As India’s Tier-II city economy rise on the startup map, they present not just opportunities but also a unique set of challenges for venture capital (VC) investors and entrepreneurs. While cities like Jaipur, Indore, and Coimbatore are gaining momentum with thriving startups and increasing investor interest, the path to scaling these ventures is far from smooth. Limited access to skilled talent, infrastructural gaps, and cultural hesitancy towards entrepreneurship continue to create barriers that can stall growth.
However, this evolving landscape is also a hotbed for innovation. Startups and investors are finding creative ways to navigate these obstacles—leveraging digital platforms, adopting alternative funding models, and fostering local ecosystems through incubators and accelerators. This article delves into the critical challenges hindering VC flow in Tier-II cities and explores the groundbreaking strategies that are not only overcoming these hurdles but also shaping the future of India’s startup ecosystem.
Challenges Hindering Venture Capital in Tier-II Cities
While Tier-II cities in India present immense opportunities for startups and investors, several structural and cultural challenges continue to impede the smooth flow of venture capital. These challenges range from a lack of entrepreneurial mindset to infrastructural limitations, talent shortages, and restricted access to funding networks. Overcoming these hurdles is critical to unlocking the full potential of India’s emerging startup hubs.
1. Lack of Entrepreneurial Mindset: Cultural and Educational Barriers
Unlike metro cities, where entrepreneurship is widely encouraged, many Tier-II cities still face a cultural hesitation toward risk-taking. Traditionally, stable jobs in government services or corporate sectors have been preferred over entrepreneurial ventures.
- Limited Exposure to Startup Culture: Many aspiring entrepreneurs in smaller cities lack firsthand exposure to successful startup ecosystems, which hinders risk-taking behavior.
- Education System Gaps: A curriculum that still emphasizes traditional career paths over entrepreneurship leads to a deficit in business acumen and innovation-driven thinking.
- Family & Social Expectations: A 2023 NASSCOM report highlights that over 60% of young professionals from Tier-II citieshesitate to pursue startups due to family pressure and fear of financial instability.
Addressing the Gap: Incubators like Startup Odisha and T-Hub’s Rural Innovation Program have launched mentorship programs to introduce aspiring entrepreneurs to startup-building fundamentals. However, a broader cultural shift is needed to normalize entrepreneurship in these cities.
2. Talent Shortage: Limited Access to a Skilled Workforce
Access to skilled professionals is a persistent hurdle for startups operating in Tier-II cities. Many high-potential individuals migrate to Tier-I cities for better career opportunities, leaving behind a gap in the local talent pool.
Data on Talent Migration Patterns
- India Skills Report 2023 states that nearly 70% of STEM graduates from Tier-II cities migrate to metros for employment.
- A LinkedIn workforce study found that top talent in tech, finance, and marketing prefers cities like Bengaluru, Mumbai, and Delhi, further widening the skills gap in emerging startup hubs.
How Startups Are Overcoming This Challenge
- Remote Hiring Models: Many startups are embracing hybrid and remote-first work cultures, allowing them to hire specialized talent from metro cities while operating from Tier-II locations.
- Example: Edtech unicorn PhysicsWallah (Allahabad-based) built a remote workforce model, recruiting subject matter experts from across India.
- Upskilling and Partnerships: Startups are partnering with local universities to develop specialized programs for new-age skills like AI, cloud computing, and digital marketing.
- Example: Jaipur-based fintech firm Razorpay collaborates with Rajasthan’s IIIT Kota to nurture fintech talent locally.
3. Limited Access to Networks and Mentorship
A robust professional network plays a crucial role in securing venture capital. Unlike Bengaluru or Mumbai, where founders can leverage a dense network of investors, mentors, and fellow entrepreneurs, Tier-II city startups often struggle with:
- Fewer Incubators & Accelerators: While over 60% of India’s startup incubators are concentrated in metros, many smaller cities still lack dedicated startup hubs.
- Investor Reluctance: Many VCs prefer startups from metros due to their established credibility, making it harder for Tier-II founders to attract large-ticket funding.
