India’s small-town startups more resilient to funding winter than big-city counterparts

While the funding boom of 2021 saw the first flush of big money coming in to young companies in tier 2 and tier 3 geographies, they did not typically get outsized valuations like their tier 1 counterparts

The funding pipeline to startups in India’s tier 2 and tier 3 geographies has been more resilient than the one to their counterparts in big cities, amid one of the worst financing droughts suffered by young companies in recent times.

While funding for startups in small cities and towns fell 66 percent to Rs 1,952 crore in H1 of 2023 from the peak of H2 of 2021, there was a sharper drop of 83 percent to Rs 13,509 crore for startups in the big cities, according to data sourced from PrivateCircle.

A great leveller

More importantly, the funding winter has become a great leveller, as the average cheque size of deals in tier 1 cities plummeted 44 percent to Rs 43 crore during the period under review. This metric rose marginally for tier 2 and 3 startups to Rs 42 crore. As such, there is barely any difference today between the average deal sizes of small-town startups and their big-city counterparts.

To be sure, H2 of 2021 was the best six-month period for Indian startups overall in the last five years as they attracted almost Rs 87,000 crore across 1,178 deals. As the pandemic-driven sheen wore off from digital platforms thereafter, startup funding in H1 of 2023 shrank to Rs 14,911 crore across 358 deals.

While the funding boom of 2021 saw the first flush of big money coming into young companies in tier 2 and tier 3 geographies, industry insiders say that they did not typically get outsized valuations like their tier 1 counterparts. This has turned out to be a blessing in disguise as many growth-stage and late-stage companies in metros such as Bengaluru, Delhi-NCR and Mumbai are not able to raise fresh funding as they are unwilling to let go of their earlier valuations.

No unicorns on the horizon

With late-stage investors refraining from taking part in investments, India has not birthed a new unicorn in the last 10 months. Indeed, the world’s third-largest unicorn ecosystem is now in its largest unicorn drought in five years. Moneycontrol had previously reported on how there seem to be no unicorns in the pipeline either.

Meanwhile, the difference in funding for big-city startups and those in smaller cities and towns is stark—startups in tier 1 geographies cracked 7,511 deals in the last five years whereas those in tier 2 and 3 areas could only secure 897 deals during the same period.

This just goes to show that the Indian government’s goal of a startup revolution in India’s small cities and towns is still some distance away. “The Prime Minister’s vision is that unicorns should also be built from the villages of India,” Union Minister Ashwini Vaishnaw said last year. To promote more new technology companies in small cities and towns, the ministry of electronics and information technology-backed Software Technology Park of India has created technology labs in different parts of the country that startups can tap.

Another point of concern for tier 2 and tier 3 startups is the very small number of funding deals—down from 136 at the peak of the boom in H2 of 2021 to 46 in H1 of 2023. The number of deals is now almost 44 percent down from the half-yearly average of 82 over the last five years.

However, small towns have been more resilient than the big cities even on this count. According to PrivateCircle data, startups funding deals in tier 1 cities have plunged 54 percent against the half-yearly average of 683 over the last five years.