Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Key phrases: Start-up, Tier 2, Tier 3 cities, funding, innovation, cost of investment, ASPIRE, Start-up India.

Why in News?

• There is a lot of potential in start-ups in Tier II & Tier III cities that needs to be tapped, Commerce & Industry Minister Piyush Goyal has said.

Start-ups in Tier 2 and Tier 3 cities:

• Indian start-ups did phenomenally well in 2021 raising a total equity investment of $24.1 billion which was more than twice the amount raised in 2019, prior to the pandemic, the report stated. More than half the equity investments have come from the 47new unicorns that were established in 2021, pushing India to the top three in terms of number of unicorns.
• As per the Economic Survey of 2018-19, of the over 16,500 recognised start-ups (as of March 1, 2019), nearly half were from tier-2 and tier-3 cities.
• Tier II cities like Ahmedabad, Chandigarh, Dehradun, Pondicherry, Pune etc. have a population of around one million, whereas minor cities with population less than one million like Madurai, Baroda, Nashik and Trichy are termed as Tier III cities.
• While Mumbai, Bengaluru and Delhi NCR usually take the limelight when it comes to the start-up ecosystem in India, Tier 2 cities are also rapidly emerging as a source of innovation. Often neglected, these cities are bustling with talent and resources and are overcoming the lack of less vigorous support infrastructure such as incubators and accelerators.
• With the government playing an active role, Tier 2 cities are gradually coming into the reckoning. From Madurai to Indore and Mohali; and from Jaipur to Udupi and Bhubaneswar, stories of successful start-ups are similar in tier 3 cities. As long as the idea is good and the product is of global quality, the location does not matter.

Reasons for emerging of start-up in Tier 2 and Tier 3 cities:

Tier 2 and tier 3 cities in India are emerging as business pivots, opening up eccentric job opportunities. Many factors are responsible for this growth are following:

• Excessive rents and high operational costs in tier 1 cities can be massive deterrents for those just setting up a new business. In comparison, start-ups find that these initial costs are much lower, skilled personnel more affordable, and local authorities a lot friendlier in tier 2 and tier 3 cities.
• The new availability of co-working spaces in smaller towns has made it even easier for start-ups to function without a heavy initial investment. The low cost of living also brings down the overall cost of running the business.
• Moreover, in recent years, the government has put a major focus on funding incubators and backing up innovation. Programmes like Start-up Chhattisgarh and Kerala Start-up Mission have set the momentum going for entrepreneurs in smaller Indian cities.
• Additionally, tier 2 cities like Jaipur, Patna, Indore and Surat have recorded an economic growth rate of over 40%, making them attractive options for larger firms as well. Larger spaces are available at lower costs, enabling these firms to operate at a larger scale. Tier 2 and tier 3 cities also provide a massive pool of untapped talent. When properly trained, companies can benefit from a large, highly skilled workforce at a fraction of the cost compared to metro cities.
• Some millennials seek opportunities that will enable them to live closer to their families; others find that their skills are valued higher and their demand is greater in smaller towns that are not yet saturated with talent.

Challenges faced by the start-ups in Tier 2 and Tier 3 cities:

• A number of hurdles have led to the sluggish growth of the start-up ecosystem in these cities, including the lack of a robust infrastructure and limited access and scope. The ecosystem hasn’t evolved in many of these towns. There is no framework to organise, facilitate and usher in alternative capital for disruptive ideas. Stable utility is also one of the main concerns even though these markets are ripe with opportunities.
• The biggest hurdle faced by start-ups in these cities is the lack of funding.
• For a start up to function, a significant amount of working capital is essential for scalability and growth. But in terms of drawing investments, start-ups from these cities have irrefutably come across countless challenges while raising funds. Although raising funds has perhaps always been a major challenge, for entrepreneurs from these cities, it’s on another level altogether. Investors’ reluctance to travel to these smaller cities is a notable reason, along with the limited clientele base and the markets yet to ripen.
• Lastly, the adaptability in these cities is slow. A majority of start-up onlookers believe that the market is ready for sectors like e-commerce, healthcare and transportation, but is yet to prove its acceptance for B2B start-ups and other sectors like hyper local and automobile.

Way forward:

• With the Government’s numerous initiatives intending to strengthen the Indian start-up ecosystem and unravel digital opportunities, it is high time for start-ups and entrepreneurs to make the best use of these endeavours.
• Every state government in India has taken measures to aid the growth of innovations and to boost the contribution of start-ups in the economy.
• Entrepreneurs must strive to find the right solutions to pertinent problems with the right tech, instead of chasing hyped funds or duplicate models in overly cluttered segments.
• Although several obstacles do exist, the odds of failure are far from overwhelming and the fruits of success are great. Who knows, the next unicorn may well emerge out of a tier-3 town.

Source: The Hindu BL

Mains Question:

Q. In the growing environment of start-up ecosystem in tier 2 and tier 3 cities, discuss the factors which are responsible for growing start-up ecosystem in Tier 2 and tier 3 cities. What should government to do for next unicorn to emerge from a tier-3 town? Critically examine with case study.