Investors are increasingly turning their attention to startups in small towns with a 'desi' flavor, leading to a surge in funding.

There has been a notable increase in funding for startups located in smaller towns, with a report indicating that 44% of investors have chosen to invest in Tier-II and Tier-III city-based startups. The funding has seen a substantial growth trajectory, rising from ₹37,500 crore in 2021 to ₹75,000 crore in 2022 and further reaching Rs1,12,500 crore in 2023.

The report emphasizes a strong investor preference for tech-based startups in smaller towns, with 64% of venture capital investments directed towards such ventures in Tier-II and Tier-III cities. Beyond financial backing, these startups have demonstrated significant revenue growth, reaching 50 lakhs in 2021, 100 lakhs in 2022, and 150 lakhs in 2023. Various state governments have launched supportive initiatives like iStart Rajasthan, Startup Odisha, and Startup Haryana to foster local startup ecosystems and acknowledge their role in job creation.

Digitalization and government initiatives at both state and federal levels, such as the National Entrepreneurship Policy and Startup India Initiative, have played a crucial role in connecting investors with founders. Interestingly, more than 66% of investors initiate contact with founders through government networking sites.

Despite increased governmental support, small-town startups encounter challenges in securing funds for growth. The report reveals that only 12% of these businesses receive pre-seed funding, 10% secure seed funding, and a mere 2% manage to obtain Series A funding.

Adrija Agarwal, the founder of Sattva Ventures, attributes the flourishing startup ecosystem in Tier-II and Tier-III cities to technological advancements, making it easier for businesses to enter smaller markets. Agarwal notes the significant impact of social media, which has leveled the playing field by enabling startups to reach wider audiences with minimal marketing expenses. Additionally, there is a noticeable cultural shift in these regions, where entrepreneurship is increasingly celebrated, partly influenced by the popularity of shows like Shark Tank.