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.