For decades, India’s startup ecosystem has been concentrated in metro hubs like Bengaluru, Mumbai, and Delhi-NCR, attracting the lion’s share of venture capital (VC) investments. However, a paradigm shift is underway. Increasingly, investors are turning their attention to venture capital in India’s Tier-II cities—emerging business hubs with promising talent pools, lower operational costs, and expanding digital infrastructure.
This shift is not just a passing trend but a response to tangible market dynamics. Rising urban saturation, soaring real estate costs, and intense competition in metro cities have made Tier-II markets increasingly attractive for startups and investors alike. Additionally, government initiatives such as Startup India, Digital India, and various state-level startup policies have catalyzed entrepreneurial activity beyond traditional metros. The infusion of venture capital into smaller cities is creating new opportunities, fostering innovation, and contributing to the broader economic development of the country.
Why Should Business Leaders and Investors Care?
The untapped potential of venture capital in India’s Tier-II cities presents a compelling case for investment. According to a 2023 report by Tracxn, nearly 30% of new startups registered in India originate from non-metro cities, a significant jump from a decade ago. Furthermore, the Indian venture capital ecosystem raised over $25 billion in 2022, with an increasing share flowing into emerging startup hubs like Jaipur, Indore, and Kochi. The combination of cost efficiency, rising internet penetration, and an ambitious young workforce makes these cities fertile ground for high-growth businesses.
As we navigate this evolving landscape, this article will provide a data-driven exploration of the venture capital in India’s Tier-II cities. We will examine the key trends driving this shift, the challenges investors must navigate, and the innovative strategies startups are using to scale in these emerging markets. Whether you’re an entrepreneur looking for growth opportunities or an investor scouting the next unicorn, understanding the dynamics of Tier-II startup ecosystems is crucial for staying ahead in India’s competitive business environment.
The Rise of Tier-II Cities in India’s Startup Ecosystem
India’s startup ecosystem has long been centered around metro hubs such as Bengaluru, Delhi-NCR, and Mumbai, which collectively accounted for over 85% of total startup funding in the last decade. However, a gradual but significant shift is underway. With increasing saturation, skyrocketing operational costs, and stiff competition in metro cities, investors and entrepreneurs are looking beyond traditional hubs.
Tier-II cities—such as Jaipur, Indore, Coimbatore, and Chandigarh—are emerging as vibrant startup destinations, driven by improving infrastructure, digital penetration, and government-backed initiatives. The success of unicorns like Zoho (Chennai, a Tier-II city) and startups such as CarDekho (Jaipur) and RedBus (Hyderabad, formerly a Tier-II city) underscores the potential of these regions.
Investment Trends in Non-Metro Areas
The shift in venture capital (VC) funding toward Tier-II cities is becoming more evident. According to a report by IVCA-EY, funding for startups in non-metro cities grew by 50% between 2020 and 2023, with many investors actively scouting beyond metro ecosystems. A 2023 report by Inc42 reveals that one-third of new startups in India now originate from Tier-II and Tier-III cities, a stark contrast to just 15% in 2015.
Key Statistics: Venture Capital in India’s Tier-II Cities Gaining Momentum
- Growth Rate: Startups in Tier-II cities have witnessed a CAGR of 30% over the past five years, outpacing the national average.
- Funding Received: In 2023, startups from non-metro regions raised approximately $3.5 billion, a substantial jump from $1.5 billion in 2018.
- Emerging Sectors: Healthtech, agritech, edtech, and SaaS are thriving in these regions, leveraging local market needs and digital infrastructure.
- Talent & Workforce: India’s expanding digital economy and remote work trends have allowed startups in smaller cities to attract and retain high-quality talent.
Real-World Examples: Startups Thriving in Tier-II Cities
Several startups from Tier-II cities are breaking barriers, attracting VC funding, and scaling rapidly. Here are a few success stories:
- Verandah Club (Coimbatore) – A digital-first cultural education startup that has gained traction in the edtech space, proving that niche sectors can thrive outside metros.
- Medcords (Kota) – A healthtech startup that connects rural patients with doctors through teleconsultation, backed by multiple investors including Info Edge.
- DeHaat (Patna) – A leading agritech company offering end-to-end solutions for farmers, securing over $100 million in funding from top investors like Sequoia Capital.
- LogiNext (Surat) – A logistics SaaS startup that expanded internationally and attracted investment from Tiger Global, proving that scalable SaaS models can originate from smaller cities.
Key Trends Driving Investment in Tier-II Cities
The surge in venture capital (VC) investments in Tier-II cities is not a coincidence—it is driven by structural shifts in India’s digital economy, policy landscape, and business dynamics. Several key trends are fueling this transformation, making these cities prime investment destinations.
