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When meeting with startups, one often hears innocuous questions or observations. The interesting part is, the dilemmas entrepreneurs share are common across regions and geographies, cutting across languages and ethnicities.

Let me start with a few conversations that I’ve had with entrepreneurs. They say, “I have this great disruptive idea that I am kicked about and want to implement.” I respond with, “Okay, can you describe it to me?” And that’s where you usually start getting sketchy details. The entrepreneur’s inherent fear is, “If I share the idea, it could get copied and I would lose out.”

Interestingly, the communication, at times, is no different for an idea that the entrepreneur has beta-tested and now wants to scale up, for which he’s starting conversations with angels/mentors. Such fears are the same everywhere. The key lies in deciding whether you trust the person you are seeking advice from. If you don’t, why start a conversation? If you do, why hold back?

Another interesting incident: Two entrepreneur partners approached angels for funding and mentorship. They pitched to prove that they had a good initial breakthrough and achieved respectable volumes and sales numbers in a competitive market.

But when quizzed on their sales strategy or distribution network, they gave roundabout, generic responses like, “tapping into virgin markets” or “delighting customers with our approach.” The interest seems to be in generating an offer for funding, but how can one mentor an opaque franchise or offer an investment? The solution is to be prepared with details and have ground rules on what can be shared at what stage.

Now for the most difficult one: “I have great plans and I’m dead sure my enterprise will become extremely valuable in the future. I need mentorship, advice and/or capital, but I don’t want to shed equity at such an early stage of my startup, as I will be foregoing huge value if I did that.”

Interestingly, this question is not confined to startup entrepreneurs. During my banking career, I witnessed a similar question confronting owners of not only more mature companies, but even market cap giants. Everyone has an opinion on the equity value of an enterprise, more so the owner—and rightly so.

After all, it is her creation and she knows it best. But a dispassionate observer might  sim-plify the question for her by asking, “What do you find more valuable: owning 100 percent of $5 million, 80 percent of $8 million or 30 percent of $250 million?”

In my experience, this question leads to a basic self-debate: Is it better to own
more of less or less of more? Though arguable, I believe if you wish to scale up your business multifold, you’re confident of value creation, and you trust the equity partner, owning less of more is sensible.

The risk of taking a different approach is that the enterprise may remain modest-sized for longer than you bargained for, though you might still own more (even 100 percent) of a lesser enterprise. The opponents of the ‘less of more’ approach could argue that it is also about timing—and equity dilution can be timed to meet the objectives of the owners.

The sad news is that empirical evidence suggests that an extremely miniscule percentage succeed in timing dilution perfectly, while there are countless stories of great organizations sinking into oblivion trying to time (market) dilution.

So, what’s your pick—less or more?

The views expressed here are personal.

BHARAT BANKA  is the MD & CEO of Aditya Birla Private Equity.

©Entrepreneur June 2010

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