Why startups should (or not) start from smaller cities

Since the launch of Startup India by the central government in January 2015, in an effort to boost the startup ecosystem, various states launched similar schemes announcing funds and sops for new companies.

The startup campaigns urged entrepreneurs to explore opportunities in different states, beyond the main metro cities of the country. Media reports also highlighted “why startups should start businesses from small cities”.

But far from the government campaigns and media stories, the ground reality is completely different.

Though there are some benefits for startups in small cities, they have to meet with some unexpected challenges, which can be as trivial as getting suitable infrastructure.

Not a good idea

In June 2015, Aishwarya Jaiswal founded an on-demand hyperlocal delivery service for grocery and household items in Lucknow, called Gharbaithay.com.

The startup worked on the Just in Time (JIT) model, where customers could order goods over the phone, website, and WhatsApp.

Within three months of the launch, the startup was offering services in various areas of the city and clicking 12-15 orders a day with an average order value of Rs 1,000.

During market research, Aishwarya estimated the size of the grocery market in Lucknow to be around $1.5 billion and observed that the share of online was almost negligible. So, he decided to launch a business in the market which was still untapped.

However, the market didn’t respond as expected and he saw his sales stuck after a some point of time. In another three months, he had to shut the business.

“The market is not ready in tier II and III cities for hyperlocal services such as grocery delivery and home-services,” said Jaiswal.

He explained that in metros, there’s a large millennial working population with high purchasing power, hence they are more likely to avail of such hyperlocal services than people from non-metro cities.

Sumit Yadav, vice-president of Jharkhand Innovation Lab, a government-backed platform for startups, revealed that he observed startups grappling with the challenge of societal acceptance.

“Many potential ideas often get diluted as the target market in small cities rejects it or is not even ready to try it,” said Yadav.

He added that the culture of the startup ecosystem is not developed yet, as there are still issues of infrastructure, capital and market growth in small cities.

But not a bad idea either...

Amitesh Anand, who runs a business and management consulting firm called 36Pi from Ranchi (the capital of Jharkhand), said that a tier II city such as Ranchi is one of the best places to run a startup like his.

His firm helps startups as well as various kinds of businesses with customer engagement, conceptualising sales, marketing strategy, digital strategy, market expansion, digital transformation and many other processes. Headquartered in Ranchi, 36Pi has expanded its business till Dubai and plans to open an office in the UK.

“For businesses like ours, this city is the perfect place. There’s no dearth of facilities here. We have reputed colleges from where we can hire a pool of talent, air connectivity from Ranchi is good and infrastructure has developed in the past few years,” said Anand.

He explained that the other advantages in running a business from small cities are cost effectiveness, high profitability and ease of mind.

However, all these factors cannot be true for every tier II city in the country, some of which are grappling with something as basic as internet connectivity.

Anand pointed out that Patna (the capital of Bihar) is one such tier II city which lacks a conducive environment for startups.

Parveen Singhal, co-founder of Wittyfeed, which is based out of Indore, said: "It is all about creating a perception. I would like to believe that a startup can rise from any city, be it metros or non-metros. In fact, when we started out in 2014 from Indore, we just wanted to create awareness that there is a huge opportunity available in the city that can contribute to the startup ecosystem. In the last three years, we have been able to create a ripple, and move from a small team to a 120-member team.”

The startup is planning to raise series A funding in the next six months.

It’s still not easy

“The obvious benefits for startups based in tier-II and III cities are lower operational and human resource costs. Besides, the startup ecosystem of smaller cities is closely knit and is at easy disposal to every new entrant,” said vice-president, Chandigarh Angels Network.

He, however, added that on the flip side, challenges include lack of market opportunity within the city which imposes a high risk on scalability. Also, lack of exposure to a good mentor network in smaller cities may become a bottleneck to their growth story.

“At Chandigarh Angels Network, our emphasis is not just on adding more companies to our portfolio. We have rather been striving to provide network access, mentoring and handholding our portfolio startups to the best of our abilities,” Khurana said.

RS Bhatia, founder of Chandigarh-based Pumpkart, said the government should come forward by providing funds and skilled manpower to small city startups. Besides, investors should not shirk away from such startups and should come forward to support them.