Tier-2 cities funding: Local investors warm up to next-door businesses hungry for capital

Vipul Paliwal, a second-generation entrepreneur from Kota, Rajasthan, returned to India after completing his education at the London School of Economics to scale his family business of limestone mining and manufacturing. He, however, wanted to venture beyond traditional boundaries, leading him to explore angel investing.

“The aspiration was not just financial returns but access to innovative business ideas that will complement and diversify my existing business,” said Paliwal, who started with just Rs 5 lakh. His investment portfolio now includes an agritech startup in Kota, a tech company addressing student housing in the town known as the coaching capital of India, and an electric vehicle firm.

Aditya Bhoopalam, who founded an insurance brokerage firm in Bengaluru by taking cues from the startup founders he met during his previous job as a private banker at Morgan Stanley, said he is seeing increasing efforts to build an ecosystem of investors and startups in his hometown of Shivamogga in Karnataka.

Many wealthy people from small cities and towns like Kota and Shivamogga are keen to support startups in their hometowns. According to data from Tracxn accessed by ET, startups in Kota secured $4.3 million in equity funding in 2024. Venture capitalists told ET that individuals are interested in startups solving hyperlocal problems while aiming to scale their solutions and give back to the communities they come from.

“Two major shifts are happening. First, the startup ecosystem is no longer limited to tier-I cities: it’s expanding across states. Second, early angel investments are yielding great returns, encouraging more people to invest in startups. This is no longer restricted to individuals who are already familiar with VC funds or investments,” said Madan Padaki, founder of social tech enterprise 1Bridge and president of TiE-Bengaluru.

The South Indian cities of Mangaluru, Mysuru, Hubballi and Coimbatore are becoming key hubs for this trend, he said. “In many cases, it’s old money being reinvested in new-age businesses.”

Some of these investors are already reaping in big returns.

Paliwal, the Kota investor, said he has so far exited two businesses with returns of six times and 10 times. Paliwal, who “didn’t want to limit myself to the family business”, recently also partnered with the agritech startup in his portfolio to set up farms.

Small cities, big investments

Tier-II cities raised $930.7 million in 148 funding rounds in 2024. Noida led with $410.7 million, followed by Gurugram ($372.8 million), Thane ($56.3 million), Coimbatore ($24 million) and Jaipur ($13.3 million). The consumer sector attracted the largest share at $588.3 million, followed by retail at $332.9 million, show Tracxn data.

Vittal Ramakrishna, who founded private investment tech platform Nucelo and is helping build an investor ecosystem in towns, said average investments in non-metro cities range from Rs 2-3 lakh to Rs 1 crore.

“These amounts reflect the growing confidence of investors from these regions, who are increasingly willing to allocate 5-10% of their wealth to startups,” he explained.

Traditional investors are also moving away from the conservative methods of their ancestors.

“In smaller cities, wealth creation is a key motivator, but there’s also interest in accessing innovative solutions,” said Neeraj Tyagi, cofounder and CEO of We Founder Circle, a startup investors community.