Startups beyond the metros: the tier-2 and tier-3 story

By Abha Lohia · Startup Decoded

A growing share of Indian startups now come from tier-2 and tier-3 cities and towns, helped by cheap data, lower costs and local problems that big-city founders do not see. Raising money and hiring senior talent remain the main hurdles.

What are tier-2 and tier-3 cities?

India groups cities into tiers, a loose scheme used by the government for allowances and by businesses for planning. Tier-1 cities are the largest metros, such as Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kolkata, Pune and Ahmedabad. Tier-2 cities are the next layer, such as Jaipur, Lucknow, Indore, Kochi, Coimbatore, Chandigarh and Bhubaneswar. Tier-3 cities and towns are smaller still.

The labels are rough and sometimes disputed, and cities move between categories. In startup talk, people often say beyond the metros to mean everywhere outside the top handful of cities.

Why are startups growing outside the metros?

Several forces help. Cheap mobile data and UPI payments mean a customer in a small town can use the same apps as one in Mumbai. Founders can live where costs are low and still reach national markets online. Remote work after 2020 let talented people stay in their hometowns instead of moving to expensive cities.

Local knowledge is also an edge. A founder who has lived in a small town understands problems that outsiders miss, such as farm inputs, local lending, healthcare access, regional-language content and small-shop supply chains. Many of the largest unserved markets in India are outside the big cities.

What numbers show the shift?

Government statements in recent years have said that a large share of startups recognised by DPIIT, close to half in some reports, come from tier-2 and tier-3 cities. The exact share depends on the date and on how cities are counted, so check the latest Startup India figures before quoting one.

Funding data tells a different story. Most of the money in dollar terms still goes to companies based in the largest hubs, because later-stage investors and large rounds concentrate there. The gap between where startups are founded and where money lands is one of the main themes of this topic.

What kinds of startups come from smaller towns?

Many work in agriculture technology, rural finance, logistics, healthcare services, education in local languages and manufacturing. Others sell to small shops, which are numerous across India but poorly served by technology. Some companies are software firms that simply hire from smaller cities. Zoho, for instance, has set up offices in rural and small-town locations in Tamil Nadu and elsewhere to hire local talent.

What they share is often a closeness to a customer group that big-city companies struggle to reach. Success depends on trust, local partners and a service model that works with low incomes and patchy connectivity.

What challenges do they face?

Access to investors is the biggest one. Many venture funds and angels are based in a few cities, and founders from smaller places must travel or pitch online without the personal ties that help. Hiring senior engineers, designers and managers is harder, as is finding experienced mentors who have scaled a company before.

Infrastructure can also be uneven, with power cuts, slow internet and limited logistics in some areas. Founders from smaller cities report that some investors doubt whether they can scale, a bias that data does not always support. On the other hand, lower costs often mean they can last longer on the same money.

What is helping them?

State governments have started startup missions and incubators in smaller cities, with grants and subsidised workspace. Kerala, Odisha, Gujarat and Rajasthan have all run programmes of this type, though results vary. Colleges set up incubators, and angel networks and funds have started to look beyond the metros, including with local chapters and online pitch events.

The Startup India programme and its seed funding support aim to reach founders everywhere, working through incubators across the country. Founder communities and online groups also help people share lessons without moving cities.

What should founders outside the metros do?

Use your cost advantage to stay lean and reach proof of demand with little outside money. Build an online presence and a network of mentors beyond your city, and join an incubator or accelerator that has investor links. Visit a hub for key meetings, but keep your base where you can do your best work.

For readers following funding news, notice where companies are based and where their customers are. A startup in a small town selling to local customers may grow differently from one aiming at big-city consumers, and the stories behind their rounds will differ too.

Do smaller-city startups look different to investors?

Investors often notice two things. First, capital efficiency: because rent, salaries and other costs are lower, a smaller-city startup can do more with each rupee, and some funds like this. Second, the distance: investors may worry about visiting often, finding senior hires and helping with introductions.

Some funds and angel networks now run programmes aimed at founders outside the metros, with online pitch days and local partners. Founders can improve their chances by showing clear numbers, customer proof and a plan for hiring key people, and by making sure investors can reach them easily.

What does the future hold?

Nobody can say exactly how fast the shift will go. Better internet, state policies and a younger generation of founders who grew up using apps point towards more activity outside the metros. On the other side, funding and top talent still gather in a few places, and that pull may stay strong for years.

A balanced view is that the founding of startups is spreading, the funding of startups is spreading more slowly, and the businesses with the strongest local roots may be best placed to benefit. Watch for later-stage rounds in companies based outside the big hubs, which would signal that the money is following the founders.

If you are a reader following the sector, one simple habit helps: when you see a funding card for a company from a smaller city, note whether the round was led by a local, regional or metro-based investor. Over time this shows how far capital is really moving beyond the main hubs.

Finally, the word startup can mean different things in a small town. Many local founders start with a trade or service business that uses technology to grow, rather than a venture-backed software company. Both are valuable, and both create jobs. The venture path is one route among several, and founders should pick the one that suits their market and goals.

Readers should also remember that tier labels say little about talent. Some of the strongest engineers and operators come from smaller towns, and their stories are a reminder that a good idea can start anywhere.

If you want to explore further, look at the sector hubs and funding cards on StopDown and note how many of them name a city outside the largest ones. Doing this a few times will give you a feel for the shift that no single statistic can.

Do not forget the role of large employers in smaller cities. Colleges, factories and regional businesses often supply the first customers, the first hires and the first advice. A founder who builds links with them early gets a head start that no investor can provide.

Questions people ask

What is a tier-2 city in India?

It is a mid-sized city, such as Jaipur, Lucknow, Indore, Kochi or Coimbatore, ranked below the large metros in a loose government and business classification.

Do startups in tier-2 cities get funding?

Yes, but they often find it harder to reach investors, and most large rounds still go to companies in the biggest hubs.

Why start a startup in a small town?

Lower costs, local market knowledge, access to talent who want to stay home and easier access to customers online are common reasons.

Are there government programmes for startups outside the metros?

Yes. Many states run startup missions and incubators, and national schemes work through incubators across the country. Check current options on state and Startup India websites.

Can a small-town startup become a national company?

Yes. Digital payments, cheap data and online logistics make national reach possible from almost anywhere, though raising large rounds may still involve engaging with investors in major cities.