Unveiling the Untapped Potential of Tier 2 and Tier 3 Cities in India

Discovering the Hidden Gems: Building Businesses for Bharat

Bertelsmann’s Conviction lies in Building Big, Building Better Businesses. We at BII, continue to be long-term investors, driven by strong conviction, making a fundamental commitment to India, as well as the ecosystem, to build businesses for the next 100 years.

India's startup ecosystem is flourishing, with statistics showcasing rapid growth and venture capitalists expressing a bullish outlook on scalable solutions. India's consumption growth has outpaced peers over the last five years and is expected to continue its upward trajectory, driven by a burgeoning middle-class population.

• Given the potential in rural Bharat, the next wave of disruption is expected to come from daring entrepreneurs catering to the needs of this aspirational rural segment.
• Notably, 10 large public companies generate nearly 49% of their revenue (over $35 billion) from rural areas by adopting a rural-first business model.
• By early 2023, more than 50 startups building for Bharat had raised $6.7 billion in funding.

The consumer spending power in India's Tier 2 and Tier 3 cities is impressive, representing three times that of the top 60 cities. Rural India's per capita income (PCI) is expected to grow 4.3 times between 2019 and 2030, compared to 3.5 times in urban India. Moreover, these regions contribute to more than half of India's GDP, underscoring their economic significance.

Building for Bharat: What Does It Mean?

C.K. Prahalad, the noted management guru, emphasized the importance of viewing the poor not as victims but as resilient and creative entrepreneurs and value-demanding consumers.

"Building for Bharat" refers to the strategic focus on creating solutions for India's Tier 2 and Tier 3 cities and rural areas. These regions, often overlooked, represent a vast and largely untapped consumer base.

1. According to the 2011 Census of India, 81% of India's population resides in urban towns with fewer than 250,000 people and rural villages.
2. These areas, known as Tier 3+ towns, house over a billion people, presenting digital players with a substantial potential audience.
3. In 2022, three out of five new e-commerce consumers came from these Tier 3+ towns. The trend of rapid digital adoption is expected to continue, with rural internet users projected to reach 480 million by 2025.

As per a report, the top 30% of rural households in India will exhibit an annual spend of approximately $540 billion by 2030. This segment, accounting for 52% of rural consumption, represents an increasingly aspirational market.

Rural India, with about $500 billion of annual consumption expenditure from over 915 million people, is a large consumer market. This spending is highly concentrated, with the top 30% of households driving a significant portion of the consumption.

The availability of budget smartphones and affordable mobile data, along with government initiatives like Digital India, have accelerated internet adoption. Nielsen’s Bharat 2.0 Study highlights a significant increase in female active internet users across rural India and a general willingness to adopt technology quickly.

Modernization and Digital Adoption in Rural India

Rural India is undergoing significant modernization in terms of both digital and physical infrastructure.

• Internet penetration is high, reaching 350 million users, and 82% of villages are now accessible by road.
• Rural consumers are increasingly exposed to urban brands and products through online content consumption via social media and OTT platforms, suggesting that e-commerce adoption in rural India is poised to follow the boom seen in Tier 3 cities.

Understanding the rural consumer deeply is often a challenge. This high-trust community is both aspirational and time-rich. Founders must remain intensely focused on their customers and learn the unique nuances of this audience to fully comprehend and address their pain points.

The Non-Metro Consumer: A New Frontier

Solutions for the non-metro consumer often originate from the rural regions, fuelled by a rich pool of local talent. Government investments in technical education and infrastructure have created a workforce ready to contribute to India's growth story. Internet penetration in these areas has surged, with 399 million rural internet users driving materialistic consumerism and an eagerness to spend. This presents a golden opportunity for businesses looking to expand their consumer base.

Non-metro consumers now have significant disposable income and demand innovation from businesses that address their unique challenges. Established giants may struggle to keep up with this fast-evolving market, creating opportunities for innovative companies to disrupt the status quo and emerge as sector leaders. This classic David versus Goliath scenario excites investors, who seek unique, difficult-to-duplicate products with strong customer appeal, proprietary ingredients, and robust R&D that deliver customer delight.

India's Growth Story: A Venture Capital Perspective

BII has consistently emphasized its vision of building big and better businesses. It continues to back emerging, mission-driven, sustainable enterprises through long-term strategic collaborations. The prime example of BII’s ‘build big, build better’ vision is its investment in startups that focus on the Middle Bharat population, ‘The Next Billion’ consumers.

BII-backed startups like Rupeek , Lendingkart are committed to serving this customer segment. AgroStar and Bijak , BII-backed startups, have been recently recognized in the Forbes Asia ‘100 Startups to Watch’ list in 2022.

The massive wealth creation in India has led to substantial investments in venture capital, attracting funds from various regions. This influx of capital is available to resilient and flexible entrepreneurs who understand their consumers and the problems they face. These leaders, often seasoned entrepreneurs or part of founding teams, possess the necessary DNA, skills, and networks to drive their businesses from inception to success.

At BII, we go beyond mere investment; we actively build and scale companies while ensuring their long-term sustainability. We are very pleased to be more than doubling our investment under the new Bertelsmann Boost program. Based on our increased allocation of USD 500 million, we expect to make six to eight new investments a year for the next five years.

While many investors focus on early-stage startups, we specialize in supporting their growth journeys from Series B to D. This steadfast commitment to fostering growth and sustainability sets us apart in the dynamic landscape of the Indian startup ecosystem.

Today, the overall investing ecosystem focus is shifting towards uncovering the immense potential in Tier 2 and Tier 3 cities. The category leaders of tomorrow will likely emerge from those who address the challenges of Bharat's burgeoning market landscape. The passion of entrepreneurs and their teams in addressing significant issues in India and devising innovative solutions is commendable, and this potential is what we, as investors, are keen to back.