Funding winter freezes start-up ad spend

With VC funding drying up and pressure from investors to show profitability, start-ups are trimming advertising budgets.

Amongst a slew of cost-cutting measures, edtech startup Unacademy announced on Monday that it will discontinue its sponsorship of the Indian Premier League (IPL) from next year.

In an internal email, Unacademy co-founder and CEO Gaurav Munjal told employees that to turn cash flow positive, the company “must embrace frugality as a core value.”

The ongoing Russia-Ukraine war, interest rate hikes and inflation fears has made investors cautious on funding. A recent PwC India report titled, 'Startup Deals Tracker - Q2 CY22’ states that in the April-June quarter the total funding has declined by 40 per cent to USD 6.8 billion.

As startups face a harsh funding winter, many are taking the tough decision to cut down their expenditure on advertising and marketing.

An angel investor and a business and marketing strategist, Lloyd Mathias, says the focus has now shifted from basic consumer acquisition to business models. The investors are asking startups for profitability.

“The free flow of funding that was coming in the first phase has tightened up significantly. Apart from the inflation and the global crisis, another contributor here is the not so successful listing of these startups. The IPOs of Paytm, Nykaa, Zomato, Policy Bazaar, Cars24 have not been doing great. That has been quite a dampener,” says Mathias.

In the initial phase, the fund crunch led to a lot of layoffs. In the next phase the marketing spends are being trimmed. While these brands continue to advertise, they are expected to reprioritize their spends. “The big-ticket marketing spends is certainly going to be relooked at. The brands that did crazy spending is going to stop. Not all, for example, those which are profitable will continue,” he adds.

“The lack of funding is going to affect top funnel marketing. So we may not see big money being spent. Businesses that need to get traffic to their website need to spend, but it will be spent in such a way that it will be far more attributed to conversions and business metrics will become more prominent. When it comes to moments like this, a more profitable strategy will be to focus on harnessing traffic and conversions,” says Ashit Chakravarty, executive vice president- business, Dentsu Webchutney.

For some it is about aligning with the regulation. For example, startups dealing with cryptocurrency. But most of the other startups, which are in the game of acquisitions, are getting into the area of revenue maximisation and there they focus more on the bottom funnel,” says Jai Lala, CEO, Zenith.

“Brands who are in the acquisition and branding game will continue to invest in big properties. But where there is a revenue focus the big properties dont make sense and you need a more focussed approach. That's where they start looking for performance-oriented plans,” he adds.

Calling it a temporary phase, Mathias says, this could last for a year or two. “Let's assume the Russia- Ukraine war eases out. Or the oil prices get more stable. Then things will stabilise. In the longterm a lot of global investors are still bullish on India,” he says.

Bindu Balakrishnan, Country Head, India, DCMN, says the solution is not to scale back completely, but to find ways to grow sustainably both during and beyond the current turmoil.

“We’ve seen a lot of brands across verticals drawing back budgets. And given the current circumstances, it’s never been more important to think long-term and plan how your brand will navigate these headwinds. But that does not mean tightening your belt is the only way. After all, many companies have actually emerged from crises as winners. For example, Uber and Airbnb, were born out of the 2008 financial crisis. The startups that survive and thrive will be the ones that show sustainable business growth.”

During such crises, companies either invest heavily into performance marketing, or dial back its marketing completely. However, Balakrishnan advises these companies to ‘not go dark’. Unlike established brands, brand building is important for startups.

“Going dark can weaken consumer ‘bonding’ metrics. During recessions, media cost goes down, giving more opportunities to reach consumers at cheaper prices. Investing in ad spend brings long-term advantages including building customer loyalty,” she says.

Chakravarty is optimistic that brand building efforts will continue. “It is just that the volume and scale will differ at this time,” he adds.

There are concerns that it may impact the overall adex as well. In 2021, of the overall adex of around Rs 74,000 crore, startups contributed around 11 percent, as per industry estimates.

These startups invested big on the IPL this year. Brands like Dream11, Byju’s, CRED, Swiggy Instamart and Meesho were the sponsors on Star Sports. Even on Disney+Hotstar, 12 out of the 18 sponsors were startups. While Unacademy has declared that they will not be associating with the IPL next year, Chakravarty says that it will be a missed opportunity for brands.

“IPL attracts brands and businesses across and it is not merely restricted to startups. It is such a mega event, and now with the 10 teams, I don’t see brands shying away from it. For every brand that doesn’t advertise on it, it will be an opportunity for some other brand,” he says.