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The Myth of “Chinese Math” is Fatal for Entrepreneurs

Have you heard of “Chinese math?”

It goes like this: “If we sell to 1% of all people in China, we’ll have 10 million customers.”

In most startup pitch decks, it’s “If we sell just 1% of this big market, we’ll have a billion dollar business!”

The math may be right, but most entrepreneurs (and investors) are on the wrong path to get there. And they don’t know it.

Most people are also confused about how big companies got to their first “1% of a big market” when they started out.

Amazon’s first billion was just online books. The first million customers of Apple’s iPhone were just the early fanboys (and fan girls) who would pay twice as much for a cool phone that wasn’t usable for calls yet. Starbucks with expensive coffee when almost nobody in the U.S. (outside Seattle) cared about quality coffee. Walmart with discount department stores in rural Arkansas.

When big companies started and grew fast, they didn’t go after the whole market and end up with 1%. They went after just 10% of the market and got 10% of that. 

Same 1% result in the end, but a very different path to become “big and successful” than everyone imagines.

Big companies get their first billion dollars in revenue in very small niches that took years to develop. As big as these companies are at super-scale twenty or more years later, only a handful of companies have more than 20% share of their big markets.

Here’s a magic trick that always works: Show me a big successful company that is expanding their markets and their product lines and I’ll show you a company that had crazy focus when they started out and grew fast. Seems unnatural not to sell to everybody, but that’s exactly what they did to become big in the first place.

The fastest way turn a little company into a big one is to ignore 90% of your big potential market and only focus on the small group who really care about what you do and already “get it.” 

Until you are seriously big ($50 million or more), well-known and dominating your market, just focus on just the best 10% of your market who is most likely to buy from you. Ignore the rest until you are a big, dominant company 10 years from now and can finally expand.

You’ll grow faster, create happier customers and have a chance at profitability. Everything in your business will work better, too.

The 80/20 Rule was half right. It should be 90/10.