Reasons Why Entrepreneurs do not Sell their Inactive Startups

Entrepreneurship was something people were averse to pursue some 15 years back in India. But now the scenario has completely changed and it has become the order of the day. After completing graduation, some students prefer to work on their own startups to lucrative corporate jobs. At the same time, a section of people working in MNCs are also starting their own ventures, leaving high paid corporate jobs. But not all of them ace the test of entrepreneurship.

Statistics say that in India 80% of the startups do not succeed and they become inactive over time. These startups could be at different stages, with some of them hardly completed 1 year and some with 3-4 years running. Some entrepreneurs usually want to sell off their startup and others do not do anything about it. But the products/services they have developed might be of use to some other startup/ company (these may even include website, mobile app, customer database etc.). Even if they are sure of getting some return on their investment, many entrepreneurs do not sell their startups (that are almost at the verge of failure) due to several reasons.

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1. Young Entrepreneurs do not give up easily

Many startups are usually founded by young entrepreneurs. When they see that their startup is not working even after serious efforts, they do not give up easily due to their never give up attitude. They also have an emotional attachment to the startup.  But due to family pressures or other reasons, they join in a corporate job leaving the startup inactive. At this stage even if some company/investor approaches them, they do not sell it. Rather, they prefer to rework on their startup at a later point of time. Also, when they see high valuations of some successful startups, they think that their startups also have such potential to reach in the future and feel that they are losing out on that income.

2. Exit is like an Insult

Unlike acquisition which many a times is a successful Exit; exit due to failure of a startup is not a good thing to digest for many. Some Entrepreneurs take the failure of startup too seriously and blame themselves, which may not be the case always as there may be several external factors too. So they prefer not to sell the failed startup just to make sure the news of the failure doesn’t become public.  At times, the ego factor also makes them not to reveal about the startup.

3. Loss of Business

When the startup is already facing problems with limited sales and less clientele, the news of exit can lead to loss of customers to competitors making the situation even worse. So entrepreneurs do not discuss about their exit and keep it as a secret.

4. Legal & Tax issues

Legal framework & Tax payment structure are very complex in our country and some entrepreneurs do not know about the rules and taxes that apply to SMEs/ Startups. In the process of selling the startup, when they go for due-diligence, there is a need to comply with legal & tax structure that may invite some trouble. So they drop of idea of selling startup itself.

5. Unwilling to spend on Commission Charges 

Failed/ Inactive startups are like a piece of obsolete furniture in the house. People do not like to spend extra amount to get rid off of it. If the startups are started by undergrads or people with few years of work experience, they do not like to shell out extra amount to sell off their startup as they usually do not have source of income.

6. Time & Effort required to Sell Startup

Selling a company in that case even a startup in India is a long and tedious process and demands some time and effort from entrepreneurs. The process of due-diligence itself requires 2-3 months. So entrepreneurs prefer to invest that valuable time in another startup rather than selling the inactive startups.

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7. Struck at Valuation 

Unlike established companies, there are no standard procedures for Startups valuation (sometimes due to its intangible nature). The sellers usually quote very high figures and often quote “high future potential” of the startup as the reason. But on the other hand buyers negotiate based on the past financials. Due to the huge mismatch in the asking price between the two, the sale process gets struck at valuation. This happens even in case of established businesses where there are standard procedures or methods like discounted cash flow to carry out business valuation.  Many times the startups are valued at a figure that is mutually agreed by buyers and sellers.

About the Author: Priya Bhagat is co-founder of IndiaBizForSale.com that provides a “Premium Discovery Platform to Buy and Sell Businesses in India” where a company is seriously planning to EXIT from the business or looking for a STRATEGIC INVESTOR for the growth of business or looking to expand via ACQUISITION of another business.

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