- Lack of Role Models: Metro founders benefit from established success stories (e.g., Flipkart, Ola), while Tier-II cities still lack high-profile startup icons that can inspire new entrepreneurs.
How Startups Are Bridging the Gap
- Rise of Regional Startup Summits: Platforms like TiE Rural Entrepreneurship Programand IIM Calcutta Innovation Parkare expanding their footprint beyond metros to connect rural entrepreneurs with VCs and mentors.
- Angel Investor Collectives in Non-Metro Regions: Initiatives like Marwari Catalysts (Jodhpur) and Kerala Angel Networkare helping early-stage startups access much-needed capital.
4. Challenges with Local Infrastructure
Despite digital advancements, physical infrastructure remains a significant challenge in Tier-II cities, affecting logistics, operations, and investor confidence.
- Limited Office Spaces & Tech Parks: Unlike Bengaluru or Hyderabad, Tier-II cities lack world-class co-working spaces and startup-friendly business parks.
- Connectivity Issues: Inadequate transportation, power supply, and logistics networks create operational bottlenecks for scaling businesses.
- Slow Government Support for SEZs & IT Parks: Despite policies promoting regional startup hubs, implementation delays hinder growth.
Startups Innovating Around Infrastructure Gaps
- Logistics Tech Innovation:
- Example: Surat-based e-commerce startup Shiprocket expanded its fulfillment network using AI-driven logistics to overcome supply chain inefficiencies in smaller cities.
- Decentralized Work Models:
- Example: Healthtech startup CureBay (Odisha) operates through a network of digitally connected healthcare centers instead of a single headquarters, reducing dependence on metro-based infrastructure.
While talent migration, infrastructure gaps, and limited networks continue to be obstacles, startups and investors are finding innovative ways to overcome these barriers. By leveraging remote hiring, digital infrastructure, regional investment hubs, and alternative funding sources, Tier-II cities can evolve into fully self-sustaining startup ecosystems. However, stronger policy interventions, improved infrastructure, and cultural shifts are needed to accelerate this transformation.
Innovations Paving the Way for VC Success in Tier-II Cities
As venture capital interest in India’s Tier-II city economy grows, innovative funding models, local accelerators, and technological advancements are playing a crucial role in reducing barriers to investment. Startups in these regions are leveraging crowdfunding, AI-driven automation, and digital networks to attract investors and scale efficiently.
1. Innovative Funding Models: Beyond Traditional VC Investment
Tier-II startups, often overlooked by traditional VC firms, are increasingly turning to alternative funding models to fuel their growth. The emergence of crowdfunding, angel investment platforms, and revenue-based financing is democratizing access to capital in these cities.
Crowdfunding & Angel Investment Platforms
- Rise of Regional Angel Networks: Platforms like Lead Angels, LetsVenture, and Indian Angel Network are actively connecting investors with startups beyond metro hubs.
- Example: Lead Angels, originally based in Mumbai, has expanded to Tier-II cities like Ahmedabad and Indore, enabling local entrepreneurs to secure pre-seed and seed funding.
- Crowdfunding Success Stories: Indian startups in smaller cities are leveraging platforms like Ketto and Wishberry to fund innovative projects. Agri-tech startups in Punjab have successfully raised capital for precision farming solutions using these platforms.
Government-Backed Startup Funds
- SIDBI’s Fund of Funds for Startups (FFS) has allocated ₹10,000 crore ($1.2 billion) for early-stage startups, with a growing focus on Tier-II cities.
- State-Specific Initiatives: Karnataka, Tamil Nadu, and Rajasthan have launched state-backed angel funds, providing direct investment into startups outside metro cities.
2. Local Accelerators and Incubators: Driving Mentorship & Growth
The expansion of accelerators and incubators into Tier-II cities is providing early-stage startups with mentorship, funding, and critical business resources. Unlike metro-based accelerators catering to high-growth startups, these incubators focus on grassroots entrepreneurship and industry-specific mentorship.
