The entrepreneur who uses Chinese math states some variation of the following: There are 1.5 billion Chinese. Half are men. One-third of that half fit within our age demographics. If we capture 10 percent of that market, we have 25 million customers in China. We're rich.
So the business plan is validated in the entrepreneur's mind because of simple math and even simpler -- but faulty -- logic.
Chinese math is not restricted to projected sales in China. Virtually everyone in the capital sector has come across the argument that the market is X millions or billions; if we only get 3 percent of that market, sales will be $Y.
But how does that math work when there are 100 competitors pursuing that same 3 percent of the market? Three hundred percent isn't possible.
To make real math work, you must know your market's potential size and what penetration you will feasibly be able to make into that market. Will people buy your product or service? Is there market "pain" that you are solving at a cost less than the pain? What competition do you have? And, to steal a line from a local venture capitalist, 'If there's no competition, is it because there is no real market?'
You also need to know what will drive your sales. Do you need a large sales force or a large marketing budget?
It makes sense to first find out if people will spend money for what you have to offer. You might think you have a killer app or product, but so did Flooz, and Flooz had Whoopi Goldberg to pitch its Internet money product. Chinese math said it would work -- a huge North American market, a new, booming technology in the Internet to serve and a clever idea backed by a big pocketbook to spend on marketing.
It didn't work.
Instead of Chinese math, use real numbers to determine what will drive your sales. And figure out what you must do to sell your product. Most capital sources are more interested in how you will achieve your first dollar of sales than your 1 millionth.
There are wonderful Chinese physicists and mathematicians, and none use Chinese math. You shouldn't, either.
Erwin Bruder (email@example.com) is president of The Gordian Organization. Reach him at (216) 292-2271.