Bright Ideas

Risk tolerance and recklessness among nonprofits

October 5, 2012 by Ted Fickes

TechCrunch posted an Andy Rachleff piece a couple of weeks ago on the odds that an angel investor or venture capital investor will make money. The conclusion: pretty darned unlikely.

The vast majority of venture capital funds, for instance, either barely break even or actually lose money.

Why does this matter to nonprofits?

The “what can nonprofits learn from technology startups” theme has picked up steam in recent years in concert with the current technology startup boom, and is regularly a topic on this blog (see, for example, our recent exchange with Jon Stahl: “Should grantmakers be more like VCs” and “Should grantmakers act more like venture capitalists?“).

A grantmaking investment model that assumes an 80% failure rate among grantees may not be our best option. What I find most interesting about the Rachleff piece, however, and potentially most useful in the social sector context, is the risk tolerance that permeates the private investment landscape. Even the most optimistic of the experienced investors know that most of their investments will fail. They are willing, to varying degrees, to invest in organizations each of which only has a small chance of succeeding.

Fostering a Nonprofit Culture of Risk-Tolerance

Fostering a culture that genuinely encourages and supports risk-taking, within organizations and between organizations and their funders, is a real weak spot among nonprofits. Doing this means that the price of a failed project can’t be very steep. It means that organizations and funders have to provide positive feedback for smart risk-taking. Claiming to support experimentation and risk-taking but penalizing people and organizations with experiments don’t work out as planned fosters a culture of risk-aversion, not risk-tolerance.

Risk-Tolerance Doesn’t Mean Reckless

Risk tolerance shouldn’t mean encouraging reckless gambles. In fact, a smart risk-oriented strategy will include explicit expectations: clearly identifying the assumptions underlying any particular risk, having a clear process or tool for explicitly testing those assumptions and learning from the experience regardless of the outcome, ensuring that effective feedback loops use this learning to improve strategy and execution.

Innovation – both the incremental and the huge-leap-forward varieties – require people and organizations to take risks, and that only happens in a significant way when the rewards for taking those risks are high enough and the penalties for failure are gentle enough.

Jacob Smith is the co-author of The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit, the former mayor of Golden, Colorado, and a nonprofit consultant.

The best tag line, ever

October 1, 2012 by Ted Fickes

“Anytime Anywhere”

The company is called Global Rescue, and these are the folks you buy insurance from if you want to guarantee evacuation or field rescue Â – from anywhere on the globe you might happen to be – in the case of a medical emergency, civil war, and natural disasters.

“Anytime Anywhere” conveys everything that needs to be communicated in a tag line, they are perfectly on pitch for the intended audience, and they did all that in just two words.

This tag line is so good it could easily double as an elevator pitch.

Jacob Smith is the co-author of The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit, the former mayor of Golden, Colorado, and a nonprofit consultant.

A new study asks: Should the nonprofit and charitable sectors engage in political activity?

September 28, 2012 by Ted Fickes

Should nonprofits engage in political activity on issues that broadly impact the nonprofit sector?

That’s one question posed by a new study, Beyond The Cause: The Art and Science of Advocacy, and the conclusion is, well, inconclusive. It turns out that there just isn’t much consensus across the sector on this very basic – if difficult â€“ question.

What Makes For a Successful Political Advocacy Strategy?

The study, which The NonProfit Times reported on in some depth last week, did reach some other interesting conclusions. For example, the report does a useful job of identifying some of the common elements among successful political advocacy efforts. They include:

“Sustain a laser-like focus on long-term goals.”
“Prioritize building the elements for successful campaigns.”
“Consider the motivations of public officials.”
“Galvanize coalitions to achieve short-term goals.”
“Ensure strong, high-integrity leadership.”

None of these results are surprising, but it’s nice to a list like this include some clear implications for both short-term and long-term priorities. The inclusion of item #3, “Consider the motivations of public officials,” is especially welcome because that step – understanding how the decision-makers themselves make decisions – is so often overlooked or undervalued when crafting political strategies. If we don’t understand who they are, and how they make decisions, it’s really tough to craft a successful advocacy campaign.

Why Not Engage in Political Advocacy?

