Divided Startup Ecosystems

A few days back, the nation celebrated National Startup Day and Startup India Innovation Week. 10 years since I started my journey as an entrepreneur, the celebrations were bigger this year. The ecosystem has gotten bigger

And this is really exciting. It makes me hopeful for a better conducive environment for startups and businesses in India.

The Startup India website puts the number of recognized startups well over 89000 now. Recently came across a post by YourStory Media about startups in metros and non-metros with comparative data. The numbers are outdated, but the comparisons could be considered current.

Interestingly, there is almost the same number of startups from Metros and non-metros. The number of non-metro cities considered for this comparison is way more than the 8 metros viz, Delhi, Mumbai, Kolkatta, Chennai, Bangalore, Hyderabad, Ahmedabad, and Pune.

This is interesting. I hadn't realized the number of startups from non-metros was so large. It's a positive sign that the innovations and entrepreneurship ecosystems are growing beyond the Tier 1 Cities.

However, here is what the investment landscape looks like across metros and non-metros.

At first look, this is fantastic.

• Over 160 Billion USD was invested in 3 years.
• Close to 11500 deals across the startup ecosystem from 2019 to 2022.

But what stands out like a sore thumb is the allocation of deals to Non-Metro based startups.

94% of deals go to startups from 8 cities.

What's even more astounding is that:

Just 1.4% of funds are invested in non-metros.

Why are most deals and money spent as startup investments only in these 8 cities? Isn't this something for the entire startup ecosystem to think of?

The data significantly points to why there is the phenomenon of "Metro Migration of Startups". It has reached a point where most founders believe that they need to migrate from a Tier 2/3 city to a Tier 1 city to effectively raise funds. And this has long-term effects.

Here is what a City-lead from the Tier 2/3 Chapter of Headstart Network Foundation had to say as to "one major action/initiative they would like to take this year for their region":

Why does the Metro Migration of Startups need to be reduced?

Here are some clear effects of such a scenario in the long term for the startup, society, and the economy as a whole:

• A higher cost of operation for startups owing to higher wages, rents, and overall cost of living will eat into the bottom lines of any startup, resulting in more investments and the whole vicious circle of profitless growth at all costs.
• The founders of innovative startups are some of the most intelligent people in a community. With more and more migration of startups, it would lead to the concentration of not just wealth, but also innovation. Leaving lesser and lesser innovation in a big segment of the nation.
• The majority of India lives in Tier 2/3 cities. So if you can solve them, you can have a wider market to tap into. What works in Bangalore might not work in a Trichy. You are losing touch with your biggest market segment while migrating to Tier 1.
• The metros have already reached their limits in terms of infrastructure and space a decade back. It takes more time to travel within these cities than to fly into them from a nearby metro. More migration will add to this already challenging problem.

Although these pointers need more research and analysis, but could be considered as a starting point for discussions.

What would make the startups stay back?

Why should a startup stay back in a Tier 2/3 city? After all, businesses will and always have grazed for greener lands, literally.

This is where startup communities and the ecosystem as a whole need to work together. It's not something that is the responsibility of any one party alone.

What would make a startup stay back can be answered with what could be missing in a Tier 2/3 Startup Ecosystem:

• An active VC ecosystem: Most investments happen between people who are connected. Physical proximity influences connections, trust, and eventually conversions. The majority of the VC funds are concentrated in the metros and the concentration of funds dispersed or deals are just an extension of this.
• Leaders who can mentor: Everyone can see up to the point they have experienced or learned from an experienced person. It's always good to have more mentors who have been there done that in your region. Sure, the digital revolution has blurred geographies, but there is no better learning than having a coffee with someone who has cracked it. Plus the added advantage of knowing the ground realities.
• Success Stories: Inspirations from local success stories can drive more people to want to stay back. People have flocked to the Middle East or Western Hemisphere because they know someone in their locality who had made it there. Similarly, people have migrated to a Tier 1 city, because someone has made it. With more local success, more startups stay back.
• The Relevant & Right Talent: As a trickle-down effect of concentration of funds and higher growth companies in the metros, the quality talent is also concentrated in metros. As remote work is getting more accepted across the board, this is getting slightly distributed but is still not large enough to move the scales.

This is not an exhaustive list. There could be more things that are missing (or needed) for startups to stay back. This is where startup communities, governments, incubators, and enablers should try to work hand in hand to solve these pain points.

In conclusion, there does exist a stark divide between the different startup ecosystems in the country. The concentration of wealth and innovation might leave a big chunk of the country behind. As startups and small businesses are the driving force of the country, a more inclusive growth of startup ecosystems will pave the way for better economic growth for the country.

What do you think are the pulling factors for those 38k startups to start in tier 2/3? What are your thoughts?