Assessing E(R)p Expected Return

A friend of mine who is very entrepreneurial, like me, called me up to intro me to 2 other "partners" to launch a new business in the medical product delivery space. We both have small and growing related businesses that could theoretically grow faster with the success of the delivery business. I encouraged him to focus on his, or my existing product line, not a new business. Once you have a sustainable business worth real revenues and real client accounts, would it then make sense to create the delivery business.

Every new business decision should be assessed with E(R), expected return.

Project 1 - Sell sell sell, with existing resources or inexpensive toolsets that can increase the marginal return of selling one more product. This is easy effort means modest but important sales. In economics, this is called assessing the Marginal Return of a product or service. Marginal Revenue / Marginal Cost. Optimally, an owner wants his Marginal return to be increasing. High probability of sales, low scaling factor. Takes time to grow to get ready for Project 2 below.

Project 2 - new delivery business, unknown cost structure, team, partner risk, unknown returns, and more. Huge potential return, huge risk. Low probability of realizing any return short term, ober the same time period as Proj 1. The devil is calling you with this Project, and with little execution experience to see him, it, for what it is, a long shot. Do not listen!

With the above, the probability, 0

Heres how i assess it. Simplified without any error coefficient.

If $1,000 of potential revenue

Proj 1 E(R) = 80%*1000 = $800

Proj 2 E(R) = 1%, So if above, 1%*X=800, so x=800/.01 or $80k is what profit

Of Proj 2 must be in order for the additional risk (lower probability) to be worthwhile, over the same time period.  By the way, if you'be ever studied derivati es, that probability is the same as the delta of an option. Its essentially the percent probability that your project (or option) will prove to be have a sucessful outcome (in the money, when time is up).  This is just not a reality for a new company with modest revs and clients, its also a deathwish.

Product product product, Sales sales sales.

Stay focused.