Startup Magic: Reshaping India's Tier 2 City Dynamics

In a departure from the traditional chicken-and-egg dilemma, India is experiencing a remarkable surge in development within its tier 2 cities. Once caught in the cycle of hesitancy—where towns lacked infrastructure due to the absence of companies and vice versa—today, these cities are witnessing a development boom that rivals many Tier 1 counterparts.

Thanks to the burgeoning startup ecosystem. The rapid development of infrastructure, skill diversity, startup presence, and governmental initiatives such as smart cities, tech parks, and incubation centres are accelerating these emerging hubs’ move towards a potential tier 1 status. This was highlighted in a joint report by Deloitte and Nasscom on Emerging Technology Hubs in India.

Startups Ignite Transformation in Smaller Towns

The burgeoning startup ecosystem is playing a pivotal role in propelling smaller towns into the spotlight as emerging tech hubs.

With over 7,000 startups currently operating in these nascent hubs, spanning fields from DeepTech to BPM services, there has been a remarkable 50 percent growth from 2014 to 2018, with expectations to surge 2.2 times by 2025.

In 2022, an impressive 39 percent of tech startups originated from these emerging hubs, showcasing the increasing significance of these regions in the entrepreneurial landscape.

Notably, 13 percent of the total funding in the same year flowed into startups from tier 2 cities in India, signalling a shift in investor confidence as they explore opportunities beyond conventional urban settings.

The DeepTech startup pool, experiencing a remarkable 42 percent growth and a 10-year Compound Annual Growth Rate (CAGR), is outpacing the overall startup ecosystem. 

Particularly noteworthy is the surge in DeepTech AI startups, which have seen a significant increase from 13 percent in 2019 to 26 percent in 2021, highlighting the transformative impact of these emerging hubs on technological innovation.

Burgeoning Startup Ecosystem Essential to Develop Hi-Tech Ecosystem

The study highlights that the availability of highly skilled talent (i.e. volume), significant value-to-cost ratio, strong technology network effects, a burgeoning start-up ecosystem, and an ever-developing infrastructure (i.e. value) are all essential for the development of a high-quality tech ecosystem in the country.

The volume speaks about the various skills that exist in the ever-increasing talent pool combined with arbitrage, startups, and established networks of technology set-ups that both competes with each other and co-create value. Emerging cities add both volume and value to the established technology sector in the country

Decentralized Workforce Trends

According to a comprehensive report by PwC and Deloitte, decentralized work has become a permanent fixture, taking various forms from independent home-based work to multinational corporations establishing centers outside of bustling metro cities to tap into a growing talent pool.

The report sheds light on the concentration of the tech industry workforce, revealing that a majority of the 5.4 million tech employees in India gravitate towards seven major cities. Shockingly, approximately 30 percent of India's non-metro population relocates to tier 1 cities for employment post-graduation.

Globally, companies are reevaluating their work structures, focusing on optimizing outcomes and costs. India's tier 2 cities are emerging as attractive hubs, offering the best of both worlds for companies seeking alternatives to metro locations.

Startups' Role In Decentralization of Tech-Hubs

India has a well-established and matured startup ecosystem. India, a global startup powerhouse, ranks third worldwide and consistently produces new unicorns. Launched in 2015, the Government's Startup India Plan aimed at fostering innovation and creating a robust ecosystem. Since 2016, there's been a staggering 400 percent increase in startups, generating over 900,000 direct jobs and 300,000 indirect jobs in the past decade. Notably, enterprise technology, consumer services, edtech, media, entertainment, and health tech sectors are key contributors to the burgeoning startup landscape.

Incentives for Multi-tier Location Strategy

These emerging competence hubs in tier 2 cities present a compelling option for companies grappling with talent acquisition and retention challenges. The incentive lies in achieving more with less, pushing companies towards adopting a multi-tier location strategy.

Driving Forces Behind Decentralization

The rapid development of infrastructure, diverse skill sets, the presence of startups, and government initiatives such as smart cities, tech parks, and incubation centers are propelling these emerging hubs towards potential tier 1 status. Today, many tier 2 cities boast a risk and regulatory environment, as well as living standards comparable to tier 1 cities.

Digital Talent Pools in Tier 2 Cities

Approximately 100,000 individuals in the target talent pool within these emerging hubs are highly proficient in the latest digital technologies. Currently, 11–15 percent of tech talent resides in tier 2 and tier 3 cities, a percentage expected to rise as more individuals opt to work from non-metro areas.

Smaller towns, contributing to 60 percent of India's overall graduates in engineering, arts, and science, provide companies with a significant competitive advantage. This advantage lies in identifying roles that can be outsourced to these towns, positioning India strategically to meet the growing digital talent requirements of companies and potentially have a skilled talent surplus by 2030.

India’s Startup Landscape Shifts Towards Emerging Cities

India's dynamic startup landscape is shifting towards emerging cities, hosting 39 percent of the nation's start-ups in 2022. Ahmedabad, Jaipur, and Lucknow stand out with thriving ecosystems fuelled by superior infrastructure, governmental backing, and a rich talent pool. Ahmedabad has emerged as a leader in finance, pharmaceuticals, and the Internet sectors. Jaipur boasts diverse start-ups, including unicorns like CarDekho and Dealshare, spanning technology, education, and e-commerce. Lucknow is gradually embracing high-tech culture, hosting around 400 tech start-ups in sectors like edtech and health tech. Indore and Coimbatore are early-stage incubators adopting digital technologies like AI, IoT, and blockchain.

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