Beyond Bengaluru and Mumbai: Capital Migration to Tier 2 & 3 cities

Introduction: monopoly of cities in start-up India

It is a matter of irony to talk about Bengaluru and not discuss start-ups; with approximately 39 start-ups per 1,00,000 people and nearly 22 new start-ups emerging each month  (source), the monopoly of cities like Bengaluru, Delhi NCR and Mumbai is undoubtedly hard to ignore.
New Delhi NCT has a start-up growth rate of 15.5%, 14 unicorns, and holds the 11th global ranking. Mumbai has an even better status quo than Delhi, with a 31.5% growth rate and 16 unicorns.

Why these cities have such higher growth rates, floods of capital, and investment and why their monopoly exists; is rather a known fact. It is not merely because these cities have hordes of talented minds, previously built infrastructure, or established networks. What truly takes these cities to a monopoly in the Indian start-up ecosystem is government support, talent density happening because of IIMs and IITs being established nearby, policies, and tax exemption. The outcome is clear: ~48% of India’s VC funding goes to Bengaluru alone (2023–24), 22% to Delhi-NCR, and 20% to Mumbai, leaving only ~10% (source) for the rest of the country. What comes with two or three successful start ups being established is a loop in itself, founders becoming angel investors, spin off founders; this whole creates a self sustaining start up machine. 

Why Is There a Lack of Diversity in Start-up India

While discussing why Tier-2 and Tier-3 cities do not receive enough limelight, we first need to define what Tier-2 and Tier-3 cities even mean. As per the RBI’s classification used for banking operations, Tier-II cities are those with a population of 50,000–99,999 people, and Tier-III cities have populations between 20,000 and 49,999 people.¹

In Startup India: Challenges Faced by Indian Youth in Tier 2 & 3 Cities, Dr Susan Reji Abraham writes five main reasons as to why such differences stay. One of the major reasons was the lack of infrastructure, poor transportation, lack of internet facilities, AI or cyber hubs, and just basic amenities. There are also not enough funding opportunities, and as discussed earlier, what happens in already established cities is that founders of unicorn ventures become angel investors, employees from successful start-ups resign to create their own, and so on. Funding therefore remains concentrated within metropolitan ecosystems . There also exists the issue of talent acquisition, difficulties in retaining and attracting talent from Tier-2 and Tier-3 cities, followed by cultural norms and regulatory hurdles.

Movement to tier 2-3 cities

 India has recently seen a rapid upward shift  in the start-up ecosystem.  India has emerged as the 3rd largest start-up ecosystem in the world due to its consistent efforts over the last few years.

53% of start-ups now come from Tier-2 and Tier-3 cities, and 51% of DPIIT start-up recognition certificates are from Tier-2/3 cities.
Education makes the highest contribution with 52%, followed by IT services, and Healthcare and Life Sciences.
Geographically, over 50% of women-led start-ups are based in Tier-2/3 cities, with growing rural integration through Self-Help Groups (SHGs). 49% of IT start-ups also come from Tier-2 and Tier-3 cities. (source)

A sharp comparison can be done to see the progress from the first Startup India state-wise report launched in 2018 to the recent national report of 2026. Comparing the performance of Tier-2 and Tier-3 cities, we notice that: (2018 report)

• In Rajasthan, in 2019, there were only 371 start-ups; in 2026 this became 1,030+.
• In Gujarat, there were 721 start-ups earlier  which now stand to 10,000+ registered.
• Increase in Assam startups from 106 to 280.
• Tamil Nadu grew from 709 to 20,000+ registered start-ups.
  

According to the Startup India Factbook 2023, the top-performing Tier-2 and Tier-3 cities in the list were Jaipur, Ghaziabad, Lucknow, Faridabad, and South-East Delhi.

While cities like Pune are now being called a “second HQ city”, their funding is generally centred in AI-led analytics, developer tools, and mobility tech. Jaipur is a place for companies that make software, financial technology, artificial intelligence platforms and things people use on the internet.

Other Tier-2 and Tier-3 cities that are worth mentioning are Chandigarh, Indore, Coimbatore, Guwahati, Bhubaneswar and Surat — rising in AI and tech landscapes, innovation hubs, agritech, fintech etc. (factbook)

End of Metropolitan Monopoly: Why Is This Happening

The infamous Forbes articles in 2017 stated that 90% of Indian start-ups are expected to fail within the first five years. Even today, many Indian start-ups in general continue to have a very low success rate.
Second, the cost of living in metropolitan cities is one major factor contributing to the rise of Tier-2 and Tier-3 cities.
Also, the problem of internet connectivity saw a dramatic improvement with the “Jio effect”, which democratised digital access across smaller cities and rural regions. These three things together answer why people might not want to migrate to big cities in order to start up.

Another catalyst to this shift is a series of government-powered schemes, policies, and actions.

1. Startup India Yatra has enabled annual recognition of outstanding start-ups and ecosystem enablers, along with a nationwide bootcamp series across Tier-II and Tier-III cities to promote inclusivity.
2. The DPIIT’s District Outreach Initiative promotes entrepreneurship in Tier-II, Tier-III, and rural regions through targeted interventions and collaborations with State/UT officials.
   Coverage of districts without DPIIT-recognised start-ups expanded from 80% (pre-April 2024) to over 95% in 2025, significantly strengthening inclusivity in the start-up ecosystem.
3. The Gen-Next Support for Innovative Start-ups, launched by MeitY in 2023, is designed to support start-ups in Tier-II and Tier-III cities, fostering collaboration among start-ups, the government, and corporates all together.

Conclusion: 

India inhibits considerable socio-economic and regional diversity, and there are differences in almost every aspect of our nation. The growth rate all over the country remains inconsistent and varies greatly in many cases, start-ups being no different. The capital gap between tier-wise cities has been a long journey, and is beginning to show signs of narrowing which now sees the sunlight of hope. Start-ups coming from non–Tier 1 cities and making almost half the total share of start-ups in India already shows the long journey that has been covered. According to public data available, funding in start-ups and employment generation in start-ups have all seen a rise. While differences exist, and many cities continue to be hubs of venture capital and innovation, it is necessary that through government policies and investors, India as a whole sees growth.

References

1. Startup India. (2026). National report (National-Report-15-01-26). Department for Promotion of Industry and Internal Trade (DPIIT), Government of India.
2. Abraham, S. R. (2025). Startup India: Challenges faced by Indian youth in Tier 2 & 3 cities. International Journal of Financial Management and Research.
3. Startup India. (2023). Startup India factbook: 100K recognitions. Department for Promotion of Industry and Internal Trade (DPIIT), Government of India.
4. Nair, A. (n.d.). Geographic and identity-based bias in early-stage venture capital: Implications for inclusive innovation in India.
5. Invest India. (2018). Startup India national report. Startup India, Government of India.

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