I was the victim of what I call “Chinese math.” At age 26, I took my life savings and left a good engineering job to buy a sports training franchise. I didn’t have enough assets to get a loan so I ended up bringing on a financial partner who took a significant ownership stake in the company. We did our research and decided to put our center right in the middle of a demographic area that had more than 84,000 target customers. We needed just under 800 customers a year to break even, so it seemed like this would be a piece of cake. After all, surely we could get just 1% of the 84,000 possible customers to sign up and make a small profit.
It wasn’t as easy as it sounded. A year later, my partner and I were losing tens of thousands of dollars a month, and had both stopped taking salaries from the company so we could continue to pay our other employees. That kind of strain takes a toll, and after many heated exchanges about what we should do, we decided to part ways. I sold him my share, at cost, in a series of installments.
Chinese math is rampant in any kind of new business. It usually goes something like this: There are 1 billion people in China, if we just get 1% of them to buy our widget, we will make $100 million dollars. This has a ton of room for error, so even if we don’t quite get 1%, we will still do well!
The unspoken assumption here is that somehow, because 1% “feels” like a small number, it is easy to obtain. Those of you who have run businesses know that nothing is further from the truth. The truth is, it is usually difficult to get even one customer, let alone 10, 100, 1000, or whatever real number is required to make that imaginary 1%.
With my first business, we were selling something new and, like most new products, people had to hear about it multiple times before they were open to buying. Like most new companies, it took over a year of trial and error before we got the pricing right, the messaging right, and figured out the best channels to market to our target customers. More than a year after I left, the company eventually did hit that 1% number, but it was far from easy.
Banks, angels, venture capitalists, and almost anyone else who will provide money to your business see Chinese math all the time. All too often, it is presented in the context that because it feels like a small number it should be easy to hit. Nothing in a startup company is ever easy. The financiers know this. When you go out to raise money, be optimistic about the opportunity, but realistic about how hard it is to get there. Avoid the Chinese math and not only are you more likely to get funding, but you will have set the right expectations for the first few years of your business.
Rob May is the CEO of Backupify. He started his career as a digital design engineer at Harris Corporation, where he worked on graphics processing chips for the Comanche helicopter. After Harris, Rob taught in the business school at the University of Louisville, then moved on to a business development position for a wireless software startup. Rob ran the popular business blog BusinessPundit.com for 5 years, before selling it in early 2008.