Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Up next in our Blogger Spotlight: Rob May and Business Pundit. He is the co-creator of the Carnival of the Capitalists, which was the second blog carnival. Rob has a BS in Electrical Engineering and an MBA. He has been an engineer, entrepreneur, small business owner, and currently runs the business development department of a wireless software company. He is also an adjunct professor at the University of Louisville. Rob has been blogging at businesspundit.com since early 2003.
Today’s focus commentary asks: Please Stop With Your Chinese Math
Last Wednesday I was sitting at the Louisville Venture Club
listening to a presentation by a software company. The presenter went on and on
about how huge the market was for his product, and how they "only needed to
get 3% of the market to…" Oh no. Not again. An entrepreneur friend of mine
sitting next to me turns and says "nice Chinese math." I nod. "Why didn’t
someone warn him?" I say.
I’ve written about this before, but it is so
damn pervasive among entrepreneurs maybe I need to be more thorough. Let’s start
by explaining the term (which comes in several forms, but ‘chinese math’ is most
common around here). Investors love companies that can a)stand on their own two
feet early so that they don’t require much more investment and b)have huge
market potential. So entrepreneurs try to convince investors that the market is
huge, and in doing so they somehow convince themselves (and in turn try to
convince investors) that it will be easy to reach cash flow breakeven because of
the market size. After all, they only need a small percentage of the market. The
name stems from the idea that there are a billion people in China, so if you
sell a $1 widget to just 1% of them that is $10 million in revenue. The
assumption that is incorrectly applied here is that 1% is easy to get because it
is a small number.
I fell victim to this myself a few years ago. Market
demographics told us we had over 5,000 potential clients within a few square
miles. Surely we could get 10% a year, and surely we would snag some from
outside this small area. It turns out that surely I was doing some Chinese math
because we didn’t get 500 clients anytime soon.
Chinese math doesn’t work
because small numbers aren’t necessarily related to easy success. Think about it
by removing the percentages. If you need 100 clients to break even for the year,
does it matter how large the potential market is? Probably not. If your
potential market is 10,000,000, does that make it easier to get 100 clients than
if your potential market was 200 clients? It depends. Probably not. First of
all, you have to have something of value (which many startups don’t) and you
have to be able to convince even one person why they need it (which many
startups can’t) or your market size is irrelevant. You won’t even get 1 client.
Secondly, it may be easier to market in the case where you need 100 out of 200
because it may be easier to identify your target audience if it is only 200
people. In that case you are probably in a niche that is easy to market to and
don’t just have to blanket your ads on the general public.
it this way, there are several billion people in the world you could potentially
date. And since you only need one to marry, it will be easy right (after all,
you only need .000000001% of that market) ? Only if you are willing to take any
random partner. Small percentages do not translate to easy results.
will impress investors soooooooo much more if you can pinpoint who will use your
product than if you use Chinese math. Don’t say 18-35 year old males with
incomes greater than $35K/year. That’s too general, but often that is where
analysis stops. Identify your early adopters and figure out what they do in
their free time. What do they read? What do they watch? What do they listen to?
Have you spoken to them? What have they said? Would they buy your
As part of my day job I deal with companies that are trying to be
super secretive as they develop the next killer product to take the country by
storm. They all think that, and honestly, you probably need some of that to be a
startup. But Chinese math can lead to marketing and financial complacency
because it lets you build these ideas up in your head that say your breakeven
point is easy to achieve. It isn’t. Stop thinking that. 98% of you will have to
bust your ass to hit breakeven.
Market numbers are important, and so is
breakeven analysis. Present these numbers as part of your plan, but don’t act
like the low percentages mean they will be easy to reach. If you are counting on
easy milestones for your success, you aren’t ready for entrepreneurship.