Startup funding winter: Will AdEx face the heat?

The decline in private equity (PE) and venture capitalist (VC) funding has forced Indian startups to cut down expenditure in a bid to conserve cash. As the funding tap dries up, the advertising spends fuelled by these startups might also see an impact. The startup funding winter has the potential to impact the overall AdEx growth if the funding crunch lasts longer than anticipated.

Most media professionals believe that the impact on AdEx growth will be marginal as startups will continue to advertise in order to grow their market share. Experts also say that startups will optimise their ad spending with performance marketing taking precedence over brand building. Share of voice is a marketing metric that allows brands to measure the market that their brand owns.

Advertising, experts say, has played a key role in the growth of most consumer-facing tech companies. They further stated that most mature startups will have to invest in advertising for getting their share of the voice in the market.

Concurring with this view, DDB Mudra Group Country Head & Managing Partner – Integrated Media Rammohan Sundaram stated, "Look, most consumer tech start-ups are in for the long haul, and barring one or two, raising money for the rest of them is not going to be an issue given the amount of traction and business progression that these start-ups have already seen. So I don’t think there will be any reduction in their spends."

In the same breath, he added that new advertisers won’t be visible due to a lack of funding. He, however, pointed out that established tech brands like Amazon and Flipkart will continue to spend on advertising to bring the next 300 million customers to e-commerce platforms.

"If you look at the demand mix, currently all the start-ups or the ones who have already been there for two decades… like an Amazon or Flipkart are not looking to advertise to capture the imagination of the existing 200M transacting audience, they advertise to reach out to the next 300M who invariably come from tier 2 and 3 towns of India and to keep them engaged, these brands will continue to spend though you will see a possible plateauing of spends in the next two years," he added.

He also said that the funding crunch is being faced by few startups and therefore there is no cause for concern. "I think this is limited to just a few and not all, wherever there is a clear growth on the pegged business models you will see them continuing to spend as much as what they have been doing."

Echoing similar sentiments, Ramsai Panchapakesan, SVP & National Head - Integrated Media Buying at Zenith - The ROI Agency, said that the AdEx will continue to gain momentum as far as spending by startups is concerned.

"In 2021, the overall AdEx was Rs 70,000-73,000 crores. Startups have contributed as much as Rs 8500 crore to the overall AdEx which is more than 11% of the total spending. This Rs 8500 crore will become Rs 10,000 crore as the AdEx is expected to reach Rs 94,000 crore. However, the contribution of startups to overall AdEx will see a dip in percentage terms since other categories are expected to up the ante this year," Ramsai said.

He also stated that startups, unlike traditional businesses, need quick results as that will help them to raise more funding. Quick results, he added, are only possible if the brand is aggressively marketing itself. "They need to show their presence, and popularity among consumers to those venture capitalists to attract funds. They need to be in the communication space. If they go away from the communication space they will lose popularity and it might also have an adverse impact on their performance," he averred.

Ramsai believes that the funding winter will force startups to optimise their spending. "They will have to see which part of the funnel is giving the return on investment. They will shift focus away from cash burners. Digital will continue to grow due to performance marketing."

A top official with a leading media network asserted that the funding winter will not have a major impact on advertising as the number of spenders and potential spenders are high. "Advertising by startups will not see any impact since the companies that are funding them want to see a bang for their buck," he stated.

According to GlobalData, a leading data and analytics company, domestic Indian startups have raised more than $12 billion during the first four months of 2022.

Performance marketing to become critical for startups

The revenue head of an OTT platform said that the impact on ad spends will be felt across the board because of the massive loss incurred by investment firms like Tiger Global and Softbank. "Startups know that funding is going to dry up or reduce big time so each of these startups who have even raised funding will try and conserve cash. They are trying to control the burn rate so it will definitely have an impact on the overall ad spends especially on big-ticket events. IPL was lucky since it sold the inventory before the startup winter came," he said.

The revenue head noted that it's a temporary lull and things will improve going forward. He also said that brand building will take a hit while performance marketing will gain importance. "Startups are being cautious but they still need to grow and stick to their business plans. They might adjust their forecast but they will continue to put in money. They will probably put less on branding and more on performance. Digital will not get impacted because there is a very clear way of measurement."

He feels that brand building will not take a backseat but it will be a tad bit reduced. "Brand building is critical for driving performance also. Why would you install an app which you have never heard of? The number of people doing it and the level at which they will be doing it will go down. Mass brands will continue to invest in brand building while startups will reduce it," he stated.

A senior digital media executive said that his company has not seen any impact on ad revenue due to the ongoing funding crisis. "We have not seen any impact so far and our numbers are holding steady. For us, JAS (July, August, September) is typically a big quarter and everything is going in the right direction. The number of companies is quite large and there has been a lot of fund inflow into the startup economy in the last two years. Some companies might step back but there are some companies who might step up the accelerator because this is the time to gain market share," the executive noted.

He also pointed out that there is no growth without advertising and most startups are in the growth phase. "Digital will gain since it is a more efficient medium. This is one reason why we have not seen a major impact. Other mediums like TV and print medium might see an impact due to cost-cutting by startups."