startup expenses: Startups talk up funding winter, but loosen their purse strings

Startup circles may be abuzz with talk of reducing operational, promotional and workforce expenses amid a severe ‘funding winter,’ but some of the country’s top internet firms increased their spending during fiscal 2023, an analysis by ET shows.
Financials of 11 of the largest online companies — both public and private — present a mixed picture. While some managed to bring down costs, most others stepped up expenditure, either to gain competitive advantage or boost growth numbers.

Fintech majors Paytm and Policybazaar parent PB Fintech — both of which are publicly listed — saw employee and marketing costs rise by 25-50% during FY23.

Paytm spent 55% more, at Rs 3,778 crore, on its employees in FY23, while PB Fintech spent Rs 1,539 crore, from Rs 1,255 crore a year prior. Paytm’s marketing expenses went up 26% to Rs 1,026 crore while for PB Fintech, they rose to Rs 1,357 crore.

On the consumer internet side, expenses shot up for most of the major companies. Ecommerce behemoth Flipkart saw its marketing costs cross Rs 2,400 crore in FY23, up 24% from Rs 1,946 crore in FY22. The numbers pertain to the company’s marketplace arm, Flipkart Internet.

“Startups require continuous investments in marketing, technology, and in hiring people with specific skill sets. At the same time, they also course correct on the investments made in other endeavours that have not found the right market fit,” said Rohan Lakhaiyar, partner, Grant Thornton Bharat. “Therefore, the net effect results in no significant cost reduction for the entity.”

Horizontal omnichannel retailers such as Nykaa, Mamaearth parent Honasa Consumer and FirstCry also saw both employee expenses and marketing costs rise anywhere between 23% to 55% during FY23.

Nykaa’s marketing bill rose by 23% to Rs 591 crore and employee costs by 51% to Rs 492 crore. For FirstCry, expenses on marketing came in 54% higher, at Rs 416 crore, while that on employees zoomed 65% to Rs 408 crore. Mamaearth’s employee expenses doubled and its marketing spend increased 35% between FY22 and FY23.

Also read | Advertisements get cash counters ringing at quick commerce and food delivery companies

Definition of expansion

The mentality of growth-at-all-costs went on the backburner for the overall startup ecosystem in 2023.

Interest rate hikes by central banks across the world starting early 2022 rendered capital scarce for growth- and late-stage companies, making it imperative for them to control outflow of cash.

“But for some sectors, the dynamics were different. Lack of cheap money meant that players in the leadership position were at an advantage,” a Gurgaon-based unicorn founder told ET, on the condition of anonymity. “There are some businesses — like ecommerce or used car sales — that will be on a growth trajectory for the next 20 years. So, these cycles don’t have much impact, except to the extent that a company should have runway till the next fundraise.”

The founder of another major Bengaluru-based fintech startup told ET that most of his peers are expanding product lines and will, hence, need to invest in fresh talent. He, however, also pointed to an overall sanity in salary expectations. “My Esop costs and salary expenses will be high in the current fiscal as well, but I am hopeful it will stabilise by FY25,” he said.

Different strokes

However, some startups stood out. Food delivery major Zomato managed to reduce employee costs in the previous fiscal, while keeping advertising and promotional expenses flat. Used cars startup Cars24 and edtech platform Unacademy reined in both marketing and staff costs in the range of 13-33%.

In the case of Walmart-backed PhonePe and Tiger Global-backed Slice, advertising expenses were controlled but employee costs shot up significantly in the period under review. For Slice, employee costs rocketed 192% year-on-year to Rs 287 crore. At PhonePe, the same almost doubled to Rs 3,000 crore from around Rs 1,700 crore a year ago.

However, data from the earnings reported for the first half of FY24 showed that listed companies became more prudent with expenditure on marketing and advertising.

Additionally, layoffs in the startup ecosystem continued through 2023 and into 2024. ET wrote on December 25 that Paytm is laying off around 1,000 employees across multiple verticals to curtail expenses by 10-15%.

Also read | 28,000 and counting: That’s the 2023 layoff data from startup land

During the analyst call after the September quarter earnings, Paytm chief financial officer Madhur Deora had said, “We have put up a lot of controls on all of our other indirect costs, such as (on) people, marketing, tech. While we’ll continue to invest in marketing, sales and other select areas, we believe this discipline is really going to pay off in terms of growth in operating leverage and growth in Ebitda over time.”

Similarly, Nykaa chief executive Falguni Nayar had also indicated during the July-September earnings call that measures were being taken to control expenses. “We worked towards improving marketing costs over the last few quarters. But right now, you can see we do believe that we do need to create and build a market… overall, we do not see a huge need to spend too much,” Nayar had said.

As ecommerce companies face macroeconomic headwinds from softening discretionary spends by consumers in light of rising interest rates, realignment of costs — including on new initiatives — becomes a key strategy to improve cash flows.

The pullback that began in the previous fiscal year has intensified in FY24.

Most of the cost reductions by way of hiring freezes, layoffs and reduced marketing costs came from venture-backed companies with a limited cash runway. Those with enough cash or deep-pocketed parent companies were largely able to withstand macroeconomic pressures.