TWO DECADES AGO, a family crisis prompted brothers Amit and Anurag Jain to leave their lucrative careers behind in the U.S. and return home. Their father was battling cancer, and the brothers, alumni of the Indian Institute of Technology (IIT) Delhi, were determined to stay closer to their family in Jaipur.

The duo first set up GirnarSoft, an IT outsourcing company, in their garage. Soon, their passion for cars sparked the idea of CarDekho, India’s leading online car search platform, which started operations in 2008.

“Being born and raised here, the city offered a sense of stability, mental peace, and strong family support, which are invaluable in the unpredictable startup journey,” says Anurag Jain, co-founder and COO, CarDekho Group. However, beyond personal connection, “Jaipur [also] has a deep talent pool, especially of engineers and problem-solvers, who often migrate to metros due to lack of opportunities,” he adds. “We saw a chance to build a company that could tap into this talent pool. Building from a Tier II city also helped us keep operating costs low, giving us more runway to experiment, refine our models, and build strong fundamentals before expanding into larger markets.” In October 2021, CarDekho became the first unicorn to be based out of Jaipur with a valuation of $1.2 billion.

CarDekho is no longer a startup. But it remains an apt example of how unicorns can be built outside India’s established startup hubs like Bengaluru, Hyderabad, the Mumbai-Pune region, and Delhi-NCR. It illustrates the potential of Tier II and III cities as startup hubs of the future.

The trend is already visible. Of the 200,000-plus startups registered in India, around 50% are from Tier II and III cities. And while there are several success stories from small towns as well (for instance, Noida-based Physics Wallah was originally incorporated at Prayagraj, Uttar Pradesh), there are many more emerging from Tier II and III cities.

Sample this: Minimalist, a D2C skincare brand is from Jaipur; Swaayatt Robots, which famously demonstrated that a Mahindra Bolero can be converted into an autonomous, self-driving SUV, is from Bhopal; BNC Motors, which builds EV two-wheelers, is from Coimbatore; ChargeZone, one of India’s largest EV-charging network providers, is from Vadodara; drone manufacturing company Vaimanika Aerospace is Patna-based; while Genrobotics, the company revolutionising sewage cleaning through its Bandicoot robot, is based out of Thiruvananthapuram.

“India’s next phase of startup-led growth is no longer being scripted in its largest cities. It is unfolding across Tier II and III towns, where entrepreneurship is aligned with real economic demand, cost discipline, and long-term sustainability. What we are witnessing today is not a temporary spillover from saturated metros, but a structural rebalancing of where innovation originates and scales,” says Prem Barthasarathy, founder and managing partner, Pontaq, a U.K.-based, U.K.-India innovation fund. Nearly 60% of Pontaq’s portfolio companies originate from Tier II and III locations, including Bhubaneswar-based robotics company Coratia Technologies that specialises in underwater inspection services, and Coimbatore-based Goat Robotics, an autonomous mobile robot manufacturer that offers industrial robots and automation solutions for manufacturing industries.

Advantage Tier II

In January, The IndUS Entrepreneurs (TiE), a global network of entrepreneurs, business leaders, domain experts, and mentors consisting of 12,000 members in 63 chapters across 16 nations, organised the 10th edition of its flagship annual TiE Global Summit (TGS) in Jaipur. This was the first time it was happening in a Tier II city. The previous editions in India were in Delhi, Mumbai, and Bengaluru. Mahavir Pratap Sharma, convener, 10th TiE Global Summit, and general partner, Swishin Ventures, says the choice of location was symbolic of the promise Tier II cities hold. “The next wave of startups will come from Kochi, Jaipur, Chandigarh and Indore. Previously, Tier II startups used to migrate post Series A or Series B funding to raise follow-up rounds. That is no longer the case.”

CarDekho’s Jain agrees. “The belief that funding is only accessible from metro cities is outdated. We have always believed that internet companies can be built from anywhere. What investors back are strong fundamentals, sound execution, and the ability to scale.”

Interestingly, the opposite could be true, i.e., being in Tier II cities is actually an advantage for companies to attract funds. “We are able to manage our funding even from here,” says Vimal Govind M.K., co-founder and CEO, Genrobotics. “We are Series A funded, and now we are doing Series B, which is almost in the closing phase. I don’t think investors have any problem. In fact, they are more interested in you being in a Tier II city than in Tier I.”

According to Govind, Indian investors are value oriented, and see more value and growth in ventures based out of small towns. “In bigger cities, expenses are way too high and deeptech startups take time to make profits. Long gestation periods in metros mean more expenses and instead of spending more there, you can spend less and build a company in a city like Thiruvananthapuram, where there is abundant talent.”

Private investors may be flocking to small towns, but that has not stopped governments from facilitating financial assistance to budding startups. Central and state governments have their own funds and fund of fund initiatives. On February 14, the Union Cabinet approved the establishment of the Startup India Fund of Funds 2.0, with a total corpus of ₹10,000 crore for the purpose of mobilising venture capital for the startup ecosystem. Most states are doing their bit too.

Anoop Ambika, CEO, Kerala Startup Mission (KSUM), says the state government is looking to devise alternative financial instruments to support startups. “We are trying to bring in larger investors. Venture debt is something we have to work out. New forms of funding are emerging in the startup ecosystem.” In a first, KSUM is working with the Kerala diaspora in Dubai to create a feeder fund for investments.

Location agnostic

Mohit Yadav, co-founder, Minimalist, a leading Indian skincare brand focussed on science-backed and clean beauty, says an online-first business can be built from anywhere. “Once you have repeatable growth and clear product-market fit, geography stops being a constraint for hiring, fundraising, or partnerships. What matters more is staying consistent with your values, culture, and execution rhythm — and Jaipur supports that.”

