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Risk tolerance and recklessness among nonprofits

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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.

Should grantmakers act more like venture capitalists?

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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.

A Brief History of the Environmental Movement

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Mardy and Olaus Murie
Or, Why the Enviros are Losing and What We Can Do About It

The environmental movement in the United States, through the bulk of the 20th Century, was characterized by iconic thought leaders and activists – people like Mardy and Olaus Murie, John Muir, Rachel Carson – who took on critical environmental issues and laid the groundwork for the grassroots movement to come.

The passage of The Wilderness Act in 1964 marked the beginning of a decade-long run, fueled by grassroots politics and a growing popular awareness of environmental concerns, which saw passage of nearly every major environmental law we presently enjoy. The widespread popular support provided political capital that was converted into critical legal and policy victories.

The subsequent three decades were characterized, on the other hand, by a shift away from building and sustaining the public support needed for broad and deep political backing for conservation values.

Increasingly, the movement expended the political capital it had acquired on enforcing this new suite of environmental laws while investing less and less in sustaining that capital.

By the 1990s and 2000s, most of the environmental laws of the 1960s and early 1970s had been steadily weakened, in some cases through outright amendment but also frequently through regulatory and policy change. But the environmental community stayed the course, investing heavy resources in litigation, lobbying, and back channel political strategies while continuing to invest very little in grassroots organizing and coalition building.

Now: Conservation values are widespread but thinly held

Today, conservation values rarely serve as determinants in voting behavior or major legislative activity. There have been some bright spots, including initiatives around renewable energy, land use, and transportation. But the language and implementation of environmental laws continues to erode, grassroots political support is as weak as it’s been in decades, and the environmental movement continues to fight largely rearguard actions.

Even where public opinion lies squarely on the side of strengthening environmental protection and even where the often-fractured environmental community is largely unified – the climate change bill comes to mind – the movement doesn’t have the political muscle to close the deal.

We created and earned a great deal of political capital up to and through the huge successes of 1960s and 1970s, in other words, we spent that capital down in the subsequent decades without replenishing it, and here we sit in 2012 wondering why the political and legal strategies (which fundamentally depend on that capital) just don’t seem to work.

I’m pretty sure that the answer is not to continue focusing on litigation, lobbying, and inside baseball strategies at the expense of the investments that actually build political power around conservation values.

It’s not that we should abandon those critical defensive strategies. We have to continue fighting hard in court and inside the Beltway. But those strategies, by and large, don’t create political power, they expend it. So long as we under-invest in the strategies that create sustained political support, our ability to win the political fights will continue to diminish.

An example: diverse allies

To offer just one example of the problem: environmental funders and groups tend to think of ‘diverse allies” as folks you recruit to be spokespeople for your cause rather than groups with whom you build long-term relationships around shared interests and values.

The standard action item: “We need to find a fill-in-the-blank who we can quote in this press release criticizing fill-in-the-blank.” Environmental groups often find and use those spokespeople, but at best those efforts put a “diverse voices” sheen on our media efforts. They simply sidestep the really difficult work of building a sustained relationship that advances multiple agendas. And funders often scoff at pitches for investing in relationship building … the timeframes were too long (it will take years!), the potential shared interests and political agenda uncertain (the point of building relationships across broad constituencies is that you don’t know ultimately what shared interests you might uncover or develop), and the outcomes too vague.

The role of funders
NCRP Cultivating the Grassroots
Cultivating the Grassroots by Sarah Hansen.

Earlier this year, the National Committee for Responsive Philanthropy published a report exploring one critical dimension – the role of environmental grantmakers – of this challenge. Authored by Sarah Hansen, a veteran of the environmental philanthropy world with an eight-year term as the executive director of the Environmental Grantmakers Association under her belt, Cultivating the Grassroots: A Winning Approach for Environment and Climate Funders politely but firmly lays much of the blame on the funders themselves.

We are losing, the report argues:

“New environmental initiatives have been stalled and attacked while existing regulations have been rolled back and undermined. At a time when the peril to our planet and the imperative of change should drive unyielding forward momentum, it often seems as if the environmental cause has been pushed back to the starting line.”

And reversing this trend will require fundamentally changing gears by “decreasing reliance on top-down funding strategies and increasing funding for grassroots communities that are directly impacted by environmental harms and have the passion and perseverance to mobilize and demand change.” Her four-part prescription:

  1. Provide at least 20 percent of grant dollars to benefit explicitly communities of the future.
  2. Invest at least 25 percent of grant dollars in grassroots advocacy, organizing, and civic engagement.
  3. Build supportive infrastructure.
  4. Take the long view, prepare for tipping points.

Her analysis fits my own experience and observation (and offered plenty of new insights, as well), and the report is worth a read.

