partners 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 startups points to factors like skilled talent, cost-effective operations, and favourable government policies that have been contributing to their growth,” Malhotra added. 

Some 24 per cent of the investors surveyed for the report have benefited from networking support, which emphasises on the significance of network. As many as 41 per cent of investors were related to Alternative Investment Funds (AIF) or Fund of Funds (FoF) syndicates, which signifies the collaborative nature of their involvement in financing startups.

The solutions listed for enhancing funding for startups in smaller cities and towns include dedicating funds and partnerships and empowering innovation through entrepreneurial education with a curriculum that focuses on transformation.

Conducting workshops, expanding mentorship and incubation networks, and maintaining supportive government initiatives like tax incentives and simplified regulations will further support the startup ecosystem in smaller cities.