Deeptech fund Speciale Invest’s founding partner Vishesh Rajaram agrees. “We invest in strong IP, strong founders, and large problem statements—and increasingly, talent is being distributed across India.” He also points out that “many deeptech founders prefer building from cities where they have access to labs, manufacturing partners, and engineering talent, while also benefiting from lower burn rates as in capital-intensive sectors, where cost advantage can materially extend runway”.

In other words, small-town locations may not be a disadvantage in themselves, but locations do matter for other reasons.

“Lucknow offers the rare combination of deep grassroot market access and a strong talent pool at a sustainable cost. Being close to large agrarian and consumption belts helps us build products with real on-ground relevance, while the city’s improving infrastructure and startup ecosystem allow us to scale without the pressures of metro saturation. For a company like Gramik, which works closely with rural and semi-urban India, Lucknow is not just a base… it’s a strategic advantage,” says founder and CEO Raj Yadav. Gramik specialises in tech-aided doorstep delivery of various agri input products and services to farmers.

Speciale’s Rajaram offers more insights into the choice and presence of sector-specific startups in cities beyond traditional hubs. “We are seeing strong momentum for manufacturing and industrial tech in Coimbatore. In Ahmedabad and Vadodara, it is chemicals, materials, and climate tech. Thiruvananthapuram is attracting space, electronics, and deeptech startups. Bhubaneswar is a promising Tier II and III startup hub for the electronics and semiconductor ecosystem, while Surat and Rajkot are for manufacturing and materials. These cities are not just cost-arbitrage stories — they are emerging as specialised innovation clusters.”

Pontaq’s Barthasarathy says, “Sectorally, founder activity from smaller cities is especially strong in agritech, healthtech, fintech solutions for MSMEs, manufacturing technology, logistics, climate solutions, and vernacular SaaS. “These sectors reflect local economic realities and unmet needs rather than imported startup templates. Ecosystems in cities such as Coimbatore, Indore, Jaipur, Kochi, Surat, Bhubaneswar, Vizag, Madurai, and Trichy are gaining depth, supported by strong educational institutions and established industrial clusters.”

A widening talent pool

The growing importance of Tier II cities as startup hubs also means more jobs. The recently-released Randstad Annual Salary Trends Report 2025-26 reveals an interesting trend — the rapid rise of Tier II cities as credible, high-paying talent hubs. The report points out that Tier II cities are witnessing a sharp surge in senior-level salaries, with top locations matching Tier I pay. The insights also point to the growing prominence of Kochi, Thiruvananthapuram, Thane, Surat, Jaipur, Vadodara, Bhopal, and Indore as future-ready Tier II locations, supported by infrastructure investments, progressive state policies, accelerated digital transformation, advanced manufacturing growth, and dedicated GCC and startup setups.

KSUM’s Ambika says the Kerala government is even trying to attract experienced IT/ITES professionals from other parts of the country to strengthen the “talent pool” within the state. “Of the 50 lakh ball-park IT/ITES professionals working in India, 15-20% are from the South. But we only have 2-3 lakh people staying in the state. The rest are outside. So we initiated a campaign called ‘Tirike’ (return), where if you are working outside Kerala, and you consider coming back, you can sign up with us.”

Genrobotics’ Govind feels talent pool and employee retention are the key reasons for his company to stick to its current location. “Funding is a one-time requirement, but human resources are more important. I cannot shift my company from Thiruvananthapuram for the simple reason that my human resources are settled in Trivandrum. Their families are with them, they have an ecosystem of their own. That human resources ecosystem is more than enough for me to run my organisation. I don’t need to go to another city to find talent.”

A promising future

India’s Tier II and III cities and their startup ecosystem received a big boost in Budget 2026, with the government reemphasising the role of such cities as engines of growth, innovation, and opportunities. Finance minister Nirmala Sitharaman, in her Budget speech, talked about the need to create modern infrastructure and basic amenities in such cities and the government’s plan to further amplify their potential to deliver the economic power of agglomerations by mapping city economic regions (CER), based on specific growth drivers. “An allocation of ₹5,000 crore per CER over five years is proposed for implementing their plans through a challenge mode with a reform-cum-results based financing mechanism,” Sitharaman had said.

On the government’s plans for CER, Speciale’s Rajaram says the narrative that India’s innovation economy is metro-led, is increasingly outdated. “Some of the most resilient and capital-efficient companies today are emerging from Tier II and III cities. The Budget’s focus on turning these regions into engines of growth is a recognition of what is already underway.”

The second decision of the government that can increase the number of startups across small towns and cities multifold in the coming days was a tweak in the definition of ‘startup’, which added cooperative societies as eligible entities, provided they fulfil other applicable criteria. “Multi-State Cooperative Societies registered under the Multi-State Cooperative Societies Act, 2002, as well as Cooperative Societies registered under State and Union Territory Cooperative Acts, are now eligible for startup recognition,” a commerce ministry notification said.

With support to develop necessary infrastructure and a window for cooperatives to enter the startup space, Tier II and III cities are certain to see further momentum in startup registrations. State-level initiatives like the ones in Rajasthan — Rising Rajasthan, along with signature platforms such as the TiE Global Summit and the World Economic Forum’s Global Shapers — will also help bring global thinking and best practices into the local ecosystem.

Indeed, the momentum is in favour of smaller cities that offer a more sustainable work-life balance. “Less time wasted in traffic, better daily living, and the same lifestyle benefits you’d expect from larger metros,” as Minimalist co-founder Yadav says, seem to be the mantra for India’s future startups.