Foundations are often castigated, by both insiders and outsiders, for not taking enough risks with what many see as essentially ‘free’ money. However, since grants are designed to be given away, ‘risk’ is clearly not the same for a foundation as it is for a company. So what is it and how do you manage it? And should foundations consider the risk of missing opportunities to make great gains as much as the risks of failing to achieve their goals? Caroline Hartnell explored these questions with Zia Khan, Vice President for Strategy and Evaluation at the Rockefeller Foundation.
What do we mean by risk in the context of foundations?
I feel the conversation about foundation risk often gets a little muddled. We use the term ‘risk’ very generally without being clear that what’s risky for a foundation is different from what’s risky for other actors. The risk for foundations isn’t about losing grant dollars as such because in a sense that’s what foundations are designed to do. It’s about not realizing the potential of those grant dollars. The money is unique: it’s very flexible and can be spent with a high degree of freedom. Yet the impacts are sometimes hard to measure and difficult to isolate in the context of other factors. Given that we are all prone to manage what we can measure, the risk focus at foundations can become about how the money is being spent and minimizing downsides without also factoring in the impact that the money could realize and maximizing upsides.
The second area of risk relates to another unique asset for foundations: their brand and independence. For those foundations that have been around for a while and established their brands, they can sometimes be overly protective of their reputation. As with money, I believe the risk focus is sometimes misplaced on mitigating threats to reputation rather than using it strategically in potentially controversial situations to achieve outcomes that other actors find difficult to realize.
While my perspective is that foundations need to manage risks by balancing upsides and downsides, I feel that some people take the risk conversation a little too far, particularly with cavalier comments about failures. People sometimes take pride in their failures and see them as proof of taking risk, but failures don’t in themselves prove the appropriate management of risk. The question is whether you have outsize successes that outweigh the failures. The whole point of celebrating failure is to give courage to people to take the risks that lead to huge successes. Furthermore, failure is different in a development context. If no one likes your automatic banana peeler, it’s not a problem. If you discover that a new water system is worse than what a rural village had previously, that is a problem.
You’ve mentioned failure and outsize success. Would you suggest bringing a venture capital approach into foundations – the expectation that you will have perhaps five or six failures for each outsize success?
It depends on the foundation’s mission. Community foundations, for instance, are often dedicated to making consistent improvements in the lives of their members and they may not be able to afford gaps in realizing a steady stream of incremental successes. They may also not be able to maximize the benefits of outsize successes. But if you think you can tolerate failures within your mission, and you have the potential to generate outsize success by influencing the enablers or investors who can really scale innovation, then you need to look for opportunities which, though they might have a significant rate of failure, can produce important big results when they succeed.
If you are the sort of foundation that can take big bets and bring in other players and thought leaders, does the idea of an exit strategy then also make sense?
Again, it depends on your strategy, but if you are looking to catalyse big change I think it has to apply – and this is where I think VC thinking hasn’t quite been assimilated by those in the sector looking to achieve big social change. Venture capitalists are always thinking about their exit strategy and they invest and work with their partners on that basis. The difference is that with venture capital, there are mechanisms that allow for an exit strategy: the capital market, private equity firms, large multinationals, etc. That’s not always the case with social change and it’s something that every foundation has to think about carefully. I think it’s irresponsible to exit something that then can’t be sustained. In some cases a sub-scale investment might even end up doing more harm than good.
Does the term ‘risk capital’ make sense in the foundation world and should foundations be willing to take fast bets?
I think so, but it also depends on the nature of the risk you’re taking. For example, we have an area of work we call ‘Search’ where we make several small bets that are usually about researching or scoping highly uncertain but potentially transformative opportunities. This currently accounts for roughly 10 per cent of our grantmaking budget. We expect many of these Searches will conclude that the opportunity is not as attractive as we initially thought, but we need this quick assessment process to figure this out sooner rather than later. This is particularly important as we move to more and more dynamic issues where it’s simply impossible to pick the right strategies top-down all the time – sometimes we need to jump in and see what we learn. In Searches we are taking conceptual risk, and we want to work with really experienced partners so we don’t get false negatives where we wonder if the idea was bad or whether the way we explored the idea was wrong. Conversely, in the stage we call ‘Execution’, where we are focused on implementing approaches we studied in ‘Search’ and we deploy significantly more resources over a longer period of time, we may take more risk with who we work with because we may be committed to building up long-term capacity to continue addressing the problem once our job is done. Since we don’t take as much conceptual risk in ‘Execution’, we can take more implementation risk.
Do you think foundations in general have a conceptual framework to determine whether a grant is risky or not, or even to start thinking about the issue of risk?