Among those nonprofit sector folks who argued against political advocacy on sector-wide issues, one major concern seems to be about the resource implications. Effective political advocacy does, indeed, require considerable resources, and nonprofits have very compelling reasons to focus all of their resources on their core mission rather than risk dilution through an expanding range of advocacy fights.

A second concern, also understandable, is that sector-wide advocacy fights “would taint the non-partisan image of charities.” It’s very easy to see how the nonprofit sector as a sector would open itself up to sharp attacks by political opponents if it were to engage in a focused way on federal or state level policy debates.

Threats to the Nonprofit Sector

But the largest threats to the nonprofit sector, as identified by study participants themselves, highlight just why I think larger-scale sector advocacy is going to be critical in the years ahead.

Those threats? In addition to overwhelming specter of the federal budget and national deficit issues, participants in the research identified four other key challenges:

Threats to the idea that the federal government has a meaningful role and has meaningful responsibilities around social issues.
Threats posed by the potential for deep federal spending cuts to nonprofit sector issue areas.
Threats to nonprofit tax exemptions and charitable deductions.
Threats to government funding for specific types of nonprofit activity, especially around vulnerable populations.

Why Those Threats Justify a More Assertive Nonprofit Sector Political Strategy

All of these are likely to grow in coming years as pressure to tackle federal budget and deficit issues continues to escalate. Engaging on policy issues that impact the nonprofit sector broadly clearly does carry some risk. It will be more difficult to defend the reputation of the nonprofit sector as non-partisan, and some of the sectorâ€™s strongest alliances really do cut across partisan lines and might come under pressure as a result. But the risks of not engaging seem even greater. The nonprofit sector is too easy for deficit hawks to target, for example: tax exemptions, charitable donations, preferential treatment, federal funding for programs that generally benefit people who are less politically franchised. Sidestepping state and federal politics won’t insulate the nonprofit sector from attack, and guarantees that we wonâ€™t be able to make sure of what should be an enormous political strength: the huge political, geographic, and religious diversity that makes up the nonprofit sector.

You win political fights by defining yourself more quickly and more effectively than your opponent, by building strong coalitions, and executing a smart, proactive political strategy. The nonprofit sector is well positioned, with a powerful â€œsupporting people and communities everywhereâ€ brand and with an enviable degree of diversity.

We wonâ€™t avoid becoming political targets simply by not engaging, and our latent credibility and strength wonâ€™t be enough to protect the values and needs of the nonprofit sector if we donâ€™t proactively use these assets in a smart, strategic, assertive political strategy.

Defending the Value of the Nonprofit Sector

I’ve always found it a bit frustrating that the nonprofit sector is so apprehensive about advocating for its own needs as a sector (nonprofit tax exemptions and charitable deductions are two of the most obvious and important examples) and asserting its political strength in defense of those needs. It’s as though we think our inherent value as nonprofits will always carry the day. That may have been true in decades past, but itâ€™s not as clear now that it will be true in the years ahead.

Should grantmakers act more like venture capitalists?

September 27, 2012 by Ted Fickes

Should philanthropic foundation board members and staff act more like the venture capitalists who fund internet startups?

That’s the question our good friend Jon Stahl posed a few weeks ago. Jon’s focus was on the high level of involvement that venture capitalists often have with the companies they invest in. Lead investors typically have a seat on the board and often participate actively in the company, at least at the strategic level. Jon points out that foundation program officers, with portfolios that often run in the dozens, simply don’t have the bandwidth to engage much with their grantees.

I think it’s a great point; maybe there are ways we could refine the philanthropy model to offer grantees more support from their funders.

But the venture capital investment model has some other qualities that may or may not fit our social sector goals very well. For one thing, the VC model is designed to foster blowout success at the expense of everything else. In financial terms, a 2x ($2 returned for every 1$ invested) or even 5x return isn’t very interesting; the VC model is designed to produce 10x and 100x or even larger returns.

In fact, VCs have a lot of incentive to actually kill companies in their portfolio that don’t knock it out of the park. You probably won’t get funded in the first place unless you’ve got a great idea, a great team, and a great market, but if you don’t show aggressive growth in users or revenue pretty quickly, and then sustain that growth, the odds are decent that your VC will actually be part of shutting you down. A typical venture fund might see half or more of its companies fail outright, thirty percent performing modestly enough that the fund can get its investment back or perhaps make a small return, and only twenty percent doing really well. (The actual numbers are tough to come by, and there’s a lot of disagreement about exactly what they are, but we know that the huge hits are pretty rare and that lots of venture capital funds actually lose money).

