High Alert Institute



Avoiding an Investment Disaster: Investment Triage

by | Jun 13, 2007

Whether investing in a start-up company, an infant enterprise poised for rapid growth, or an established company seeking expansion capital the investor is always faced with one simple question, “Will this work?”


The question of feasibility is often couched in such phrases as ROI – Return on Investment; profit and loss analysis; and risk-benefit ratios.  Regardless of how we phrase it the question still comes down to feasibility.  If the investor is fortunate enough to be well versed in the technology, language, processes, practices, and preferences of the market then they are often able to make a reliable prediction of the feasibility of a venture seeking capital.  


However, if an investor takes a diverse approach to their investment portfolio then they must learn to analyze business plans in a fashion that allows them to determine if the conclusions drawn are applicable within the market of that venture.  


In the disaster field office community, emergency and disaster plans are practiced and evaluated by master exercise professionals who have researched the resources and challenges of an individual community or business. However, these professionals do not live in this community nor do they work with any of the many agencies and organizations that must coordinate as part of the plan.  When evaluating plans, the lesson learned in the disaster field office is to evaluate the plan by evaluating the factors that the planner took into account.  


Whether planning for a hurricane, terrorist attack, or to recover from a business misstep or the challenges of business growth the process of planning is the same.  


The first step in the process is to list the specific goals (products) that are the expected outcome of the plan.  In a hospital the “product” of a disaster plan is the preservation of life; for a community, the “product” of a disaster plan is the safety of its citizens and the restoration of normal community function.  When evaluating a business plan the “product” of the business should be clear to the reader because then the investor knows that it is clear in the mind of the entrepreneur.  Further, this “product” should be clearly stated in the corporate mission plan as well as be the obvious outcome of all stated business objectives.  This ensures that the same clarity of ultimate purpose that exists for the entrepreneur exists for every member of the organization.  It must be inescapable.


The second step in planning is the evaluation and prioritization of business processes.  This gives an insight into whether or not the entrepreneur knows how to actually produce their “product”; how to achieve their stated goal.  Business processes are divided into three categories when applying business triage.  These categories are red or critical, yellow or essential and green or supportive.  


Business processes that are deemed red (critical) must be supported by all available resources and it must be clearly stated within a business plan that in the event of limited resources such as capital these red (critical) business processes will receive all necessary capital to maintain the process.  Business processes that should be deemed red (critical) will vary within industries but they should be obvious and logical once stated even to a reader outside of the industry.  Further, there are business processes that are red (critical) in any new or expanding business; these would include marketing, advertising, public relations, essential staff and employees, essential materials, essential accounting, and essential legal services.  The investor should also have a list of red (critical) business processes that in their own experience have made the difference between successful and unsuccessful investments.  This means that not only should it be obvious if not actually stated that the entrepreneur establish some form of triage for their business processes but the investor must have triaged all business processes within their experience and expertise.


Business processes deemed to be yellow (essential) are those that support and facilitate the production of the “product” of the business; however, the “product” can still be produced if these processes are temporarily suspended.  It is not unusual to find yellow (essential) business processes mistaken as red (critical) business processes because while they are essential for smooth of the business, the venture can continue for a period of time in a resource limited environment without these yellow (essential) processes.  As with the red (critical) business processes it should be obvious which processes the entrepreneur has determined to be yellow (essential) and it should be equally obvious and stated how the business will continue to operate should these yellow (essential) business processes need to be curtailed or suspended in a resource limited or capital limited situation.  


Similarly, the investor should have a list of business processes which they deem to be yellow (essential) and therefore of high priority but suspendable in the event of severe capital or resource restriction.  Although most entrepreneurs would balk at the idea of their own salary being on the yellow (essential) rather than the red (critical) list the entrepreneur’s salary should in part if not in whole be on this yellow (essential) list.  This list should be significantly restricted and market/industry specific.  The yellow (essential) list should never include business processes that if suspended even temporarily would result in a threat to the ability to produce the “product” of the venture.


Green (supportive) processes are those that may be halted without significant impact upon the production of the “product” of the company.  The list of green (supportive) business processes in most ventures whether long established or start-up is significant.  In the disaster field office we find that green (supportive) services constitute 80 percent or more of all efforts extended by businesses, health, healthcare, and communities.  


The third step in planning in a business triage model is to have clear and definitive perimeters by which business processes are assigned to the red, yellow and green lists.  In healthcare, this triage is performed based on an individual’s breathing, pulse and mental function.  Breathing is evaluated based on hard numbers (green is a breathing rate of 12 to 20); pulse (green is a heart rate of 60 to 100); and mental function (awake versus unresponsive, alert versus confused) are essential processes of the product of healthcare; life and therefore are the processes monitored, stratified and given definitive perimeters for measurement. In the same way, each business process whether or not financial should have specific perimeters by which not only will its success be monitored and measured but against which its relative importance in the production of the “product” of the venture and therefore its triage level (red, yellow or green) can be reproducibly established.


The fourth step in planning under a business triage model is to enumerate one’s support, that is one’s sources of alternate resources both raw materials and capital to use in the event of adversity in the form of internal or external business challenge, unexpected market performance, or even community wide disaster.  


In the disaster field office we have learned that most disaster plans for businesses, healthcare and communities are based on the “best case scenario.”  A business plan should be “drilled” in the same way a disaster plan is “drilled” with the goal of causing to fail within ten minutes and then evaluating how those who must now work with a failed plan actually perform under those circumstances.  In the disaster field office we utilize a technique known as the “Flumann Factor.” 


The Flumann Factor is the introduction of a realistic and likely adverse event into the plan while it is being drilled.  The “Flumann Factor” is designed specifically to overwhelm one or more essential business processes thus causing a cascading failure within the disaster plan or in the case of an investor evaluation, the business plan.  An appropriate and rapid reassignment of resources based on a business triage model that is resources first dedicated to red (critical) business processes will invariably support the business through the effects of the “Flumann Factor”.  An expert plan reviewer ensures that the “Flumann Factor” introduced is not so overwhelming as to be unrecoverable by any business man in any market.


A business plan, like a disaster plan, must be structured to concentrate all available resources on the most critical business processes in support of the “product” of the plan or venture will represent a sound investment for the prudent investor regardless of whether or not they are well experienced within the market of the venture seeking your capital.


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