Investors’ Radar: Investor interest fuels small town startup story

With more than 50% of the recognised startups in Tier II and III cities, as per recent data from the Union ministry of commerce and industry, small town India is big on investors’ radar.

Over the past three years, startups at emerging hubs have raised about $850 million, signalling increasing investor interest, said a recent Nasscom-Zinnov report. While the total amount of investment raised by startups in emerging hubs was over $130 million in 2019, it increased to more than $430 million in 2021.

Titled ‘Tech Start-up Ecosystem – Year of the Titans’, a report by Nasscom and Bengaluru-headquartered management consulting and strategy advisory firm Zinnov in January this year said there has been a 15% increase in share of all startups coming from emerging hubs from 2017 to 2021. Of the 70 active unicorns, one was launched in 2018 from Jaipur, an emerging startup hub, and about 7% of all the deep-tech startups in the country are now based in Tier II and III cities.

As per the Nasscom-Zinnov report, there has been a 3x growth in investments and 2x growth in seed stage deals at emerging startup hubs over the past three years.

While the overall funding has dropped in India, just as in the global ecosystem, the quantum of deals and dollars invested has been steadily increasing through 2021, well into Q1 2022, said Atit Danak, partner, Zinnov. “Funding trend is currently reflecting the macroeconomic variables of the larger ecosystem. We are witnessing more growth-stage funding moving to Tier II and III cities than ever before,” said Danak, adding: “We expect this to continue well into 2022, wherein Tier II and III cities will follow the trend lines that don’t witness disruptions due to location factors.”

Propelling this growth trajectory are investors that are starting to take note and giving an audience to Tier II and III startups. “The space has been democratised like never before. Anyone building a great solution for a real problem that has the potential to scale has the interest of the investors, irrespective of location,” said Anubha Prasad, founder-CEO of Karekeba Ventures, a startup-focused growth catalyst based in Patna.

Karekeba Ventures (Kare-ke-ba is Bhojpuri for ‘must do it’) was founded towards the end of 2020 to create a game-changer for the entrepreneurial ecosystem in Tier II and III cities and to help startup founders from ‘Bharat’ with mentorship, hand holding and investments.

“So far, we have invested in eight startups with cheque sizes ranging from about 50 lakh to 2 crore, and have participated in bigger rounds with other networks; our sectoral preference being healthcare, edtech, local jobs, SMB-tech, etc. We will shortly conclude deals for startups using deep tech in agriculture as well as BFSI sectors,” added Prasad.

Karekeba has four startups under its first acceleration cohort — all from small towns of Bihar and UP. So far, it has helped about 30 startups with mentorship and network access.

With the wave of innovation and entrepreneurship sweeping across the country, it was quite obvious that many Tier II and III cities would emerge as startup hubs.

“During the pandemic, businesses had to pivot to new models of working and workforce engagement, and this opened up the opportunity for companies to hire the best talent irrespective of geographical restrictions. At the same time, companies found value in low-infrastructure costs available in Tier II cities, without compromising on any aspect of quality,” said Sparsh Kaur, chief of staff at AgNext Technologies, an agritech startup based in Mohali, Punjab. In August last year, the company announced that it raised a total of $21 million, said to be the largest Series A funding received by an Indian agritech startup till date.

According to Kaur, Tier II cities, such as the Chandigarh tricity, not only enjoy suitable market conditions but also active support from local and state governments for business development. With easy access to affordable resources, good amenities and technological connectivity, smaller cities of India have become preferred destinations for young startups, she added.

Meanwhile, non-metro cities are also seeing growth in startup leasing as well as flex space take-up due to low cost of living, reduced capex and work from anywhere trends. “Emerging hubs such as Jaipur, Ahmedabad, Indore, and Coimbatore are likely to witness a rise in flex space and startup occupancy as entrepreneurs are increasingly leveraging these locations to launch operations,” a recent report by property consulting firm Colliers highlighted.

The trend might have accelerated during the pandemic, but shows no signs of waning. Prasad of Karekeba Ventures said none of the Karekeba-funded startups have shifted their base entirely. Healthcare startup Hanuman is still based in Patna, e-commerce startup Fydo (formerly Lfyd) in Jamshedpur and edtech startup EdUncle continues to be in Kota. “The fact is that startups have woken up to the might of the small-town-India markets, and if they are given the right access to mentorship, network and capital, there is no reason why migration to metros should happen. We need more ‘Karekebas’ across India to have a more equitable distribution of opportunities and wealth,” added Prasad.

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