I think most foundations probably do. But, as I mentioned, the frameworks and processes can sometimes be biased towards avoiding downsides rather than trying for upsides. In some cases, the downsides would be a very big deal and the risks need to be mitigated. For example, in the US we are not allowed to earmark funding for lobbying activities and have to be very careful about how we support policy research and advocacy. In these cases, we need tight controls. In some other cases, it’s a judgement call. For example, a foundation might find getting involved with Occupy Wall Street risky if they work with a range of institutions across the political spectrum. On the other hand, it could be truly catalytic and aligned with a foundation’s goals. There’s no framework for those kinds of decisions – they are ultimately judgement calls. At Rockefeller, I feel very lucky that the legal and grants management functions take a very strategic view towards managing risks and are great thought partners.
If foundations were to take a portfolio approach, with some grants they specifically categorize as risky – say 20 per cent – how would they go about it? Would they need to change the way they do due diligence for those grants?
It’s hard to do this on a grant-by-grant basis. Let’s say that with a portfolio of ten grants, you decide to take a lot of risks and you want one or two that are promising ideas for future investment. Each of those ten will have probably an 80 per cent chance of not realizing its expected benefits, so if you were to analyse them on an individual basis, it would be hard to figure out how to move forward on any of them. But collectively you’ll get what you want from the portfolio.
Instead of looking at each grant individually, you look at the whole bundle at once and ask whether you feel there is at least one winner in the bunch. This is the change that would be necessary – looking at portfolios and aggregate probabilities rather than individual grants and individual probabilities.
Does the Rockefeller Foundation make risky bets?
I believe so, both with our grant dollars and with our reputation. Often, if there’s a new organization taking a very innovative approach and they have a grant from the Rockefeller Foundation, other funders might see it as less risky to follow suit. This of course multiplies the downside risk: we’ve not only failed to realize impact with our resources if things don’t work out, but we’ve also misguided the resources of others. Fortunately that’s a very rare situation.
Can you give an example?
I can give you an example of a risk that didn’t pan out. A couple of years ago, a very young well-known entrepreneur decided to start up an organization that would support non-profits in a new way. The potential was enormous and the idea was engaging a lot of people; he needed some start-up funds very quickly, so we took a risk and funded it. It did OK, but it wasn’t getting the traction that he or we had hoped and eventually it combined with another organization. By the way, this was a smart and mature move as I feel too many people in the sector keep flogging a dead horse. But when I reflect back on the decision so as to learn what I could have done differently, I don’t think I took proper account of whether, given the person’s relative inexperience in the area, there was enough of an existing supporting ecosystem that might help him succeed. We should have tested the resilience of the model under different potential future circumstances. In social change, you need collaboration, so you need to look at the ecosystem.
I think risk management has to be tightly coupled with very good monitoring and evaluation and even strategy capability, because the risks unfold as you do the work. This requires making hypotheses, expected outcomes and intermediate milestones very explicit. If you don’t, there’s also the risk of not generating knowledge of failure. There’s a saying that you often learn more by being specifically wrong than vaguely right. That’s something I hadn’t thought about much until this conversation: the risk of not learning from failed risk-taking.
There’s a lot of emphasis in foundations on measuring impact. Does this actually make it less likely that foundations will take risk?
First, for context, let me state that within ‘measuring’ you can include some qualitative metrics as well; it doesn’t always have to be numbers. I want to dispel the straw man argument that measuring impact leads people to think narrow-mindedly about numbers only. To answer your question, a major benefit of focusing on measurable impact is the rigour: it forces you to think about your theory of change and to make your hypothesis explicit. If you’re actively monitoring what’s really happening against your theories, you’re more likely to spot problems early on. This in itself will mitigate risks because you can course-correct sooner if you are wrong. If you don’t have that, you can make decisions too late. That safety net might allow you to take bigger risks. But I agree that overemphasis on measurable impact can lead to rigidly quantitative theories of change that don’t allow foundations to adapt to changing circumstances.
Should foundations be more willing to engage in activities where the outcome is potentially very great?
I think the ability to take risk depends on the amount of success you’ve had. We’ve had a number of very important successes, so if we’re involved, it can encourage other people to share the risk with us and that helps make success more likely. If you take too much of a high-risk approach and end up with a lot of failures, you start to lose that credibility, which makes it less likely that you can mobilize collaborators to convert a very transformative opportunity into a success.
Will the Rockefeller Foundation be doing things differently following the Bellagio Initiative and what came out of that?
For those of us who attended, I’m sure our work will be informed by what we each took away from the Bellagio Initiative. At an organizational level, the emerging philanthropic sectors in developing countries are an area of interest to us. We’re also continuing the dialogue about what it means for philanthropic organizations and development organizations to collaborate in terms of innovation and the whole notion of an innovation value chain. Another area we’re doing some work on is the topic of this conversation: what risk actually means for the philanthropic sector. We have small projects that are following these concepts and others. I can see some changes happening down the road.