From the outside looking in, starting and scaling a business doesn't look too challenging. When you consider that there are over 300 unicorns (private companies valued at over $1 Billion), it's easy to focus solely on the startups that have created massive and visible success.  

Success requires a blend of market conditions, vision, good decision-making, determination and luck. Over the course of my experiences as a student, observer and participant in entrepreneurship, I've realized that you don't get to control the outcomes. You only get to control the inputs: vision, decision-making and determination.

The input that is often most challenging is decision-making. The path to success is covered with potholes. You will make mistakes, and that's ok. Yet from my perspective, you only get to make so many mistakes. At some point the mistakes compile, and the aggregate of those mistakes can be too costly to overcome.

The reality is that finding success with tech startups is very difficult. To help make your path to the top easier, and more probable, consider these three mistakes that many entrepreneurs make and successful entrepreneurs avoid.

1. Raising Too Much Debt (Especially in the Early Stages)

Capital is the lifeblood of any business, especially a startup. The most common ways to fund a business are through equity or debt financing. Equity financing, from VCs or private investors, is unquestionably the tried and true path for capitalizing a startup.

A scan through the public funding history of current unicorns on Craft and Crunchbase shows that most of them raised equity in their early stages. WeWork, a company currently valued at over $40 Billion, raised over $6 Billion in equity financing before raising debt nine years after it was founded. Airbnb, another of the world's most valuable unicorns, didn't raise debt for seven years, relying instead on over $1 Billion in equity fundraising to that point.

While successful entrepreneurs follow the playbook and raise equity, bad entrepreneurs go a contrarian route and prioritize avoiding dilution over long-term liquidity and options. When one raises debt, they do it expecting that they can pay down the interest payments with cash flows, and in the process, avoid giving up precious equity.

This is risky since most startups aren't cash flow positive for a long time (if ever). At some point, it catches up to them. Further complicating the matter, future investors don't like to participate in equity rounds when startups have too much debt because their invested capital goes out the door to the creditors, instead of flowing into the business as operating capital.

While raising money without giving up equity is possible, follow the example that successful CEOs have set and focus on raising equity instead of debt, especially until you reach a point where you can identify a path to positive cash flows.

2. Not Raising Enough Money

Another takeaway from studying unicorns is that many of them raised significant sums of capital during the early stages of financing. Knowing full well that scaling quickly requires cash, successful CEOs raise more than enough money to keep their foot on the gas. They know that focusing on hiring, marketing, sales and adoption is more important than worrying about a little dilution.

Amateur CEOs, on the other hand, try to raise as little as possible to avoid dilution. They might be overly optimistic in terms of how adoption will go and the resources necessary to drive that adoption. When this happens, the short runway runs out and these founders must slow down and turn their attention to fundraising while a competing company captures market share and brand recognition.

You can see the risk in this decision: if you run out of money while your competitor is scaling fast, you actually miss out on the market opportunity and the value of the equity you tried to preserve goes down.

It's common sense to conclude that it's better to own a lower percentage of a much bigger number than own a bigger percentage of zero.

3. Not Knowing When to Exit

It's easy to look back with hindsight and determine the optimal moment to sell a startup. For as many people that admire the founders of YouTube for their success, you are likely to find critics that say the founders sold too early - despite selling to Google for $1.65 Billion in stock.

The CEOs of successful startups face a decision, sell the business or keep going. It's not easy because you must make a tough decision with limited information. Yet successful founders, and their board of directors, know when to exit. They know that nothing lasts forever, and they don't let emotion get the best of them. They know taking a good deal is better than no deal.

On the other hand, bad CEOs hold out for too long. Perhaps they're overly optimistic (or delusional) about the potential, or they allow a sense of entitlement to block their better judgment. Either way, declining a good exit puts them at risk of watching the market pass them by. Sometimes this risk is overblown, and a better exit awaits them. In other cases, they wait too long and their chances for an exit decline - along with value of any potential deal. 

There is another great saying: pigs get fat and hogs get slaughtered. Whether they're a unicorn looking at ten figures, or a mobile app looking at a term sheet for $5 Million, a smart entrepreneur knows a good deal when they see one, and they take advantage of it.

Final Word

Reaching unicorn status is one of the rarest accomplishments in business. And while we all won't be the CEOs of a unicorn, we can all learn from the playbook they leave behind.

Success is a combination of doing the right things and avoiding the bad mistakes that doom startups. If you aspire to reach the same level, become a student of startups and study how great CEOs, and their teams, created that level of success. Equally as important, study up on the mistakes that other entrepreneurs make that keep them from success.

Published on: Mar 28, 2019
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.