Key Players in the Ecosystem
- TiE (The Indus Entrepreneurs) Rural & Tier-II Chapters: TiE chapters in Lucknow, Coimbatore, and Bhubaneswar are mentoring local founders, providing access to capital, and fostering investor confidence in non-metro startups.
- Atal Innovation Mission (AIM): Launched by NITI Aayog, AIM has set up over 1,000 incubators in Tier-II and Tier-III cities, offering startups structured mentorship and financial support.
- Example: iCreate (International Centre for Entrepreneurship & Technology, Gujarat) has incubated over 450 startups in manufacturing, agritech, and deep tech, attracting investments from both domestic and international VCs.
Case Study: TiE Lucknow’s Impact
- TiE Lucknow has launched the “ScaleUp” accelerator program for startups in healthtech, fintech, and agritech, guiding founders through fundraising and market expansion.
- In 2023, startups incubated at TiE Lucknow secured over ₹200 crore in combined VC and angel investments, showcasing the potential of local accelerator-driven funding.
3. Technology & Automation: The Game Changer for Tier-II Startups
Adoption of automation, artificial intelligence (AI), and data analytics is enabling startups in Tier-II cities to scale efficiently while keeping operational costs low.
How Startups Are Leveraging Tech to Overcome Scaling Challenges
- AI-Powered Business Solutions:
- Example: Surat-based Textile AI Solutions is using AI-powered inventory management systems to help textile manufacturers optimize supply chains and reduce wastage.
- Automated Logistics & Warehousing:
- Example: Agri-tech startups in Madhya Pradesh are deploying AI-driven crop monitoring systems to enhance productivity and attract agritech VCs.
- Fintech Disruption in Non-Metro Markets:
- Digital payment startups like Razorpay and BharatPe are driving financial inclusion in smaller cities, making business transactions more seamless and transparent.
The Role of AI & Machine Learning in Investor-Startup Matching
- AI-driven investment platforms like Tracxn and LetsVenture are using data analytics to match VC firms with promising Tier-II startups based on financial health, market potential, and growth patterns.
- This reduces investor risk and increases the chances of successful funding rounds.
4. Digital Platforms & Networks: Bridging the Investor-Startup Gap
The rise of digital networking platforms has been crucial in overcoming one of the biggest hurdles for Tier-II startups—limited access to investor networks.
Key Digital Platforms Connecting Investors with Tier-II Startups
- LetsVenture & AngelList India: Providing a virtual matchmaking platform between startups and angel investors across India.
- Startup India Hub: A government-backed initiative allowing founders from non-metro cities to directly connect with VCs and corporate investors.
- LinkedIn’s “Startup Connect” Groups: Entrepreneurs in Tier-II cities are increasingly using professional networking groups to connect with potential investors and mentors worldwide.
Case Study: How Digital Networks Helped a Startup Scale
- Bhopal-based healthtech startup MedCords struggled with VC funding due to its location. By leveraging LetsVenture, it secured a ₹25 crore investment from angel investors, demonstrating how digital platforms are revolutionizing access to capital.
A New Era of VC Investment in Tier-II Cities
The future of venture capital in Tier-II cities will be shaped by innovative funding models, incubators, digital investment networks, and technology-driven scaling strategies. As investor confidence grows, these cities have the potential to become self-sustaining startup hubs that rival Tier-I ecosystems.
However, for this transformation to be fully realized, collaborative efforts between government bodies, private investors, and ecosystem enablersare essential. By bridging funding gaps, improving mentorship networks, and fostering technological innovation, India’s Tier-II city economy can become global centers of entrepreneurship in the coming decade.
Key Players in Tier-II VC Landscape
As venture capital (VC) interest in India’s Tier-II city economy gains momentum, a diverse ecosystem of investors, government-backed funds, and regional investment networks is driving growth. While metro cities have long dominated India’s startup funding landscape, leading VC firms, state-backed initiatives, and local investment hubs are now fueling innovation in smaller cities.
