Founder: "We should enter X market! It has $1 Trillion worth of annual business." VC: "It must be heavily saturated, with mature, efficient companies. Why should we fund you?"

And now is the fallacy - instead of replying with something like "we have better A, we do B differently and we're priced at C," they say "well we don't have to take over the entire market, we ONLY need .001% and we'll be billionaires!"

And the fallacy, more specifically, is similar to an appeal to probability, because using such broad metrics aim to give the VC a false sense of confidence - that even if the founders aren't 100% successful, they only need to be .00001% successful for them to make a killing.

But it still doesn't answer the original question: How does a founder go from 0% to .000001%.

But when you're evaluating the marketplace, it's perfectly reasonable to say "I need x% of the market to break even, y% to earn a profit" and extrapolate from there. The idea itself isn't bad, it's when it's used improperly.