Startup funding in India is no longer a story that begins and ends in Bengaluru, and the numbers now confirm what many founders in smaller cities have known for years: the country’s investment geography is shifting fast.
The scale of the shift
Major hubs like Bengaluru, Hyderabad, Mumbai, and Delhi-NCR have led India’s startup revolution, but smaller cities are increasingly contributing to the momentum, with over 51% of startups now emerging from tier-2 and tier-3 cities. That is not a marginal change. It is a structural one.
Startups outside urban hubs recorded around 2,200 funding rounds and attracted approximately $3.2 billion in investment from 2016 to 2025. Seed funding in these regions expanded from $27 million in 2016 to $167 million in 2025, showing consistent growth in early-stage startup formation engines.
India’s startup ecosystem hit a new record in FY 2025-26, with the government recognising over 55,200 new startups. This takes the total number of recognised startups to more than 2.23 lakh as of March 2026. Recognised startups now operate across every state and union territory. While Maharashtra, Karnataka, Uttar Pradesh, Delhi, and Gujarat continue to lead, tier-2 and tier-3 cities are increasingly becoming important centres of entrepreneurship.
Why tier-2 cities attract startup funding now
Cost is one clear driver. Startups in tier-2 cities operate with 30 to 60% lower burn rates compared to metro counterparts. Lower burn means longer runways, stronger unit economics, and a more attractive pitch to investors who now demand capital discipline.
Digital infrastructure has also changed the equation. Thanks to BharatNet, 4G expansion, and cheaper smartphones, mobile-first consumption has grown rapidly, and even tier-3 towns show UPI adoption rates over 75%. India now holds over 870 million internet users, with half of all new users coming from non-metro and smaller towns, fueled by affordable devices and data.
Additionally, the shift to remote work redefined how startups are built. Tier-2 city founders no longer need to move to Bengaluru, Delhi, or any other metro to attract talent, connect with investors, or raise funds. Established funds like Blume Ventures, Peak XV Partners, and Accel now actively source deals beyond metros, while over 250 active micro funds (under Rs 300 crore corpus) have formed specifically to capture this opportunity.
City stories: founders building from the ground up
The data points to specific cities making the biggest moves. Jaipur is widely regarded as one of India’s most mature tier-2 startup ecosystems, driven by an evolving state startup policy. Through the iStart Rajasthan programme, the state has registered over 7,100 startups, with Jaipur leading in SaaS, fintech, AI platforms, and consumer internet companies.
Jaipur’s rise is also fueled by talent retention. Many engineers who once moved to metros now choose to build or join startups locally, enabling AI-first companies to scale with lower burn rates.
In Kerala, momentum has been even sharper. Kerala’s startup funding in the first 9 months of 2025 rose to $14.7 million, an increase of approximately 147% from $6 million during the same period in 2024, according to Tracxn data. Kochi is emerging as a GCC and AI-led innovation hub. The presence of Infopark and a growing number of global capability centres has elevated the quality of AI, analytics, cybersecurity, and health tech startups, with an emphasis on sustainable product development and export-oriented software.
In Madhya Pradesh, agritech startups like Gramophone are helping farmers make better decisions. Indore’s reputation for cleanliness, a growing tech workforce, and state government support have made it a natural base for ventures focused on rural India.
Investor perspective on regional startup funding
The shift toward tier-2 startup ecosystems represents more than a geographic trend, it reflects a fundamental revaluation of where durable businesses are built. Founders in cities like Jaipur, Indore, and Kochi demonstrate stronger unit economics because their cost structures are leaner from day one. They are not burning capital to rent prestige; they are deploying it to solve real, underserved problems. As investors, we are seeing faster paths to product-market fit in these cities because founders are embedded in the markets they serve. The next phase of Indian venture capital will increasingly reward those who go where the problems actually are, not where the conferences are held.
Industry perspective, venture capital and startup investment professionals in India
Government policy as an accelerator of innovation
The government has accelerated startup formation through flagship schemes including the Fund of Funds for Startups, the Startup India Seed Fund Scheme, and the Credit Guarantee Scheme for Startups, offering financial support at different stages of the startup lifecycle.
Under the Fund of Funds for Startups, more than Rs 7,000 crore has been disbursed to over 135 Alternative Investment Funds. These funds have further invested over Rs 26,900 crore in more than 1,420 startups. A second fund with a corpus of Rs 10,000 crore has also been announced.
At the state level, Rajasthan’s iStart programme has turned Jaipur into a startup hub by offering funding, mentorship, and incubation from the seed stage. In Uttar Pradesh, the UP Startup Policy has spurred incubation centres in Kanpur, Meerut, and Prayagraj. Tamil Nadu’s Startup and Innovation Policy 2023 sets a goal of 15,000 startups by 2032, with focused efforts in Coimbatore, Madurai, and Tirunelveli.
One of the clearest examples of this strategic shift is Zoho. The SaaS company relocated its R&D operations from Chennai to Tenkasi, a small town in Tamil Nadu. This move was deeply strategic: by decentralising operations, Zoho reduced costs, accessed a stable talent pool, and made a meaningful contribution to local economic development.
What still needs to change
The opportunity is real, but honest analysis requires acknowledging the gaps. Tier-2 and tier-3 cities, which host about 45% of India’s registered startups, still receive less than 10% of venture capital investment. The concentration problem at the top of the funding funnel remains significant.
Access to early-stage capital remains a major challenge, as most venture capital and angel networks are still concentrated in metros. There is also a perception gap, with many investors still associating urban tech clusters with greater credibility. While smaller cities now produce skilled graduates, retaining top talent remains difficult. Many young professionals still move to bigger cities for better opportunities, making it hard for startups to build experienced teams locally.
Median round sizes in non-metro ecosystems have increased significantly, signalling a move toward conviction-led investment. However, investors are backing fewer startups with stronger execution visibility, resulting in a funding environment with rising capital depth but narrowing participation.
Startup funding is finding a new map
Startup funding in India is at a genuine inflection point. The success stories from tier-2 cities share common patterns: deep market understanding, capital-efficient operations, and a focus on real problems affecting large populations outside metros. These are exactly the qualities that a maturing investor base now values most.
The startup ecosystem in India is moving from a growth-at-all-costs phase to one focused on building robust companies. Profitability is becoming a competitive advantage. In this environment, tier-2 founders operating on lean budgets and solving locally embedded problems hold a structural edge.
Startup funding will continue to concentrate in metros for large, late-stage rounds. But the formation of India’s next generation of durable companies is happening in Jaipur, Kochi, Indore, Coimbatore, and dozens of other cities that the venture capital world is only beginning to take seriously. Founders who understand this shift, and investors who act on it early, will define India’s next decade of innovation.
Discover more about startup funding
- Startup India, Official Government Initiative Portal
- Tracxn Regional Startup Ecosystems Report, The Hans India
- How Tier-2 and Tier-3 Cities Are Driving India’s Startup Ecosystem