1. Venture Capital Firms Expanding into Tier-II Cities
Over the past few years, top VC firms have broadened their investment horizons to include promising startups beyond Tier-I cities. These firms recognize the cost advantages, rising digital adoption, and untapped market potential in non-metro regions.
Profiles of Leading Investors in Tier-II Cities
1. Sequoia Capital India (Peak XV Partners)
- Sequoia Capital has historically backed high-growth metro-based startups but is increasingly supporting founders in Tier-II cities, especially in agritech and fintech.
- Example: DeHaat, an agritech startup based in Patna, secured $60M in Series E funding (2023) from Sequoia and other investors. The company provides AI-driven advisory and financial support to farmers across India.
2. Accel
- Accel has been actively investing in supply chain and agritech startups with operations in smaller cities.
- Example: Ninjacart, originally a Bangalore-based B2B agri-supply chain startup, has scaled operations into smaller cities like Nashik and Vijayawada, securing multiple rounds of VC funding.
3. Aavishkaar Capital
- A pioneer in impact investing, Aavishkaar focuses on rural markets and startups working in financial inclusion, agritech, and clean energy.
- Example: The firm has backed AgroStar, a startup supporting farmers across Tier-II and Tier-III cities with agri-advisory and input services.
2. Government-Backed Funds Supporting Tier-II Startups
Government initiatives play a crucial role in bridging funding gaps for startups in smaller cities. SIDBI and state-backed venture funds are actively fostering entrepreneurship beyond metro hubs.
Case Study: SIDBI’s Role in Supporting Tier-II Startups
- SIDBI’s Fund of Funds for Startups (FFS) has backed over 100 VC firms, many of which have invested in startups from smaller cities.
- Example: Agritech startup Bijak (based in Haryana) secured early-stage funding through SIDBI-backed investors, enabling it to scale operations across North India.
3. Regional Networks & Investment Hubs: The Rise of Local Investors
Beyond large VC firms, regional investment networks and incubators are strengthening Tier-II startup ecosystems. These networks connect local entrepreneurs with early-stage investors, provide mentorship, and offer business scaling support.
Case Study: The Impact of Venture Catalysts in Non-Metro Cities
- Venture Catalysts, India’s first integrated incubator, has actively invested in startups from Tier-II cities like Surat, Nagpur, and Vadodara.
- Example: Surat-based Zebpay, a crypto startup, secured funding from Venture Catalysts and scaled operations beyond Gujarat.
Government-Backed Regional Hubs
- Startup Odisha: With a ₹100 crore ($12M) corpus, the initiative is attracting VCs to invest in Odisha-based startups.
- TiE Lucknow: The “ScaleUp” accelerator program has secured over ₹200 crore in combined VC and angel investments for startups in Uttar Pradesh.
The Evolving VC Landscape in Tier-II Cities
The venture capital ecosystem in India’s Tier-II city economy is evolving rapidly, with top-tier VCs, government-backed funds, and regional investment networks fueling growth. While traditional VC firms still dominate metro-based investments, the expansion of incubators, government support, and innovative funding models is making smaller cities attractive investment destinations.
For this transformation to reach its full potential, collaboration between private investors, state-backed funds, and ecosystem enablers is critical. As investor confidence strengthens and startups in Tier-II cities continue to prove their scalability, India is poised to unlock a new wave of entrepreneurial success beyond its metropolitan centers.
Unlocking the Next Wave of VC Investments in Tier-II Cities
India’s Tier-II city economy are no longer peripheral players in the country’s startup ecosystem. With a steady influx of venture capital, rising digital adoption, and government-backed initiatives, these cities are set to emerge as the next frontier for investment and entrepreneurship. Over the next 5-10 years, venture capital (VC) activity in non-metro regions is projected to expand significantly, unlocking new opportunities for investors, entrepreneurs, and business leaders alike.
Projections and Industry Growth Trends
According to a 2024 NASSCOM report, startups in Tier-II and III cities grew by 50% between 2019 and 2023, compared to a 30% growth rate in metro cities. By 2030, Tier-II cities are expected to account for over 40% of India’s total startup ecosystem, driven by:
- Increasing internet penetration (850M+ smartphone users by 2030).