The model might make sense on issues where our most desperate need is for a few blowout successes (and where we are comfortable killing off the groups that don’t achieve this level of success). For example, it might be perfectly reasonable for the Gates Foundation to fund malaria eradication programs using a VC-style approach, hoping that one of their high-risk-high-reward investments comes up with the solution we’ve all been waiting for.

But on lots of social sector issues, activists and funders are happy – and reasonably so – with moderate, sustained success. If a VC-style approach on malaria eradication comes at the cost of stable, sustained funding for effective malaria prevention efforts, it’s probably a much less appealing strategy. In fact, those “moderate” successes only look modest by comparison to absurdly high Google-style returns.

And on many issues there probably just isn’t a knockout punch waiting to be uncovered through high-risk entrepreneurial style investment by philanthropic donors. Preventing extinction and recovering endangered species is just hard work, politically and ecologically; there almost certainly isn’t a fantastically successful strategy just waiting to be discovered. We ought to have more sophisticated ways of measuring outcomes, and more effective ways of rewarding nonprofits that craft and implement successful strategies, but success across lots of fields won’t look like the 1,000x return that early Facebook investors walked away with. There may be some radical advocacy innovations waiting to be uncovered, but odds are good that most of our success will come through philanthropic investments with returns that look more like the equivalent of 2x, 5x, and 10x outcomes in the investment world. And even though these numbers look small compared to the superhits, they are still huge success: anytime a foundation invests $50,000 in a nonprofit and gets $100,000 or $250,000 worth of social change value out of the deal we all ought to celebrate.

The VC model also shifts enormous control over the company itself to the investors. It’s one thing for a social sector funder to have detailed expectations about how their grant will be spent, and perhaps to use the size of their grants to influence organizational decisions about staffing and strategy (which itself is enough to make many nonprofits very uncomfortable). It’s something altogether different when the funders actually control the organization itself.

Finally, the idea that funders might play a more active role in managing the organizations they fund carries as many risks as it does benefits. The best program officers offer real expertise about the issues they fund, they can draw on wide experience working with the nonprofits they fund, and can offer a higher-level strategic vantage precisely because they aren’t in the trenches on a day-to-day basis. But even the best are still at a distance from the day-to-day work, they often don’t have much experience on the other side of the funding equation, and they can be very prone to a favorable results bias.

In fact, while investors and entrepreneurs may not (and often don’t) share the same long-term vision, they measure results in a very consistent way: how much money is this company earning and how much is it worth. Philanthropic funders and the nonprofits they support may tend to have better alignment on long-term vision, but they rarely share a consistent and unambiguous approach to measuring outcomes. And this problem is only amplified by the strange power dynamics that characterize most grantmaker-grantee relationship. Deeper involvement by program officers in the nonprofits they fund comes with some real challenges.

I’m guessing the appeal of the VC model for Jon is mostly around the opportunities for nonprofit folks to learn from the experience and vantage of the funders they work with (not to mention the potential for funders to provide other kinds of resources to their grantees), and given how weak nonprofits usually are mentoring and professional development this makes a lot of sense. The trick, as is usually the case when drawing from outside models, is making sure we understand what those external models are designed to do and adjust the ways we mimic and poach from them accordingly.

There are other models worth exploring, as well. Angel investors often contribute much smaller amounts but expect much lower returns, which means that a moderate success can still be a success, and the angel investment model includes a lot of room for investor involvement and support. Crowdsourced funding models, with Kickstarter as a marquee example, might offer some insights. In many ways these models look a lot like traditional membership-oriented fundraising in the nonprofit world, but as federal law expands accessibility to true crowdsourced investment we can expect to see rapid evolution in the mechanics and structure.

I agree with Jon’s basic point that we should look at the venture capital model for ideas about improving philanthropic funding. I do think, however, that the VC model in particular has some significant limitations in a social sector context. The nonprofit world, at times, goes overboard when it pulls from other sectors, missing the nuance and context and overdeveloping some particular element that seems important. But we can learn a lot, too, by paying attention to other sectors, and we’ve got a lot to gain by poaching, adapting, and testing whatever we think might help.

