Will funding winter freeze start-up ad spending in 2023?

Most of these brands have already started to cut their marketing budgets. According to TAM Media data, the indexed avg volume growth for new-age advertisers on TV fell by 11% in 2022 through October

by Sonam Saini
Published - February 07, 2023
5 minutes To Read
Will funding winter freeze start-up ad spending in 2023?

The outbreak of the Covid-19 pandemic in 2019 brought consumers online and categories such as edutech, fintech, crypto, e-gaming and e-commerce benefited greatly. As a result, some of these brands emerged as prominent advertisers in the last two years. But with start-up funding in India falling to a two-year low in the third quarter of CY22, media planners believe that brands in these categories are unlikely to spend significantly in FY 23. In fact, many advertisers have already begun to reduce budgets, say experts.

Ad spends in last three fiscal

For example, upGrad's marketing and advertising expenditures increased three times in the last three fiscals to Rs 393.68 crore in FY21-22 from Rs 95 crore in FY19-20. Similarly, Unacademy’s ad spends rose by 359.86% to Rs 519.64 crore in FY 21-22 from Rs 113 crore in FY19-20. For Phonepe, marketing and advertising expenditures declined 14.85% to Rs 866 crore in FY21-22 from Rs 1017 crore in FY 19-20. However, it increased by 61.87% to Rs 866 crore in FY21-22 from Rs 535 crore in FY20-21. 

According to Ankit Khirwal, Head of Marketing, upGrad, in 2022, the brand launched new sub-brands and new products, made acquisitions and tapped into new markets etc, and this  added to the company's overall marketing spends. “This growth momentum and marketing drive will continue in 2023 and we are likely to increase the spends by 40%,” said Khirwal. 

He shared that in 2022, upGrad’s digital media expenditure rose by 20%. “Our core TG is working professionals, typically in the age group of 21-35 years, who spend a lot of time on YouTube, social media, and other digital platforms. So, majority of our marketing budget was spent on this category, followed by performance marketing expenditures on Google search, which helped us reach the audience with the highest intent. Between March and December 2022, our marketing spends on television was marginal,” added Khirwal.

So, is it necessary for brands to spend such huge amounts on marketing even though they are incurring losses? 

Explains Ramsai Panchapakesan, SVP & National Head-Media Buying at Zenith, “The word ‘huge’ is highly subjective. Marketing expenditure is always proportional to sales revenue.”

“When a start-up begins its journey, it will invest and look for returns, which means that the marketing budget will be divided into two components. A certain percentage, which they refer to as investment, will continue to decrease. The skill marketing, where the return has been focused, which is similar to performance, will continue to increase depending on market responses and expanding audience size. So that requires additional money to keep doing it,” he said further.

A senior media planner, on the condition of anonymity, shared the possible reason for this continued spending on marketing by the start-ups. “One of the reasons for the increase in spending was that many of the companies, which were experiencing organic growth during Covid, began to see this growth flatten. As a result, significant spending was required to maintain the same level of growth,” he opined.

Impact on FY23 

Most of the advertisers have already started to cut their marketing budgets. According to TAM Media data, the indexed average volume growth for new-age advertisers/start-ups on TV fell by 11% in 2022 through October compared to 2021. While the majority of these new- age businesses prefer television as a medium for advertising, others experiment with marketing outreaches.

According to the media planner, ad spending from these new-age categories has declined in the second half of the year 2022. “There might be year-by-year growth, but in 2023, we don't see many of them increasing their ad spends. We are seeing most of them pulling out from big properties like IPL,” he suggested. 

The planner further added, “2023 is expected to be a slow year. It will be best if they can maintain ad spends level of 2022. Otherwise it will be a decline.” 

Panchapakesanhe predicted that spending will be almost similar to last year. "The investments were at peak last year and this is specific to the existing start-up companies. They all have now started focusing on performance. So, for every dollar that they spend on marketing, they are seeking a return. As a result, the marketing budget will be on a tightrope, with the emphasis entirely on performance.”

What can brands do?

Dinesh Singh Rathore, CEO of Madison Omega, suggested that these companies will have to determine their strengths, areas of acceptance, and what works for them. “They need to find out which part of the investment provides the best return on investment?”

"Investments in performance vs. branding cannot be done simultaneously. There must be a fine balance, and one cannot chase only performance," he explained.

Experts say it's difficult to predict how long the funding slowdown will last, but businesses are being cautious and have cut back on spending.

"The strategy being followed by most of these companies is to reduce anything that increases the burn, which means a reduction in top-of-funnel awareness campaigns and a focus on performance campaigns," said an industry observer.