The start-up story in India's non-metros appears to be a non-starter.

While most of the service start-ups did well in the metros, riding on the increasing volume of business, the true test of their business model is when they step out of their comfort zones and get into tier II and III markets in search of growth. Interestingly, not many have really managed to replicate their success story outside tier I cities. The recent failures by players like Zomato and Grofers only go to further substantiate the fact that start-ups have to rethink their go-to-market strategy when it comes to doing business in smaller cities across the country.

It all started as a one-off incident last year in October when online grocery retailer Localbanya resorted to lay-offs and shutting down operations, citing technical issues. Though Localbanya called it a temporary suspension, their operations have still not resumed. The wave has caught up with other players like TinyOwl, Foodpanda, Grofers and Zomato going into the lay-off mode.

Industry experts say this is picking momentum, and many more start-ups will join the bandwagon as they get into curbing cash-burn and seeking profitable growth. In terms of factors making start-ups aggressively look at rationalising operations, experts say, it has a lot to do with their business model, expansion plans, fund raising and direction from investors.

According to Harminder Sahni, managing director, Wazir Advisors, investors fund start-ups for growth. "To fulfill this, start-ups look to expand their offerings in newer markets. However, what would work in cities doesn't necessarily work the same way in tier II and III towns. This is because the buying and consumption behaviour is very different there. However, when it comes to customer acquisition costs, it is more or less the same, which then puts more pressure on the business of the start-up leading to such drastic steps by their respective management."

Leading restaurant discovery and food ordering app Zomato is the latest example of a start-up that has failed in generating the same amount of excitement in smaller Indian cities. While it made headlines laying off 300 employees in October 2015, the company management has now decided to shut down online ordering service in four Indian cities – Lucknow, Kochi, Indore and Coimbatore. Zomato joins e-commerce grocery delivery firm Grofers, which last week said it has shut down operations in nine cities including Ludhiana, Bhopal, Kochi, Coimbatore and Visakhapatnam over the span of 15 days.

Elucidating the reasons behind this move, Pankaj Chaddah, co-founder, Zomato, said in a company statement that the size of the market in these cities is small right now and is growing with time. "We will re-launch when the time is right," said Chaddah who is leading Zomato's online ordering business.

Chaddah was not reachable for clarifications on whether shutting down the online ordering operations was restricted to the four Indian cities only or there is a likelihood of other cities joining the fray as well in the coming months. According to the company statement, Zomato was unable to see significant increase in the online order volumes in these cities despite recent marketing efforts, including television ads.

Interestingly, the Grofers management had given exactly the same reason for shutting down operations in the nine cities. Albinder Dhindsa, co-founder of the company, had cited low acceptance of its services in the particular areas as the key reason for discontinuing operations. And this was despite running a series of marketing campaigns including television ads to test the markets and see if the volume picks up.

Elaborating on their reasons for pulling out online ordering offering, Zomato said the combined order volume in the four cities accounted for less than 2% of its total order volumes. "These smaller cities are not yet entirely ready for the online food ordering business, but once they are, Zomato will reconsider its strategy," the company said in a statement. Though online ordering operations have been shut down in these cities, Zomato will continue to offer its content including scanned menus to ensure foodies are able to find and order food as per their requirements.

With Grofers and Zomato confirming their inability to sustain operations in smaller cities, the development is a clear indication that a lot of cleaning up of operations is still left to be done by other players in order to streamline business and put it on a profitable growth path. Accordingly, both investors and entrepreneurs are spending more time on evaluating if the growth strategies are working right and that money is being made on every penny spent.

"Failures in smaller cities is certainly because those markets don't generate the kind of traction tier I cities do. So smaller volumes and higher costs make the business unviable. With profitability becoming crucial, investors are also regularly reviewing the business performance of their investee companies and taking a call on whether to continue with cash burn or cut losses by shutting down operations. And in a few other cases, the start-ups themselves rationalise operations as the model may not be working as envisaged," said Harish H V, partner, Grant Thornton.