Video done right: Protect Our Winters

September 25, 2012 by Ted Fickes

Great videos don’t need to be earth shattering displays of far out creativity and mind-boggling production values. Video is a storytelling form that lifts characters, dialog and emotion off the page and into the visual line of sight. Basically, video shares a story.

Marketing videos – especially PSAs – can often get overwrought or overdone. It’s hard to keep it simple.

We like this short piece from Protect Our Winters — an organization created by winter sports professionals that advocates for policies that halt climate change and gets pro athletes into schools, communities and Congress. Check out the video:

It may have helpful to share some images of winter that weren’t all about the high alpine environment and maybe more familiar to viewers. Maybe the scene of a city park hushed by a fresh blanket of snow would connect more people with their personal experiences.

But the scenes left in are aspirational, true to the character of the organization, and one can always add more scenes. Brevity and focus are powerful tools, too. We think this is powerful and a great example of how strong video doesn’t need to be complicated.

What do you think?

How to Give Feedback to Your Employees: Nine Tips

August 13, 2012 by Ted Fickes

5819125499_dcaa29bed9_z — This usually isn’t the best way to offer feedback to your staff.

In our research on nonprofit organizations, we found that more nonprofit staffers complained about the weak management skills of their executive directors and supervisors than about any other problem.

Among the most critical but under-developed skills: feedback-giving. Here is some straightforward advice:

1) Actually give feedback to your staffers. The alternatives (passive-aggressive outbursts, complaining about one staffer to other staffers, abruptly firing them, wishing you had the gumption to abruptly fire them) all suck.

2) Provide feedback frequently. The annual evaluation has its place, but it’s a poor substitute for regular feedback throughout the year.

3) Assume she was acting in good faith with good intentions. Assume her motives were all spot-on, in other words, and focus instead on her words and actions.

4) It’s often helpful to start by asking your employee to talk through what happened, what she did and why, and how she would evaluate her own performance (whether you are talking about a specific event or performance over the course of some time period). It gives her a chance to set the tone and she may have already identified some of the successes and critiques you had planned to raise. You might even shift your view on her performance if you know more about what she did and why.

5) Be direct and clear when providing feedback on the things she did that you liked and on the things she might (or should) have done differently. Even managers who do a good job of providing regular feedback often stumble on this point, just as many people often stumble when communicating with board members, friends, lovers, spouses, and kids. You have to be clear about what worked and what didn’t if you expect your staffer to remain motivated and improve her performance.

6) But don’t be a jerk about it! “Direct and clear” doesn’t mean patronizing, insensitive, or rude.

7) Offer very clear direction on what she might do differently next time, on what lessons to draw from the experience, and on how to improve. If you don’t do this, and she doesn’t improve, her subsequent underperformance is on you.

8) If you are trying to foster a culture of innovation you have to reward people for taking risks. This doesn’t mean that you should celebrate every risk someone takes; if you establish clear boundaries and expectations for risk-taking, you can evaluate your staff based on how well they operated within those limitations. But if your team believes they’ll get chastised when risks they take don’t pan out, you’ll be encouraging risk-aversion rather than risk-tolerance. Likewise, if you find ways to reward your team for taking smart risks even when they don’t work out, you’ll incentivize the innovative culture you are after.

9) Finally, you may have to work hard to avoid making people feel defensive when initiative a feedback interaction. Part of managing this is ensuring that you are calling out the good and the bad throughout your frequent feedback interactions (and making a point of calling out the good more often is usually pretty helpful). Part of tackling this is clearly establishing the feedback process in your organization as a frequent learning loop. Every feedback interaction is an opportunity for someone on your team to figure out how to improve their performance and for you to learn more about what they need from you to excel in their work. And part of sidestepping someone’s instinctive defensiveness is getting to know them well enough to figure out how – with each of your direct reports – to create the right space for a productive feedback interaction.

These tips are easier to write down in a blog post than they are to execute, but none are especially difficult if you commit to making productive feedback interactions an important part of your organizational culture.

(Photo by Flickr user Orange Steeler.)