Some years before, a woman had presented an idea for hand-embroidered sneakers as “tapping into the multi-billion dollar shoe market.”  When I questioned whether that figure was genuinely relevant, she noted that athletic shoes accounted for more that a quarter of the total market.  The sample pair that she had with her that day were red with floral embroidery.  In that meeting, we discussed whether investors might be more interested in the market for hand decorated red sneakers than for shoes generally. I came to call her hyped-up market size reference the “Red Sneakers” problem.  I wish that these were the only too examples that I knew about, but unfortunately, the Red Sneakers problem shows up in far too many business plans.

Red Sneakers market descriptions wave a red flag. It suggests that you are given to gross exaggeration, that you simply did not bother to do the necessary research and analysis to determine the size of the relevant market segment and/or that you do not know how to estimate the appropriate niche for your product.  Each of these reflects poorly on the plan and the writer.  The only market size estimate that makes any sense is one determined by the “100% of sales” rule.  How many dollars in revenue would the company produce if it made 100% of the sales in its market segment or niche?  Calculating that figure, even if it relies on a few (explicit) assumptions constitutes some evidence of sound business analysis; offering up overall industry figures is vacuous hype.

Of course, plans that then estimate their share of a Red Sneakers market are guilty of the further offense of “Chinese math.”

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… lose the “Chinese math.” Chinese math is the argument that goes like this: If just 1% of the people in China bought a Macintosh, Apple would be the largest computer company in the world. Many plans cite a study that “proves” that a market will be $20 billion by 2003 and state that all the company needs to do to be profitable is to get 1% of the market.

There are problems with Chinese math: 1) there’s never been a consulting study that didn’t predict a multibillion-dollar market size. (Do you think consulting firms can sell studies that predict small or down markets?) 2) Getting 1% of a market is easier said than done. 3) If you say that you need to get only1%, does this mean you’re conceding the 99% to others? 4) You label yourself a bozo because only bozos would try this line of reasoning on sophisticated investors.

Kawasaki’s reason #1 continues to ring true, especially in emerging markets. Still, let’s focus on reasons #2 and #4.  They are closely related.  Reason #4 warns that if your presentation or business plan relies on Chinese math, sophisticated readers will think you are a bozo.  Why? Because of #2!  Naively taking for granted a 1% (or worse yet a 5%, 10% or more) market share simply sweeps the real world difficulties of marketing and sales under a flimsy statistical rug.  Let’s assume that a reasonable case can be made that your market comprises a million individual buyers. Capturing a mere 1% of that market means selling 10,000 customers.  If you enjoy a typical closing rate around 25%, then closing 10,000 sales requires making 40,000 sales presentations to qualified prospects, i.e., people who need what you sell, have the means to buy it and will give you a reasonable opportunity to sell it to them.  To find 40,000 qualified prospects, you may need to start with 100,000+ leads; that is people who express some kind of interest, such as visitors to your web site. 

These numbers put a little flesh on the bare bones of a 1% market share.  How will you attract all those visitors?  Does your business plan have an adequate marketing budget and strategy to reach them?  Does it describe an efficient means to qualify prospects out of the 100,000 leads?  Who in your company will make the 40,000 sales presentations? If it takes 12 minutes to fill out a sales slip and run a credit card, then the 10,000 sales will require 120,000 minutes or 2000 hours … just to cash out all those customers, to say nothing of selling them!  Investors want to know how you plan to do all these things. They will dismiss  an empty market share forecast that fails to comprehend such challenges.  To run your business, you will need to know the answers.  Consequently if your plan forecasts some small share of a large market, discuss that in terms of the actual numbers and how you will capture and service them.

Neophyte entrepreneurs continue to write business plans containing Chinese math.  They submit them to investors and to potential strategic partners and use them to recruit seasoned managers, executives, board members and advisors.  Many entrepreneurs have no idea what role Chinese math has played in the failure of these important initiatives.

So my idea of the best practice for online marketing is to keep a close watch on Guy. His blog is virtual textbook on how to use the latest Internet tools. For example, Guy’s “online magazine rack” called Alltop recently put up a video promotion for MyAllTop, a new version with customizable pages for the reader. Click over to Alltop and watch the video; a slick, sharp, and highly effective application of best marketing practices on the Internet. Guy is the man.

Click around through Guy’s various articles to see how he shares freely not only what he does, but precisely how and why.  His article How to Use Twitter as a Twool is a terrific read, not only for it’s content, but for the attitude it teaches and his delightful sense of humor. Guy makes clear how he has built his enormous and loyal following by sharing information.  If you market on the Internet, or anywhere else for that matter, keep an an eye on Guy!

Winning requires the right vehicle. Plans that exaggerate markets overstate sales forecasts, over-hype the business idea or underestimate the competition will not cross the finish line. Investors expect an honest, evenhanded assessment of the opportunity and the risks. Hyperbole will not sell them on you or your business. In fact, it may turn them off entirely. Everyone that you might want to “sell” on your idea, including investors, strategic partners, prospective employees, advisors and board members wants to evaluate your plan on the strength of facts, frank assessments and honest analysis.  That is not to say that you should not convey enthusiasm, just don’t overdo it.

An investment grade plan must identify a management team with required core competencies (including as yet unfilled positions). It must engender confidence that management recognizes the predictable business challenges and that it is capable of handling unforeseen contingencies. The marketing section must address thoroughly the target market, analyze relevant trends, set out strategies based on realistic goals for its marketing, advertising and sales and estimate reasonably the cost of customer acquisition. The plan must realistically evaluate the competition (including even quite dissimilar rivals for the target market’s budget line item). It must state clearly how it intends to establish and maintain advantageous market differentiation. A plan must illustrate that the entrepreneur has anticipated competitive reactions that result from own market entry. It must show that management has developed integrated strategies and a comprehensive tactics for staying a step ahead. Management must also show that it can muster all the necessary human and other resources to execute. To pitch professional investors with confidence, plans must include appropriate levels of analysis and detail in a readable, well-organized plan supported by credible financials. If you leave out important parts, your plan will go off the road. If you exaggerate people won’t take you or your plan seriously.