Risk tolerance and recklessness among nonprofits

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.

Two Kinds of People in the World

A nesting osprey (photo by Flickr user Yai&JR).
There are two kinds of people in the world, as the saying goes, those who divide the world up into two kinds of people and everyone else. One way to draw the line: those, when presented with a new idea, a challenging opportunity, or a risky possibility, who come up with reasons to say no, and those who come up with ways to make it happen.

A couple of decades ago, while sharing office space with an environmental law firm, I posed a question to one of the attorneys: could I use the Migratory Bird Treaty Act to prevent a local government from placing a trail near an osprey nest. The answer, in a word, was no, accompanied by a host of reasons. The law wasn’t designed to prevent that sort of activity. It was hard to enforce. No one had done anything like this before.

You know how this kind of conversation goes. They may be highly skilled at their work, friendly, and supremely earnest. But when presented with the new and different, they tap their creativity and cleverness to present barriers – all of the reasons why it’s a bad idea, why it won’t work, why it will cost too much – rather than ferret out how to pull it off.

Government (sadly) tends to cultivate and reward this approach. Large organizations of all types are notorious for doing the same thing. Even small organizations can inadvertently find themselves elevating inertia over taking risks and tackling the hard problems.

Not liking the answer to my bird protection question, like a kid who tries the other parent when the first answer is no, I tried again with another attorney. The answer: it’ll be really tough, but sure, it might be possible. You’d have to find strong science showing trail impacts to the birds. You’d probably need documents showing that the local government knew there might be impacts. You’d probably even need to show actual dead birds to more clearly establish the link. No sugarcoating and no false sense of optimism, to be sure, but a profoundly different attitude to the challenge: it won’t be easy, but here’s what it would take.

Inertia and the art of ‘no’ cohabitate, and it can take some real effort to hold it at bay, but if your organization wants to uncover better solutions to the problems you are hoping to solve, if it wants to delight its customers and frustrate its adversaries, and if it wants to generate extraordinary results, it’s worth encourage your colleagues to adopt the “here’s a puzzle to solve” attitude instead of the “here’s a bunch of reasons why it’s a bad idea” approach.

Cultivating a Culture of Innovation at Your Nonprofit

Photo by Flickr user elycefeliz (and h/t to Beth Kanter).
A persistent focus of conversation among nonprofit folks – and the highlight of one of the plenaries at the Nonprofit Technology Conference a couple of weeks ago – is the challenge of fostering a climate of innovation within the nonprofit community.

Why does it matter? For one thing, nonprofit folks know that some of the challenges they face aren’t solvable with conventional approaches. For another, funders often explicitly emphasize their interest in funding innovative approaches (a topic for another day). And innovative just sounds cool. Who wouldn’t prefer to be innovative and ground-breaking instead of dull and conventional?

The trick about innovation, though: it’s one thing to say we encourage it, but quite another to actually follow through. Cultivating a culture of innovation means encouraging your staff and colleagues to take risks. It means embedding an expectation about learning from those risks – the successes and the failures – and sharing that knowledge. It means rewarding people on the team for questioning assumptions and suggesting new ideas. And if fostering a culture of innovation is important enough to you, you may even need to penalize people for not taking risks.

Most importantly, you need to convey – not just pay lip service – to your staff and colleagues that you genuinely support them thinking creatively, testing their ideas, and sharing what they learn, even when it fails.