- Surging middle-class consumer demand, expanding local markets.
- Government-backed funding, fostering deeper regional startup networks.
Strategic Recommendations for Business Leaders and Investors
As the startup ecosystem in Tier-II cities matures, business leaders and investors must adopt a targeted approach to tap into high-growth opportunities.
A. How Investors Can Capitalize on Emerging VC Markets
1. Build Local Investment Hubs
- Form regional angel networks to support early-stage startups.
- Partner with government initiatives like SIDBI’s Fund of Funds to co-invest in promising ventures.
- Establish city-specific incubators to nurture local talent.
2. Adopt a Sector-Specific Investment Approach
- Focus on sectors with high scalability potential, such as agritech, fintech, and healthtech.
- Invest in startups addressing region-specific challenges (e.g., AI-powered crop monitoring in Punjab or fintech solutions for MSMEs in Gujarat).
- Leverage impact investing to drive financial returns while solving critical socio-economic problems.
3. Strengthen Due Diligence and Risk Mitigation
- Assess scalability and local adaptability before investing.
- Encourage hybrid funding models (VC + crowdfunding + government grants) to mitigate risks.
- Support startups with strong execution teams that can scale beyond their city of origin.
B. How Business Leaders Can Leverage Tier-II Opportunities
1. Expanding Operations in Emerging Hubs
- Consider Tier-II cities as cost-effective expansion centers for manufacturing, R&D, and tech development.
- Capitalize on lower operational costs (30-40% lower than metro cities) to boost margins.
2. Attracting and Retaining Talent
- Build hybrid work models that combine local hiring with remote talent acquisition.
- Partner with regional universities to create talent pipelines.
3. Strengthening Digital and Physical Infrastructure
- Invest in automation, AI-driven analytics, and supply chain tech to offset infrastructure challenges.
- Collaborate with local governments to improve logistics and connectivity.
A Defining Moment for Tier-II Cities
The next decade will be transformative for India’s venture capital ecosystem, with Tier-II cities playing a central role in the country’s startup growth story. The convergence of digital infrastructure, lower operational costs, and investor confidence is creating an unparalleled window of opportunity for business leaders and VCs alike.
Those who proactively embrace this shift—by identifying high-potential sectors, forming regional investment networks, and leveraging government initiatives—will be at the forefront of India’s next big entrepreneurial wave.
Tier-II Cities – India’s Next Investment Goldmine
India’s Tier-II city economy are no longer on the periphery of the startup revolution—they are fast becoming high-potential investment hubs. With rising digital infrastructure, a thriving entrepreneurial culture, and strong government support, these cities present a compelling opportunity for venture capital firms and business leaders looking to tap into new growth markets.
The data is clear—the expansion of startups beyond metro cities is not a passing trend but a structural shift in India’s economic landscape. With sectors like fintech, edtech, agritech, and healthtech leading the charge, investors who diversify their portfolios to include high-growth Tier-II opportunities will be well-positioned to maximize returns while driving inclusive economic development.
For venture capitalists, angel investors, and private equity firms, the message is simple:
- Diversify investments beyond metro hubs to capitalize on lower operational costs and strong market demand.
- Strengthen local investment networks and accelerators to nurture high-potential startups.
- Leverage government-backed funding initiatives to mitigate risks and scale investments.
- Support startups with scalable, tech-driven solutions that address region-specific challenges.
Looking ahead, the rise of Tier-II cities as innovation and investment hubs could reshape India’s economic trajectory. As more startups emerge from non-metro regions and investor confidence grows, these cities will drive the next phase of India’s entrepreneurial boom, fostering job creation, economic resilience, and technological advancement.
For those willing to bet on India’s next big opportunity, the time to act is now.
For a deeper dive into the rising potential of India’s Tier-II city economy in the venture capital space, explore article, “Venture Capital in India’s Tier-II Cities: A New Era of Investment Opportunities”. Discover the investment trends, opportunities, and the evolving landscape shaping the future of these untapped markets.