The role of environmental organizations

But I’m also willing to place more of the blame on environmental nonprofits, as well, since we don’t tend to think in these terms, either (yes, of course, some groups do – and hats off to them – but I don’t think that perspective is pervasive among environmental groups).

Moreover, the nonprofits absorbing the lion’s share of grant funding – those with the most ability to push back on funders and best equipped to fund a wider array of strategies independent of grant funding simply because of their size and financial capacity – are by far the most resistant to change. The Wilderness Society’s recent staff purge, becoming even more top-heavy and less capable of supporting on-the-ground grassroots organizing and relationship building, is just one example.

Incidentally, there are some fascinating parallels between the issue Hansen tackles in her report (a focus on top-down policy strategies vs. ground-up grassroots capacity-building) and the challenge to conventional nonprofit models posed by the rise of social networking … organizations that want to remain effective can’t simply layer social networking on top of a deeply hierarchical, tightly controlled organizational culture. As Beth Kanter and Allison Fine argue in The Networked Nonprofit (and as Trey and I argue in the “Social Lipstick on a Networked Pig” chapter of The Nimble Nonprofit), it requires shifting real control and autonomy in a more dispersed, unpredictable way.

Another, parallel read on the history of the environmental movement: isolated visionaries led the way to a powerful grassroots movement which then evolved into a deeply professionalized nonprofit industry.

I don’t think the answer is to abandon the movement’s well-earned professionalization and political maturation. Trying to return to a rosy-hued nostalgic past usually causes more problems than it solves, and the challenges (environmental and political) are too complex and the obstacles too deeply rooted to overcome without sophisticated political strategies and aggressive legal strategies.

Image credit: america.gov/Flickr
The future is coming (we should get ready)

But there isn’t any reason why the movement can’t begin investing substantially in community-based and grassroots organizations, in strategies that emphasize long-term relationship building across sectors, in organizations that emphasize environmental justice and other issues differentially impacting marginalized communities, and in efforts that build sustained political power around environmental values. And unless we do, it’s tough to see how we’ll start winning.

Innovation v. Effectiveness

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Innovation is just a whole lot sexier than do-more-of-what-we're-already-doing.
One of the peculiarities of the philanthropic foundation world is its energetic enthusiasm for supporting innovation among the organizations they support. Everyone loves innovation, for one thing, and we know that many of the challenges we face probably aren’t solvable with traditional approaches. And funders are as susceptible to the temptations of organizational ego as everyone else … what funder wouldn’t want to get credit for breakthrough innovations in providing key community services, securing a durable change in political values, dramatic improvements in nonprofit organizational structure, or solving an important social problem?

But sometimes the right answer isn’t to create something new but to scale up something you are already doing, or to copy an approach someone else already nailed. The problem: the idea of innovation can be so sexy that it comes at the expense of effectiveness. If a funder conveys through their grant application or awards process that being innovative trumps being effective, it’s not hard to see how the nonprofits themselves might slide in the same direction. If you’re trying to solve a social change, advocacy, and community challenge, sometimes imitation actually is the best solution.

(Photo by Flickr user Jules Antonio).

Our First Book Launch: The Nimble Nonprofit Hits the Streets (and Barnes & Noble)

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The Nimble Nonprofit is now available at Barnes & Noble ($4.99)!
Yesterday Trey and I launched our first book, The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit, with a ton of help from our Bright+3 colleague Ted Fickes.

We’re only a day into it, but it’s been great fun so far: a ton of awesome reviews on Amazon, a bunch of great Twitter traffic, and even an unsolicited and really favorable full-on book review (thanks Bonnie Cranmer!).

In addition, I now have a “Jacob Smith” author page on Amazon. I wasn’t expecting much when I logged in to set it up, but I must not have paid author pages much attention previously because it turns out they’re actually set up pretty well. In addition to what you’d expect (profile, photo, etc.), they also allow you to bring in a Twitter feed and an RSS feed, which is a nice touch.

And great news if you are a Nook fan: The Nimble Nonprofit is now available at Barnes & Noble!

The book is in review at Apple, and as soon as it launches there we’ll announce it.

We’re thrilled to sent our little book out into the world, and we welcome your comments, critiques, and thoughts … send them our way:

The First Bright+3 Book Launch: The Nimble Nonprofit

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I am thrilled to announce the launch of The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit.

The nonprofit world truly is in a state of flux. Much of what used to work doesn’t anymore. The need to invest in growing ass-kicking staff and to develop sustained organizational capacity has never been greater, yet the difficulties of doing so are growing as quickly as the need. In The Nimble Nonprofit we cover a wide range of what we believe are critical challenges facing the nonprofit sector:

  • cultivating a high-impact innovative organizational culture;
  • building and sustaining a great team;
  • staying focused and productive;
  • optimizing your board of directors;
  • creating lasting relationships with foundations, donors, and members;
  • remaining agile and open; and
  • growing and sustaining a nimble, impactful organization.

