Looking back – making sense of pro formas

In late 2005 we did our firstpro forma financials.  Our accountants, Isdaner and Co (namely Hank Abrams) did a great job of pulling together what was a messy set of materials into a meaningful whole.

Unfortunately, our core assumptions were wrong. We made the classic top-down, young exuberant company market size goof. Meaning, we picked a market size and amount we wanted to capture. We said that the total p2p swapping volume is around 32 billion files swapped per year, and if we can convert 0.75% of that into revenue at $0.99 per swap, then – wow – we’re making a whole lot of money!  

Of course, that’s a bogus way to calculate market size, and we’ve since done a bottom up analysis. We took a look at our demographic in terms of accessible numbers, did a little primary market research to gauge interest (pretty high, btw)  and determined total probabal user population. We factored a relatively even growth curve, assumed some sales averages and derived our pro formas that way.  Until you have real revenue, knowing your customers is the only way to forecast revenue.

Lesson learned.

Posted on January 4, 2007 in Uncategorized

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