As a start-up, we at FIG need to heed our own advice and listen to our customers to better understand what they expect us to deliver. So when speaking with one investor, I was interested to hear that he was excited to be working with us because we help him avoid listening to pitches that suffer from 'the Chinese bicycle problem'.
You might not have heard of it, but it’s a major issue for investors dealing with excitable new entrepreneurs. It can be illustrated thus: there are more than 450,000,000 bicycles in China, so making bike socks and selling them in China should be very lucrative. If they will cost 50p to make and you sell them for £1, even you only reach 10 per cent of the market, you can make £22,500,000.
It seems like sound business sense, but it’s really not, and investors hate this sort of blind optimism. Let’s pick up on a few points.
First and foremost, the market: there are approximately half a billion bikes in China, but does every single bike rider wear socks? Probably not, so that shrinks the potential market from the off. You could argue that people share bikes and that it will balance out, but that’s very hard to prove. Not all those bikes are in regular use and not all are being ridden by people wearing socks.
There may still be a massive market, and there may still be millions of people who wear socks and ride bikes. So, for argument’s sake, let’s say you are able to demonstrate this.
Now you have to think about the industry. You would have to enter the clothing industry, and stock will need to be created and distributed. There are already lots of companies who make clothing and can compete with little to no effort on their part – with no infrastructure, you start with a massive disadvantage.
And aside from the logistical nightmare of shipping millions and millions of socks around a vast country if you do manage to get established, how are you going to reach your customers and distributors on day one?
Why would they buy your bike socks instead of normal socks or other companies’ bike socks? Is the price competitive on a local scale? Can you make a profit if you compete?
The fact is that 10 per cent is, more often than not, a huge chunk of any market. To sell millions requires a lot of stock which needs to be made up, and which therefore poses a massive capital risk from the onset. Stats are all very well and good, but they can be meaningless or even deceptive if used out of context.
Think your idea through carefully, then research the market and industry, thoroughly before ploughing ahead. If you have an idea and you want to do just that, you can use FIG’s online viability test to help you.
James King is MD of Find Invest Grow UK