Low cost of running business and the potential of high net returns are some of the key reasons why startup investors with heavy pockets are going to Tier 2-3 cities in search of their next unicorn.
Ahmedabad, Pune and Surat are the three non-metro cities that attracted the maximum amount of investments from the investors during the first nine months of 2018 — $183 million collectively, according to data shared by Tracxn with Moneycontrol.
Investors such as Singapore’s Fullerton Financial Holdings pumped in $87 million in Ahmedabad-based fintech firm Lendingkart in one of the biggest deals bagged by a non-metro startup in 2018. The company has raised $154 million overall so far.
Pune-based Faasos raised $6 million from its existing investors LightBox Ventures II, Sequoia Capital India, RuNet South Asia and RB Investments, this year. It has raised $63 million in total till date.
Multiple other companies from over 25 non-metro cities such as Guwahati, Trivanthpuram and Vadodara bagged $293 million collectively from investors during just the first nine months 2018, according to Tracxn. This is slightly lower than $313 million raised by the companies across the 22 cities, last year.
The numbers point towards a growth trajectory given that $293 million has been raised in just nine months of 2018 against $313 raised throughout 2017.
According to Anil Joshi, managing partner, Unicorn Ventures, government initiatives to set up incubation centres is creating a fertile startup ecosystem for young minds in smaller cities. He also stressed that the next wave of opportunity lies in smaller cities given that the metros have already been acquired by marquee investors and the equity is expensive there. "Instead of investing in companies headquartered in the metros, local business households in smaller cities are now seeing the opportunity of investment in smaller towns," he said.
“One clear difference between setting up a company in a metro city vs a non-metro city is the cost of running the business," he further said adding that angel investors get good deals by investing a small amount in a startup.
Joshi has invested in six tech startups in Tier 2-3 cities.
Another investor Venture Catalysts told Moneycontrol that the fund is networking with local high net individuals to mentor and invest in startups in small cities through their incubation centres. It invested around $21 million across 44 startups in Tier 2-3 cities in 2017. The firm is setting up incubation units in cities such as Ahmedabad, Surat, Hyderabad, Kochi, Lucknow, Raipur, Pune and Nagpur.
According to a report on high net individuals and households, Top of the Pyramid by Kotak Wealth Management, 56 percent of ultra high networth households (HNHs) hail from four metro cities while 18 percent of ultra HNHs are based out of cities such as Ahmedabad, Pune, Hyderabad and Nagpur, among others.
“Investments are happening in Tier 2 cities because the ecosystem is maturing. Local HNIs are interested in investing in these startups because there is demand. Good startup ideas are coming up from these areas and so are the investments. Cities such as Jaipur, Ahmedabad, Chandigarh are coming up with interesting technology and product startup. It is a demand and supply theory,” said Alok Mittal, angel investor, co-founder of Indian Angel Network.