1. Rise of Digital Infrastructure: The Backbone of Startup Growth
The rapid expansion of internet access, smartphone penetration, and e-commerce platforms has democratized entrepreneurship across India. According to a 2023 TRAI report, India boasts over 850 million internet users, with Tier-II and Tier-III cities contributing to more than 50% of new internet users in the past five years. This digital revolution is fostering business creation in smaller cities, particularly in sectors like fintech, edtech, and direct-to-consumer (D2C) brands.
- Internet Penetration: Mobile broadband subscriptions in non-metro regions have grown by 35% year-on-year, surpassing urban growth rates.
- E-commerce Boom: Platforms like Flipkart, Amazon, and Meesho report that nearly 60% of their new sellers are from smaller towns.
- UPI & Fintech Expansion: With 9 billion UPI transactions per month, digital payments have enabled local businesses to scale without the need for metro-level financial infrastructure.
This connectivity has bridged the urban-rural divide, providing entrepreneurs access to digital marketplaces, financial tools, and customers nationwide.
2. Government Initiatives and Policy Support
The Indian government has played a crucial role in fostering entrepreneurship beyond metro cities. Several central and state-level initiatives have been introduced to incentivize startups in smaller cities.
- Startup India Program: Since its launch in 2016, over 100,000 startups have been recognizedunder this initiative, with a significant portion emerging from non-metro cities.
- State-Level Policies: States like Rajasthan, Gujarat, and Tamil Nadu have launched startup-friendly policies, offering tax exemptions, seed funding, and incubation support to businesses in Tier-II locations.
- Credit Support & Incubation: The SIDBI Fund of Funds and Atal Innovation Mission have backed multiple incubators in cities like Indore and Jaipur, providing early-stage support to local entrepreneurs.
According to DPIIT (2023), 45% of new DPIIT-registered startups are from non-metro regions, proving that government interventions are effectively fueling startup growth outside major urban centers.
3. Cost Efficiency: A Game Changer for Startups and Investors
One of the biggest advantages of launching a startup in a Tier-II city is cost efficiency. Lower expenses related to office space, employee salaries, and living costs enable startups to extend their runway and achieve profitability faster.
- Real Estate Savings: The average office rental in Bengaluru is ₹125–₹150 per sq. ft., whereas in cities like Jaipur or Lucknow, it is ₹40–₹60 per sq. ft.
- Talent Costs: Hiring skilled employees in Tier-II cities is 30–50% cheaper compared to metro cities. With remote work gaining acceptance, many startups are tapping into this cost advantage.
For investors, this means lower capital burn rates and higher long-term ROI, making these startups more attractive in an ecosystem where sustainable growth is increasingly valued over aggressive scaling.
4. Emerging Sectors: Where the Money is Flowing
While traditional tech startups continue to thrive, specific sectors are experiencing exponential growth in Tier-II cities, drawing investor attention.
- Edtech: Startups like PhysicsWallah (Allahabad)and Utkarsh Classes (Jodhpur) have gained traction by catering to Bharat’s growing demand for affordable digital education.
- Fintech: Companies like Jodo (Bengaluru, expanding into Tier-II cities) are innovating in financial inclusion, targeting semi-urban and rural markets.
- Agritech: Startups such as DeHaat (Patna) and KrishiHub (Kanpur) are digitizing agriculture supply chains, securing millions in VC funding.
- Healthtech: With the rise of telemedicine and diagnostics, Medcords (Kota) and CureBay (Odisha) are bridging healthcare gaps in non-metro areas.
The above chart highlights the sector-wise VC funding distribution in Tier-II cities, with edtech and fintech leading the pack. As consumer demand grows, these industries are expected to drive the next phase of startup success in India’s non-metro regions.
The combination of robust digital infrastructure, favorable government policies, cost advantages, and thriving sectoral opportunities makes Tier-II cities an increasingly attractive bet for investors. As we progress, the ability of startups and VCs to capitalize on these trends will determine the next wave of India’s entrepreneurial success.
Tier-II Cities—India’s Next Investment Goldmine
The rise of venture capital in India’sTier-II cities in the startup ecosystem is not a fleeting trend but a structural shift reshaping the country’s investment landscape. With a combination of cost efficiencies, robust digital infrastructure, and an ambitious, tech-savvy workforce, these emerging hubs are unlocking new avenues for venture capital growth. Government-backed initiatives, sector-specific opportunities in edtech, fintech, agritech, and healthtech, along with success stories from cities like Jaipur, Indore, and Coimbatore, underscore the untapped potential waiting to be harnessed.
For investors and business leaders, diversifying beyond traditional metro markets is no longer just an option—it’s a strategic imperative. Those who recognize and capitalize on the growth dynamics of Tier-II cities will not only achieve strong returns but also play a pivotal role in shaping the next chapter of India’s entrepreneurial success story.
To gain deeper insights into the challenges faced by startups in Tier-II cities and the innovative strategies driving venture capital success, read our follow-up article, “Conquering Barriers: Venture Capital Challenges and Innovations in India’s Tier-II Cities”.