We mean for The Nimble Nonprofit to be a guide – an unconventional irreverent, and pragmatic guide – to succeeding in a nonprofit leadership role, and to tackling this incredibly challenging nonprofit environment. We aimed for a conversational, practical, candid, and quick read instead of a deep dive. If you want to immerse yourself in building a great membership program, or recruiting board members, or writing by-laws, there are plenty of books that cover the terrain (and some of them are quite good).

But if you want the no-nonsense, convention-challenging, clutter-cutting guide to the info you really, really need to know about sustaining and growing a nonprofit, well, we hope you’ll check out The Nimble Nonprofit.

This is our first book, and the publishing industry is a state of disarray, so – following the spirit in which we wrote the book – we are taking an unconventional path. We decided to publish strictly as an e-book, and we decided to self-published (with a bunch of help from Ted here at Bright+3). We are offering the book through the big three e-bookstores (Amazon, Apple, and Barnes & Noble, and we might add a few more to the mix), and we’ve priced the book at $4.99, which is much less expensive than the vast array of other nonprofit books.

As of right now, the book is available on Amazon (and it’ll hit the other two stores shortly). If you’d like to score a copy of The Nimble Nonprofit and enjoy reading it on your Kindle, iPad, or another tablet, jump on Amazon and grab it (did I mention it’s only $4.99?).

And, because our main goal is contributing to the conversations around these critical questions, we are also making a .pdf version of the book available for free.

We suspect that most readers will agree with some of what we argue and disagree with other parts, and because we challenge much of the conventional wisdom about building strong nonprofits, we’re pretty sure that some folks will disagree with a lot of what we write. And we look forward to the conversations. Please send us your thoughts, critiques, comments, and ideas

Tell us where you think we’re wrong and where we’ve hit the nail on the head, and please share with us other examples of nonprofits doing a great job of tackling these challenges and where they are just getting it wrong.

Happy reading –

Jacob

(P.S. The Nimble Nonprofit is available right now on Amazon.)

Why Annual Reports?

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Earlier in November, a coalition of outfits including the Communications Network, the Philanthropy Awareness Initiative, and the Williams Group published a really interesting report questioning the value of the annual reports produced by philanthrophic foundations: Talking to Ourselves? A Critical Look at Annual Reports in Foundation Communications.  The good: the study was motivated by a terrific question (are annual reports worth the effort?) and they nailed some important insights.  The bad: a little too much straw man in the study’s actual research questions, even though their conclusions all seem pretty sound.  What do I mean?  One of the key questions they asked: how many people actually read the annual reports published by foundations?  The answer, predictably, is not many.  They get points for not assessing readership among the entire American public, and instead measuring it among an “engaged public.”  But this narrower “engaged public” audience was still made of up tens of millions of people, and it hardly seems fair or useful to judge recall or brand awareness of any particular foundation against an audience of that size.  The issue seems to me like a classic communications challenge: identify precisely who your audience is and what you hope to accomplish, develop a strategy for accomplishing those specific outcomes with those specific audiences, measure effectiveness, and adjust.  It’s tough to see why very many foundations, if any, would see their strategically targeted audience as including 12% of the American population.

Another example: the report assembles all of the annual report objectives noted by their survey respondents and then criticizes foundations for trying to do too much.  I suspect that many foundations really do try to accomplish too many objectives with their annual report, but I might have approached this question a little differently.

That said, it requires some guts to to take on a deeply established practice, these folks did a lot of work in asking the question, and they a good starting a valuable conversation.  One particularly interesting finding is the internal value of the annual report process that many foundations identified.  Creating an annual report resulted in “significant internal benefits for their foundation, prompting a regular chance for reflection, creating a communications discipline, and generating new content that can be repurposed in other vehicles.”

Research question quibbles aside, the report does ask a tough, important question – is it worthwhile? – about a widespread, inertia-bound foundation practice, and their conclusions are spot-on: foundation communications tools  should be targeted and strategic rather than broadband, foundations should measure impact of those tools, most people don’t find annual reports valuable, and skipping the annual report process can save a foundation substantial cash, time, and environmental impacts.  And the report generated some good – and ongoing – online chatter, including Philantopic‘s comments and a post on the Public Policy Communicators of New York blog highlighting the upcoming “no-holds barred online conversation” about the report.

They clearly mean for their report to be the beginning of a conversation.  Hats off to them for asking the question, doing the research, and inviting the engagement.  You can learn more and plug in to the conversation at the WhyAnnualReports.org website.